Advantages of Investing Through a Real Estate Syndication
Traditional real estate investing is very demanding: 24/7 property management, third-party vendors, corporations, mortgages, insurance policies, taxes, tenant turnovers, leasing, evictions, rent collection, capital improvements, along with federal state and local laws to abide by.
Typically, new real estate investors will start with a small building. These properties are generally the most difficult to manage. They are not big enough to profitably hire a full time management company and as soon as one tenant moves out the cash flow decreases and frequently turns negative. The investor has essentially purchased a business that is open 24 hours a day.
Syndication provides investors with all of the benefits of real estate, without all of the responsibilities, truly making real estate a lucrative, passive investment.
1. Superior expertise
A primary benefit of investing with a syndicate is the expert knowledge and skills gain by partnering with several real estate professionals. Instead of relying solely on one individual investor’s expertise, syndicate investors are able to leverage the intelligence of the experienced team. This is perfect for the busy professional that is time constrained and unable to learn all facets of real estate investing.
Syndication allows individual investors to easily diversify among several different properties, in different markets. Diversification is ordinarily very difficult with direct real estate investments; however, syndication makes diversification extremely easy.
Investors can diversify the real estate holdings between different markets and property classes. The ability to effortlessly participate in syndications for apartment buildings, high-end commercial buildings, office space, self-storage, mixed used properties, etc. are one of the lures of property syndicates.
3. Economies of scale
Similar to other industries and businesses, when you purchase in bulk your cost is reduced. The decrease in cost is realized across-the-board from your management company, to your landscaping contractors, to your cost of capital – consequently increasing the properties net operating income.
Traditionally, when economies of scale are discussed, the benefits are purely financial. An additional and commonly overlooked advantage, possessed by syndicate, is their relationships with vendors, brokers, lenders, and managers. A broker who consistently sells a syndicator multi million dollar complexes will spend considerably more time finding them great deals while also providing valuable market insight. The broker will send the syndicator off market deals, profitable value ad deals, and will practically become a member of the syndicators acquisition team. An amenity that is unavailable to new or smaller investors.
4. Access to Larger Properties
Direct real estate investors are customarily unable to partake in choice properties because of their high sales prices. Typically, a real estate investor will be required to invest 30% (25% for the down payment and 5% for the closing costs) of the sales price in order to purchase a commercial property, plus show proof of additional liquid assets (an additional 10% of the purchase price). This 40% constricts the direct investors purchasing power. The investors are usually left purchasing small C and D class properties with minimal appreciation and maximum headaches.
Since real estate syndications pool the funds of many investors, it allows individual investors to access large, high-quality properties. Instead of providing a 30% down payment themselves, the syndicate might be offering individual shares of the investment for only 1%-2% of the purchase price. The syndicator will also handle the loan approval process, including signing on the loan. A $20 million property might now be accessible to an individual investor for $50,000 per share. The majority of commercial real estate transactions are completed using some form of syndication.
5. Minimal Risk
Minimizing risk is easily accomplished with real estate syndication, coinciding with the diversification benefit. Instead of investing 100% of your capital into a single investment, an investor is able to easily spread their capital over several separate investments.
Syndicate investors are “limited partners” while the syndicator is the “general partner”. A limited partner’s risk ends after they have made their investment. A limited partner has no exposure or liability for any lawsuits against the property mortgages on the property, liens etc. The limited partner simply invests the set of amount of money without any other responsibility or obligation, including personal liability or credit risk.
6. Inflation Hedge
Real estate, in general, has always been an excellent inflation hedge. However, cash flowing commercial real estate with long-term, fixed debt provides the highest returns in its property class. The limited supply and high demand of apartments, along with other commercial properties, consistently outpaces the rise of inflation. A cash flowing, commercial property that is properly leveraged will significantly outperform other asset classes during any inflationary period.
7. Tangible Assets
Real estate syndication provides investors with ownership and actual tangible, hard assets. These tangible assets continually carry an economic value and their values minimally fluctuate, unlike stocks. Gold and silver are other hard assets, but they do not provide any type of quarterly return, along with the fact that if you purchased gold in 1980 and held it to today, you would actually have lost money to inflation.
8. Entirely Passive
Real estate syndicates allow an investor to be 100% passive in their investment, with no other responsibilities. The syndicator sends monthly updates and quarterly reports along with quarterly distributions that are directly deposited into their limited partner’s bank account.
9. Consistent Returns and Less Volatility
We previously outlined all of the benefits of commercial real estate, but unlike other asset classes, commercial real estate pays consistent quarterly distributions, while also providing consistent appreciation. Over the past 90+ years, the S&P 500 has had 28 down years, 3x to 4x more down years than commercial real estate. An excellent example why you cannot borrow money from banks to buy stocks, but you can borrow money from banks to purchase cash flowing real estate.