To prepare, consider options like syndications.
Realtors, change is coming for our industry. The jury in the Sitzer/Burnett versus NAR lawsuit ruled in favor of the home sellers to the tune of $1.8 billion and accused NAR (among others) of inflating commissions, hampering negotiations, steering listings, and inhibiting competition. The judge has yet to issue his final verdict, which could treble that amount to more than $5 billion. More lawsuits are slated for next year, with new cases sure to follow.
The reality is this: Whether or not you agree with the lawsuits, change is inevitable. Although the repercussions will take years to play out, consumers outside of our industry are on alert. USA Today, The New York Times, the Wall Street Journal, Apple News, and other nationally distributed news outlets have made the general public aware of the lawsuits.
To survive this sea change, you must be prepared to answer questions about how you earn money, why you earn what you do, and clearly articulate your value on the buy-side of the equation.
Your state may already have buyer-broker compensation agreements in place. Even so, if you are overwhelmed and confused, you are not alone. Even seasoned real estate agents are unsure about what this means for their future in the industry.
Americans currently pay nearly $100 billion in real estate commissions each year. Ryan Tomasello (a real estate industry analyst) forecasts two things as a result of the lawsuits: (1) 30% of commissions could go away (about $333 million in commissions) and (2) the industry could see an exodus of about half of all agents.
People have spent hours opining on YouTube in attempts to read the tea leaves. Let’s be honest: Nobody really knows how this will all play out.
What can you do to prepare? Here are some key actions you can take.
Future-Ready Your Finances
You should draw one conclusion from all this: You need an unrelated source of income. One that isn’t subject to the whims of a jury, the NAR or the Fed. One that doesn’t require you to handle contractors, tenant calls at 2 a.m., or leaky faucets—you’ve got enough going on.
You can invest in real estate without the responsibilities of active management. Invest, sit back, and cash checks. (OK, there’s more to it than that, but at a high level, that’s pretty accurate.)
It’s called a “syndication.”
Without getting too deep in the weeds, syndication is how an experienced operator brings in limited partners (LPs) as investors to purchase a commercial property. Passive investors get a slice of ownership, cash flow, equity, and even tax benefits without being involved in active responsibilities.
Here’s how the process usually works:
- An experienced operating team sifts through properties to identify an opportunity.
- The commercial property is placed under contract and evaluated based on legal documentation, physical condition, and financials. Qualified opportunities get presented to possible investors (like you)!
- Investors see a presentation on the property and the business plan and ask clarifying questions. Each investor gets to decide whether they want in or not.
- Investors who want to invest use their preferred funding source. Common choices include liquid cash, solo 401ks, and self-directed IRAs.
- Investors earn regular distributions (quarterly is standard), get annual tax depreciation to offset their passive income, and receive regular updates on progress at the property.
Six Benefits of Passive Investing
As you already know, owning property comes with a lot of responsibilities. But there are also benefits to owning real estate. The good news is that if you passively invest in a commercial property, you get many benefits without the headaches.
Here are six advantages:
- Tax-Advantaged Investment. When you invest in commercial properties, you can get a slice of the losses to offset your income from the deal. In many cases, you can legally show little to no income from the investment.
- Value Appreciation. Homes get bought, renovated, and sold. The rehabber cashes a nice check and moves on. Commercial properties can undergo a similar process. As a passive investor, you share in the upside. But, unlike a house, the process takes longer (three to seven years).
- Scale with Less Cash. To acquire a portfolio of rentals, you need a lot of money. When you invest in a commercial syndication, you own part of a multimillion-dollar property for as little as $50,000. Put $50,000 into a rental worth $250,000 or $50,000 into a commercial building worth $5,000,000. That’s up to you.
- Reduce the Pain of the Commission Rollercoaster. You eat what you kill. Or something like that. But we all know there are factors you can’t outwork or control—the Fed, interest rates, and a lack of supply, for starters. When you invest in a commercial property, you set up additional streams of wealth to support you during slow times or unlock access to extra vacation days, summer camps, and college savings for your family.
What if you invested $100,000 in a warehouse with a 134% return over 10 years? You’d average nearly $10,000 per year in passive income, a cool $36,000 from the sale proceeds, and the return of your initial investment (without considering tax benefits). Not too shabby.
- Take control of your time. You want to strike a better balance between your work and the personal life you work so hard to support. Passive income is not an end in and of itself. It’s a means to get you to what you want: income freedom, time freedom, financial peace, and mental peace from knowing you don’t have all your eggs in one basket (your commissions).
- You understand it. Warren Buffett is famous for saying, “Invest in what you understand.” You already understand real estate. There are plenty of similarities between residential and commercial real estate. The stock market? That’s a different story.
Investing in real estate isn’t for everyone. Every investment (whether it’s real estate or something else) has its risks.
Where do you start? Find a community of like-minded agents (e.g., www.AgentOptional.com) who share the same concerns and passion for taking control of their financial future as you do. You aren’t alone in your desire for a better balance between work and life and a way to earn more without sacrificing more time.