When most people hear about real estate investing, they usually imagine someone buying a single-family home, renting it to tenants, paying the mortgage with the rent, and hoping that the property will appreciate over time and build wealth for the owner.
While this type of investing is fairly common, it can be very stressful, time consuming, and risky. Most people vastly underestimate the workload of managing a rental property and running it like a business.
We prefer investing in multifamily properties, as they often have opportunities to “force appreciate” them by making strategic improvements that allow us to raise the income and lower the expenses.
The challenge with multifamily is that the cost of entry is so high that, even when using leverage, most people simply can’t afford to make an investment.
This is where syndications come in.
What is a syndication?
In the simplest terms, a syndication is simply a group of people who pool their resources. Real estate syndications are therefore groups of people who put their money together to acquire larger assets, like apartment buildings. This also allows individuals to make smaller investments.
For example, $50k might not be enough capital to purchase a single-family home in a good, safe neighborhood, even with leverage. However, you can easily pool your $50k with other investors in a syndication deal to purchase much larger properties. You would then receive cashflow and equity proportional to the amount you invested.
That all seems reasonable enough, but who’s actually doing all the work? Good question.
How does it work?
There are two primary groups of people that make up a syndication: the general partners and the limited partners.
The general partners (GPs for short) are the active investors. They do the day-to-day work of sourcing, acquiring, managing, and eventually selling properties.
The limited partners (LPs for short) are passive investors. They provide a large portion of the capital required to execute the deals that the GPs source. They have no active responsibilities in managing the asset.
The GPs and LPs team up and create an entity (usually an LLC) and that entity holds the underlying asset. Because LLCs are pass-through entities, investors get the tax benefits of direct ownership.
Once a deal closes, the GPs go to work on their value-add business plan. They keep the LPs up to date on how things are going while also paying out monthly cash flow distributions. Once the value-add process is complete, the GPs sell the property and split the profits with the LPs, and everyone on the team does a happy dance.
Why invest in a syndication?
If you’re reading this right now, it’s highly likely that are you are a successful professional. You’ve thought about real estate investing, but you simply do not have the time or mental bandwidth to do it on your own. You know that building wealth and passive streams of income is a great idea, but there is no clear or easy way to achieve these goals.
If that sounds like you, syndication investing as a limited partner is probably a great strategy for you.
It gets you invested in cash-flowing real estate deals, but all the active management and headaches are taken care of by the GPs of the deal.
You get great risk-adjusted returns, tax benefits, diversification, and exposure to the oldest and most reliable physical asset of all time.
Stay tuned for upcoming articles that will take deeper dives into the incredible benefits of real estate investing.