They say there are two sides to every coin.
How does this apply to real estate syndications?
Well, did you know that one of the most famous buildings in the United States, the Empire State Building, was purchased through a real estate syndication?
That's right. It was the first of its kind. 3000 people came together in the 1960s to invest in this historic property. That's pretty cool, right?
Owning a stake in a piece of property that you normally wouldn't be able to afford is one of the pros of investing in real estate syndication.
But for every pro, there is a con. Today, I'm going to help you weigh the options when it comes to investing in real estate syndication.
I've been investing in real estate for a long time. But for the past decade or so, I've been focused on multifamily real estate as an operator or sponsor.
I know all of the ins and outs of syndicated real estate deals, and trust me, there are a lot of benefits to investing in real estate syndication. That’s why I've dedicated my career to it, as both an operator and an educator.
Today, I want to share with you the cons of investing in multifamily syndication.
Before we get into the cons though, let's quickly turn to some of the pros. At the top of that list: – above average returns at a lower risk than other investment strategies, particularly when compared to the stock market.
Now, there's a lot of ground to cover on this particular aspect, especially as it relates to tax benefits. I won't go into all of the details, but I did write a special report about it that you can download here.
Pro number two is that you know what you're getting. You know the exact property and strategy the operator is taking to increase the profit on the property. I think this is a huge pro, because I want to know what I'm investing in. If I'm investing in a fund, I have no idea.
Knowing exactly what you're getting into and who's going to be running the property is a major pro.
Pro number three is diversification of your investment portfolio. You're only buying a small stake in the property, which leaves you money to invest in other properties or different investment vehicles.
Take that example of the Empire State Building. Many of those 3000 investors invested only $10,000, and they owned a stake in that iconic building.
So, a lot of passive investors don't invest all of their net worth in a single property. They invest in multiple properties in the asset class they like, and then maybe in some other asset classes as well.
The last pro on my list is my favorite – mailbox money.
Who doesn't love mailbox money?
Investing in real estate syndications is one of the best forms of passive income, because it actually generates cash flow, which you don't get from the stock market at all.
In truth, the most work you'll do up front is researching the opportunity and the operator and sponsor, and most passive investors continue investing with the same operator and sponsor year after year.
So now for the cons list.
The first con of real estate syndication is that your investment money is frozen. That means, it's no longer liquid. It’s tied up for the length of the deal, which is typically five to seven years. That's not really a bad thing, when you consider the above average, consistent compounding return it’s going to get, but it's definitely something to take into consideration.
Another con is lack of control over the deal, because you're investing as a limited partner. The pro, of course, is that your investment and your exposure is limited to the amount of money you invest. As an active partner, you have legal liability for the property. As a limited partner, you don't have that. But in return, you also give up some control, which means that someone else's sponsor decides when to refinance, sell, etc.
So, it’s important that you invest with an operator who has a deep track record, someone you can trust to make the right decisions.
Some of the costs and fees are harder to understand in a real estate syndication, which in reality is the result of choosing the wrong operator or sponsor to partner with. It's very important that you, as a passive investor, put the time in to vet the right operator before jumping into a deal.
Now, you need two, maximum three, operators, because each operator is going to have two or three or deals every single year, and you don't need a lot. So once you do the upfront work to vet one of these operators, you can continue investing with them year after year.
If you want to get started in real estate syndications, on your path to financial freedom, there are two things you should do right now:
- Continue educating yourself. It's the best thing you can do to make smart moves with your money. I have a resource center that you should check out, called Get Started With Passive Investing.
- Start creating relationships with potential deal sponsors, so you can get to know them and how they do business. In fact, if you want to set up a call with us, our firm is called Nighthawk Equity. We would love to have a chat with you, so head on over to our website and click the Join button. You can fill out a short form and set up a call with us. We'd love to discuss your investment goals, and share what deals we're working on now that we might be able to share with you.
As you can see, there are far more pros than cons of investing in real estate syndications.