Smart investments can change our lives by providing us multiple streams of income to live our dreams. However, while we see investors filling up their portfolio with stocks and bonds, they often overlook real estate. But, in the changing dynamics of our times, owning a property remains one of the best ways to build wealth. Real estate is an inflation-hedged asset class, which offers a lot more than traditional assets in terms of performance, risk levels, and tax advantages. However, people, who are interested in capitalizing on this asset class, often think that they’ll need to have a substantial amount of money at their disposal to even enter the market. But, that’s not the case at all. Today, there is more than one way to invest in real estate. One of them is investing in real estate syndication, which lets anyone and everyone participate in this thriving market.
What is Real Estate Syndication?
Real estate syndication is a way for a group of investors to pool their financial and intellectual resources together to invest in large properties and projects, which they can’t afford or manage on their own. Basically, it’s real estate crowdfunding. The syndicator identifies investment opportunities, underwrites and manages the property. The investors provide funds for the project, earning a percentage of its profits based on predetermined and agreed upon rates. Most syndicates are structured as limited liability partnerships or LLCs, which are very flexible entities, allowing investors to own multiple classes of shares. You can be a shareholder or a creditor, or both. It’s a win-win structure for both syndicate and investors.
In recent years, real estate syndication deals, which have only grown more and more in efficiency and credibility, have gone mainstream. There are numerous benefits. To begin with, real estate syndicates allow individuals to invest in something that is too large for your portfolio. The syndicate members also benefit from the combined expertise and experience of each member. But, there’s more to it. Here’s why you should invest in real estate syndication:
Access to Lucrative and Large Investment Opportunities
Instead of investing in single family projects on your own, you can invest in more profitable multifamily projects through a syndicate. In the past, the real estate market had a high entry threshold, operational costs, and restrictive regulations. Now, syndication has opened up the market to everyone, who set aside some money for investment. The regulations have become much more progressive as well. In the USA, the Title III of the JOBS Act, which became effective in 2016, even allows non-accredited investors to participate in real estate crowdfunding, subject to few limitations.
The age-old investment strategy is not putting all eggs in one basket, and rightly so. An ideal portfolio should contain investments in a wide variety of asset classes, which have little or no correlation between them. Otherwise if one performs poorly, others will do the same. Real estate is not closely linked to the public markets and it remains largely unaffected by any social, geopolitical, and economic crisis. Thus, investing in syndication allows you to build a well-diversified portfolio, which maximizes your returns and minimizes risks. It also lets you spread out the risk with other investors. Also, since syndicates invest in multifamily projects, if a few tenants move out, the others will cover the operating costs, still generating profit in most cases. So, the cashflow will not be affected in the way it does when a tenant moves out from a single-family rental property.
When people invest through a real estate syndicate, real estate tax deductions are passed on to them. If you’re an equity holder, this structure allows you to compound your money for years without paying taxes until the property is sold. Because of depreciation combined with interest payments, and other expenses, a property can easily show a loss for tax purposes even though it’s generating a positive cash flow. So, your investments will be extremely tax efficient.
When you invest through a syndicate, all the work is done by the syndicator, who identifies opportunities, negotiates purchase, obtains financing, and manages the property. If you’re a busy working professional, this is an excellent form of passive investment. After the initial due diligence, it takes very little time and effort to keep track of your invested money.
Economies of Scale
Real estate syndicates secure large property deals such as multifamily syndication deals and enjoy economies of scale. The property management costs, onsite, and renovation cost falls per unit. This is because contractors lower their price per unit when the number of units is very large and vendors will sell at a discounted rate when materials are purchased in bulk.
The single-family properties are valued based on the selling price of similar properties sold in that area. However, large multifamily properties are valued based on their net operating income (NOI). NOI can be increased either by increasing rents or reducing expenses. Since this can be controlled by the management, it is called “forced appreciation.”
Principal Pay Down
Another advantage of investing in cash flow producing real estate is the principal pay down. The principal of the mortgage is paid down every month and the amount of equity in the property increases. Syndicates invest in larger properties, which house multiple tenants. With all of them paying down the mortgage, this effect is magnified, producing more profit for investors.
Hedge Against Inflation
When inflation occurs, it lowers the value of money in your pocket and other assets such as stocks and bonds. However, real estate is an inflation hedge, which maintains or increases its value over time. During the inflationary period, property values and rents typically go up. Since 1968, real estate has been appreciating at the rate of six percent per year, including the economic downturn beginning in 2007, according to the National Association of Realtors. With more tenants in multifamily properties, this scenario becomes even more favorable to investors.
No Liability Exposure
In an LLC or LLP syndicate, there are two sides of the operating agreement. One side includes managing members, who are responsible for making the decisions with the fund and another side includes investors, who only bring their financial resources to the table. Under no circumstances, the latter side can be found liable for any decisions made, so you’ll never find yourself dealing with a lawsuit.
Today, syndication has given people access to large investment opportunities with low threshold entry-level, and a lower fee structure due to the disintermediation of financial agents and consultants while enjoying the same portfolio benefits of direct investment. That’s why more and more investors are flocking to the realty market.