Four Reasons Real Estate Syndications Might Not Be for You
by Christopher Levarek
“If a man knows not to which port he sails, no wind is favorable.”
- Seneca the Younger
Coming from a real estate syndication group, the above title might seem a bit out of sorts. Why on earth would I write an article about the how syndication might not be for you? Well, here is the truth. These blog articles on this site are not just to sway the reader into investing into some deal or syndication. I write these blogs to help people learn about the many investing options in real estate and ultimately choose the investment strategy that best fits their goals and lifestyle.
The truth is, not all investments will align with every investor. Real estate syndications might not be for you and here are four reasons why this might be the case.
Lack of Control
If you like to maintain full control and manage your real estate investment, real estate syndications might not be for you. This is the major difference between investing passively and investing actively( purchasing your own real estate deal). In active investing where you buy & manage the property, renovations and rental strategy, you keep the control over all the pieces. Ultimately you have the say in every decision being made.
Investing passively in syndications means giving up the decision-making and that control. It’s putting yourself as a passenger instead of the driver. You are along for the ride. This can be hard for some investors while others enjoy the hands-off approach.
The key is developing a good relationship with the sponsor team and a level of trust to where you feel comfortable no longer controlling all the details of the investment. If, however, working with other experts in real estate and giving up control sounds too difficult, perhaps consider another investment model instead of syndications.
Lack of Liquidity for Invested Capital
Investing into a real estate syndication is agreeing to terms and conditions of the investment. Most investments have a lifetime of 5-7 years to allow execution of the business plan and raise the value of the property. During this time, your invested capital is fairly illiquid until the asset is sold.
Real estate takes time to turnover and renovate so it can be difficult to retrieve invested capital before the timeline of the project is up and this capital is already in use to execute the business plan. Unlike stocks or mutual funds, where you can simply sell your shares in a matter of minutes, selling your shares in a real estate syndication might take months.
Typically, a real estate syndication will have to find another investor to buy out the shares of the selling investor and this can take some time depending at what phase the project is in.
Once you sign the syndication documents and acknowledge the PPM(private placement memorandum) of the investment; you are signing to the terms of syndication deal to include hold time and liquidity. This can mean that your invested capital is inaccessible for 5-7 years. If that doesn’t sound like something you are able to do, perhaps a syndication is not the best choice for you.
Need to Learn a New Investing Model
If you have any experience with real estate or even owning a home, you should be familiar with the standard rental property model. You purchase a property, you rent it and then collect rents every month. Typically, you can even visit the property at any time and even talk to tenants directly.
Now when you invest into syndications, you are investing into large commercial acquisitions with many moving pieces. You are one passive investor in a very big project. Typically passive investors will often never step foot on the property, speak with the lender or property management team and almost assuredly never talk to any of the tenants.
Passive investing means not being involved in the day-to-day operations. It means joining the investment when the real estate property is well under contract and almost closed. This new form of investing can be different for experienced real estate investors use to their own projects. It requires learning the paperwork, the investment model and sometimes tossing out what you might know about investing in active deals thus far.
Need to Invest a Large Sum
Most syndications require a minimum investment amount which can be fairly substantial for the average investor. In our syndications, we are focused on helping other working professionals like us invest into real estate syndication deals. Due to this, we keep entry in our deals at a $25,000 minimum investment.
Although, this already is a significant investment for many people, when compared to other syndication groups, this is actually quite low. Most syndication groups will have minimum investments set at $50,000 or $100,000 and higher.
This ultimately sets the bar quite high for investors to enter into real estate syndication. For many, $50,000 is a large sum of money and to invest the entire sum into one real estate investment can be difficult to conceive. For many, $50,000 might be their life savings and a syndication is probably not the best option.
When you invest into a syndication, you definitely want to ensure you don’t drain your bank account. If the sum is going to liquidate all your savings, this is not the best investment for you. My recommendation is to always keep an emergency fund and some savings. You can then invest into a syndication if you have enough to meet a minimum investment and the opportunity aligns with you and your goals.
In Final
Although you won’t hear this from many syndication groups, real estate syndications are not for everyone. We feel real estate syndication is worth understanding and an amazing method for building wealth, but it is not the only method. If any of the above four reasons resonated with you, perhaps investing passively in a syndication isn’t the right choice. That is perfectly ok.
I recommend being true to you and your goals. Sit down with your family and talk through the various opportunities. Only you know what is right for you. Trust your gut feeling and invest where it makes sense.
Remember, we are always here to talk with you and understand your investment goals. Join our investor club to speak with someone from our team and hear about any open opportunities.