Christopher Stout is the Principal of StoutCap. He has been a multifamily real estate investor for over a decade and is a master operator.
Wealth building in the United States is a tale of two realities. Nearly a quarter of adults in the United States say investing in real estate is the best way to build personal wealth, outpacing stocks, entrepreneurship and second jobs by meaningful margins. However, that’s not how most people actually invest their money. Instead, more than a quarter of U.S. adults invest in the stock market, while just 12% pursue real estate assets.
Of course, the economy can play a role—90% of Americans don’t invest in real estate during an economic downturn—as do prices (increases since the Covid-19 pandemic have priced many people out of the market). The reasons are multifaceted but ultimately simple: Real estate investing often combines high costs with a high degree of responsibility. After all, investors who buy Apple stock don’t have to invent the next iPhone, manage the company’s day-to-day operations and oversee a global retail footprint. In contrast, independent real estate investors are typically solely responsible for the investment’s upkeep and continued success.
Real estate syndication, a way for a group of investors to combine their financial resources to invest in properties and projects, is one way individual investors can mitigate the upfront costs and long-term upkeep associated with real estate investment and capitalize on this important wealth-building asset class. (Full disclosure: Syndication is a service my company offers.)
Understanding Real Estate Syndication
Real estate syndication is a partnership between multiple investors who pool their money to invest in larger properties or projects than they could afford individually, with a general partner managing the day-to-day operations and limited partners providing capital. For example, an investor with a $200,000 budget but a $1 million investment opportunity can form or join a syndication to collectively purchase the asset.
For individual or inexperienced investors, real estate syndication can serve as a gateway to investment opportunities that would otherwise require too much capital or upkeep to be practical or viable. In other words, it’s a way to diversify their investment portfolio and potentially share in the profits that come from these larger projects, including generating income through rental fees or potentially appreciating in value, leading to a profitable sale in the future.
The Benefits Of Real Estate Syndication
Real estate syndication can offer many advantages, opening the door to larger, safer assets and presenting a compelling alternative to traditional investment options. Here are some of the benefits:
1. Access To Larger, Safer Assets
Syndication allows investors to participate in larger asset investments that are typically safer than smaller ones. For instance, a 100-unit property is generally considered more stable than a one or two-unit house due to the distributed risk. If a tenant leaves a single-family home, the property is 100% vacant. However, if a tenant leaves a 100-unit property, it’s only 1% vacant, significantly minimizing the financial impact.
2. Tax Advantages
According to the Internal Revenue Service, real estate depreciates yearly, allowing investors to write off a portion of their income and thereby reducing their overall tax liability. Real estate owners can deduct expenses directly related to their properties’ operation, management and maintenance, including property taxes, insurance, mortgage interest, property management fees and repair costs.
3. Cash Flow
Real estate generates rental income, providing a steady return on investment while owning the property. While stocks and other investment assets might offer a steeper return on investment, real estate can provide both short-term income in the form of rent and long-term wealth generation as properties appreciate and are eventually resold.
What To Look For In A Real Estate Syndicator
In my opinion, real estate is a relatively low-risk investment, but assets can lose value if market conditions deteriorate and poor management by the syndicator leads to financial losses. Additionally, as an investor in a syndicate, investors have little control over property decisions, making careful research and due diligence critical to syndication success.
In short, successful real estate syndication is often predicated on the people making the purchasing decisions. When choosing a real estate syndicator, investors should consider:
Experience
Look for a syndicator with a proven track record in real estate investing, preferably in the type of property and location you’re interested in. They should have experience not just in buying properties but also in managing them effectively and exiting investments profitably.
Reputation
Look for a syndicator with a solid reputation in the industry. You can often find this through online reviews, testimonials or references from past investors. You can also check whether they have any lawsuits or complaints against them.
Priorities
Look for a syndicator whose financial incentives align with those of the investors. This means that the collective best interest should guide their decisions and their profitability should be linked to the success of the investment. The syndicator’s compensation structure should be designed in a way that incentivizes them to maximize returns for all investors, creating a symbiotic relationship where everyone’s success is intertwined.
Business Model & Deal Structure
Look for syndicators that deploy a business model and deal structure that are comfortable and advantageous to both parties. This includes details about how the investment will be managed, the distribution of profits and the exit strategy for the investment. Moreover, the deal structure should balance risk and reward, clearly specifying the rights and responsibilities of all parties.
While every investor will have their own criteria when looking for a real estate syndicator, experience, reputation, priorities and business model provide a foundation for making this important decision.
In conclusion, real estate syndication makes this asset class more accessible, allowing inventors to pool resources, granting them access to larger, safer assets and multiple tax advantages while providing the potential for consistent cash flow. Yet, the success of this approach largely hinges on selecting an experienced, reputable syndicator whose priorities align with those of the investors. With the right partnership, the world of real estate investing might not be as exclusive as once thought.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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