SS64: Should I Passively Invest in Real Estate Syndications?

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing should I passively invest in a real estate syndication?

Many future real estate investors ask themselves if they really want to be real estate operators or just passive investors? This is a great question and in this episode, Charles discusses the pros and cons of investing into a syndication vs purchasing a property and managing it themselves.

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Talking Points:

What Is a Syndication?
- A syndication is the pooling of funds from several investors to invest in a single real estate asset.
- There are usually 2 groups of people in a syndication; general partners (operators) and limited partners (passive investors). Typically, general partners will also be limited partners to a certain degree.
What Is an Equity Fund?
- An equity fund is similar to a syndication but the general partners are purchasing several properties; typically, over a calendar year.
Liquidity
- Real estate is an illiquid investment; however, in certain situations, you may be able to access cash from your real estate investments.
- If you own a property, and it has increased in value, you can refinance it or take out a supplemental loan against the property and tap your equity. These solutions are not quick or cheap. You will be paying fees and spending months trying to complete the process. In addition to submitting endless documents.
- In syndications and most funds; the funds are locked in for the entire term of the investment.
- I have heard of general partners buying out the shares of their limited partners if there is an emergency but I would not expect that. In that situation, there are going to be legal fees and the general partners will probably buy you out for your initial investment. The tradeoff is that typically the longer you own or are invested in a property; the less volatile it is and the more valuable it is (if managed correctly). For example; the first few months of owning an investment property are when the majority of the bugs are worked out. New management is in place, deferred maintenance is being handled, non-paying tenants are evicted, etc. As the time of ownership lengthens, the property begins to run more and more like a well-oiled machine. If you have to sell your shares; 1 or 2 years in; you have already sat through the most volatile part of your investment and returns and operations should only be getting better.
- Any investment into real estate should be considered illiquid.
Investment Term
- If you are flipping properties then your term will only be a few months but if you are a long-term investor, the terms usually range from 3-10 years. In a hot market, the hold times will be on the lower end, and in a stagnant market, the hold times will be on the longer side.
Reserves
- Every investor should have reserves, but more so on the active side. Unless there is a capital call on the syndication you have invested into; you will not have to provide any funds out of your pocket. The deal operators should be keeping a reserve throughout the project; from the beginning to the end; to take care of any unforeseen expenses or CAPEX items. There is also much more cash flow with large properties (syndications) compared to small properties that are typically owned by one investor. Allowing for many unexpected expenses to be paid right out of cashflow without the need for tapping any of the reserves.
- If you are an active investor, you might have major problems come up that you have not expected and with smaller properties, there is less cashflow to cover them. Requiring you to tap your reserves.
Investment Minimums
- Typically, syndications require a $50,000 minimum. If you were to invest $50,000 into an investment property, you would only be able to purchase a $200,000 property at a 25% loan to value. This is not including; closing costs, reserves, repairs, etc.
Diversification & Risk
- With minimums usually being lower with syndications vs purchasing a property yourself, it is much easier to diversify with syndications.
- Your risk is also decreased with syndications. Your risk is limited to the amount of capital you invest. You are a limited partner and you are not responsible for any of the debt or obligations of the property. Compare this to being a sole owner of a property where you will usually need to personally guarantee the mortgage and if you are sued; you need to defend yourself and hopefully you have a solid asset protection plan.
Returns
- The more work I do on a project; the higher the returns I require.
- If I am passively investing; a 7%-8% cash-on-cash return and a total return in the double digits will suffice.
- If I am purchasing a property myself; I want to see double-digit cash on cash returns; which is very difficult, if you are purchasing properties in C+/B- areas and above.
- Smaller properties are also more volatile and are less predictable when compared to larger properties that you will be investing in a normal syndication deal.
Return on Time
- When I am planning on passively investing; I spend a few hours underwriting the deal, and then on an ongoing basis; I will spend about 1 hour a year managing my investment; mainly on reading monthly reports and saving and sending the K1 tax statement to my accountant.
- Compare that with the hours upon hours per week or month you will spend managing your own property or managing your property manager.
Perform a Self-Assessment
- Do you like acquiring and managing (asset managing) real estate?
- Do you have capital, do you have a high-paying career?
- What is your time worth?
- What are your ultimate goals?

If you are interested in learning more about future investment opportunities our company is working out; please go to Harborside Partners .com and click on “Invest With Us”.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing, should I passively invest in a real estate syndication? And this is a question I often get from potential investors or people that want to start building usually passive income from real estate, but they don’t know where to invest. So first off, what is a syndication? Well, syndication is the pooling of funds from several investors to invest into a single real estate asset. And there are usually two groups of people in a syndication there’s general partners or operators and limited partners or passive investors. Typically general partners will also be limited partners to a certain degree since they’re usually, or they should be investing money into the deal alongside the passive investors. Next you might hear is an equity fund. Well, an equity fund is similar to a syndication, but the general partners are purchasing several properties, typically over a calendar year.

Charles:
Now, the benefit here is that you’re spreading your investment funds over a lot more units, a lot more doors, but the downfall is you’re not able to, if your money’s already in there and they start purchasing assets and you don’t agree with those assets or with how they’re financing ’em or the business plan. That’s a problem. It’s much different with an individual syndication where you know exactly all of the particulars of the deal before investing. Next thing is liquidity. Cuz this can differ if you are passively investing or actively investing. So real estate is an illiquid investment. However, in certain situations you may be able to access cash from your real estate investments. If you own a property and has increased in value, you can refinance it or take out a supplemental loan against the property and tap your equity. These solutions are not quick or cheap and you’ll be paying fees and spending months trying to complete the process.

Charles:
In addition to submitting endless amounts of documents to most lenders in syndications, most funds, the funds are locked in they’re they’re locked in for the entire term of the investment. Now I’ve heard of some general partners buying out shares of their limited partners if there is an emergency, but I would not expect that. And don’t bank on that happening in that situation, there are going to be legal fees and general partners will probably buy you out for your initial investment amount. The trade off is that typically the longer you own or invest into a property, the less volatile it is and more valuable it is if managed correctly. So for example, if the first few months of owning an investment property are when the majority of the bugs are worked out, new management is in place. Deferred maintenance is being handled. Non-Pay tenants are evicted, et cetera.

Charles:
As the time of ownership lengths, the property begins to run or more like a well oiled machine. If you have to sell your shares one or two years in you’ve already sat through the most volatile part of your investment and returns and operator change should only be getting better from then on. So any investment in real estate should be considered illiquid if it’s in, even if it’s active or if it’s passive now the investment term. Now, if you’re flipping properties, then your term will only be a few months. But if you are a long term investor, the terms usually range from three to 10 years in a hot market. The whole times will be in the low end and in a stagnant market. The whole times will be on the longer side. Next is reserves and every investor should have reserves, but more so on the active side, unless there’s a capital call on the syndication you are invested into, you’ll not have to provide any funds outta your pocket on the deal.

Charles:
Operators should be keeping a reserve throughout the project. From the beginning to the end, the, to secure of any unforeseen expenses or CapEx items, there is also much more cash with large properties, syndications compared to small properties that are typically owned by one investor, allowing for many unexpected expenses to be paid right out the cash flow without the need for tapping any of the reserves. If you are an active investor, you might have major problems come up that you have to handle and they’re unexpected with. And if there is less cashflow to cover, ’em, you’re gonna be requiring to tap your reserves all the time. Now you should always buy properties. You should always keep reserves no matter what you’re investing into, but when you’re active, all that falls onto your shoulders, if you have, you know, two single family houses and one of them has a $5,000 issue that happens with, you know frozen pipes at bursts and all that kind of stuff that happens in that scenario, they’re gonna come looking for you and that’s something you have to get done right away.

Charles:
That’s not something that can be waiting around to get fixed. So it’s very important always to have reserves the difference though, this happens a huge event like that happens and you have a syndication with 80 units or a hundred units in that scenario, you might be able to take that right outta your reserves at $5,000. Okay. and right out of your operating cash, that $5,000, you don’t have to go into your reserves. That’s a huge benefit. Next our investment at minimums. So typically syndications require a $50,000 minimum. If you were to invest $50,000 into an investment property, you would only be able to really purchase a $200,000 property at a 25% loan of value. Now this isn’t including, including closing costs, reserves, repairs, the value add, et cetera. This is just the property. So for you to buy larger properties, it’s gonna take a substantial amount of money for you to be able to purchase them, renovate them and rent them out.

Charles:
Next is diversification risk. Well with minimums, usually being lower with syndications versus purchasing a property yourself, it’s much easier to diversify with syndications. Your risk is also decreased with syndications and your risk is limited to the amount of capital you invest. You are a limited partner and you’re not responsible for any of the debt or obligations of the property. Compare this to being a sole owner of the property, where you will usually need to personally guarantee that mortgage, if you’re a sued and you need to defend yourself and hopefully you have a solid asset protection plan. So this is one of the big things with it. It’s much more cut and dry with the syndications. First of all, you’re, you’re a limited partner, but also there’s so many different LLCs in corporations that are stuck with the syndication. There’s usually one just for the property.

Charles:
Then there’s one just for general partners, then one just for limited partners. And then, you know, you’re, so you’re now a limited partner or passive investor of this business that owns the property. So if anything ever happened on the property, you’re so many corporations back, as well as being a limited partner, you really don’t have any risk compared to when you own a property, no matter how many LLCs you have set up if something happens, you’re gonna be one of the first people that are gonna be you know, served with lawsuit when it comes to returns. Now the more work I do on the, on a project, the higher returns I require, and this is just a return on time kind of thing. If I am passively investing a seven to 8% cash on cash return and a total return in the double digits will suffice for, for me.

Charles:
Now, if I’m purchasing property myself, I want to see double digit cash on cash returns, which is very difficult. If you’re purchasing properties in C plus the BMI areas and above that’s just, it’s gonna be hard to hit those double digit cash on cash returns. Now smaller properties are also more volatile than less, less predictable when compared to larger properties that you’ll be investing into in a normal syndication deal, right? Because less doors, less income streams, and this could be anything you’re investing into small self storage versus large self storage, small multifamily, single family versus large multifamily. You have less income streams. And if something where someone is delayed paying or doesn’t pay or disappears or whatever it is that’s a larger percentage of your overall total income revenue for that property. Now the return on time, this is a very important thing as I alluded to before.

Charles:
But when I’m planning on passively investing, I spend a few hours underwriting the deal. And then on an ongoing basis, I will spend about an hour a year managing my investment. And it’s mainly on reading a monthly reports and saving and sending the K one tax statement to my accountant. I mean, it’s very bare bones. Compare that with the hours upon hours per week or month, you’ll be spending managing your own property or managing your property manager. I know when you’re setting up with a new property manager, it’s not just like, oh, here’s the keys and good luck with it. You’re talking to that person every day using on the weekends for months to get that property, to get people, to get the property managers, to know who your tents are, to know the problems on the property to start deferred maintenance, have that taken care of.

Charles:
So it’s a lot of work. After several months of the that’s when it becomes even a more of a semi passive investment, but still if there’s a problem, if there’s a major issue they’re gonna be calling you directly for you to sign off on what’s happening with this syndication. It’s not like that it’s all handled by the operators that make those decisions. And you being a pass investor are just receiving your quarterly or monthly distribution. What I would do is perform a self assessment before you make your decision. If you’re gonna passively invest. I mean, do you like acquiring and managing assets like real estate? I mean, do you have capital? Do you have a high paying career? You know, what is your time worth and what are your ultimate goals? I mean, most people get into real estate because of this thing called passive income, which is true.

Charles:
It does make passive income for you not being there spending time, but your properties are like any piece of real estate. They’re very management intensive and they take a correct team of management team. That’s on site there to be able to, to manage them correctly and for the right price so that you actually will make money on the property. So it’s very important if you just like the passive investing side, if you just like passive income and not really the real estate side, and you don’t have the time, that’s where you become a passive investor is the best part of it. If you love real estate and you want to get hands on active with it, and you want to inquire and manage properties and build your own portfolio that you’re manager yourself, or you have a property manager take care of go the active route, but it really depends on what are your ultimate goals and then make decisions in that direction. If you’re interested in learning more about the future investment opportunities of our company, Harborside partners is working on, please go to Harborside partners, do and click on, invest with us. And we can speak to one of our partners and we can explain to you exactly how our process works and put you on our new deal list. So I hope you enjoyed, please remember to rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you than.

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