If you’re into real estate, you may have heard the term “real estate syndications.” This is a fancy term for group investment, where several people come together to acquire a large property (such as an apartment complex), they form an LLC, and there are active investors who manage the property and passive investors who help with the capital for the deposit, and they get to share the profits with the active investors.
This type of investment has become very popular, especially in the last 4 to 5 years, and to be honest, for a very good reason: the risk-return profile is spectacular and real estate has important features that make it a very good investment . investment: cash flow, valuation, equity, leverage and tax benefits.
However, it is also true that real estate investments are big investments and not the perfect choice for everyone. So, here are my four reasons why anyone should not invest in real estate syndications.
Syndications are illiquid investments.
Investing in a real estate syndication means that you agree to the terms and the expected waiting time. Your capital or money is illiquid for the duration of the transaction until the property (for example, an apartment complex) is sold.
It is unlike other investments such as stocks, mutual funds or even REITs where if you want to withdraw your capital you can do so quickly within days. If you own a rental property, you can, and normally you should receive the proceeds within a few months. If you are investing in a real estate syndication and the holding time is typically 5 to 6 years, you should plan to leave your capital in the project for the full five years, if not longer. Real estate syndications do not allow you to withdraw money at will.
If there’s something about the idea of investing at least $50,000 (the usual minimum investment) and not having access to it for five years that makes you uncomfortable, turn it around now.
Even for doctors, the usual minimum investment is a lot of money.
The minimum investment in real estate syndications is usually $50,000, which is a lot of money for anyone, even highly paid professionals, such as doctors. You may need or use this capital in various ways (think of the 5 to 6 year retention period). You or your spouse may need to buy a car in 1 to 2 years, your oldest child will be going to college in the near future, or you may need to pay for private school for your children.
Remember to always have reserves before you consider investing in a real estate syndication or anything in general. My advice? Do not invest in a syndication until you are absolutely sure you want to use this money THIS. In fact, if you have $51,000 in your savings account, don’t you dare invest $50,000 of that in a real estate syndication. Always have at least 3-6 months of monthly expenses in case of an emergency. You need to make sure you have enough saved in a separate emergency fund, create other accessible savings for additional short-term goals or needs, and have even more money to cover life in general.
You have to relinquish control.
When you buy a rental property, you usually make all the day-to-day decisions and all the responsibilities fall on you. In fact, many people like this: having control over their investments.
There is a big fundamental difference between passive investing and everything else; the level of control you have over the day-to-day decisions made regarding the property, renovations and tenants.
Real estate syndications are a passive investment, where you sit in the passenger seat. While this can be great for many people, it can be frustrating for others. In this case, developing some level of trust in the sponsor team is imperative. If you are the type of person who usually wants to make decisions or be involved in everything related to the activities of an investment, syndications may not be right for you.
Syndications, as well as the business plans, are new to many people.
People tend to feel comfortable and invest in what they are comfortable with. Although syndications have become very popular in the past 5 to 10 years, they are not as easy to understand as rental properties. For many people, even doctors, learning a new system or process may not be ideal or feel uncomfortable. That’s why it’s so important to educate yourself about this and other alternative ways of investing outside of Wall Street.
Passive investors hardly ever see the property, have no relationship with the lender or management team, and never come into contact with tenants. Passive investing is called that for a reason – because after you have done your due diligence and analysis of the investment statement, signed the agreement and sent your capital, you will take a backseat. Of course, you communicate with your operators and receive regular updates about the investment, but you cannot make a decision about the investment itself.
My last attempt
Real estate syndications are great investments and an excellent way to create wealth and put your capital to work outside of Wall Street. However, no investment vehicle is perfect and no investment style is perfect for everyone. If any of the above four reasons not to invest in a real estate syndication make you uncomfortable, passive investing in real estate syndications is probably not for you, or you may need more time to research and educate yourself until you feel comfortable with it. And that is good.
It’s important to have options and the ability to make an informed decision for you, your family, and your financial goals. At the end of the day, there are a ton of ways to invest in real estate, so don’t feel bad if you prefer an investment vehicle other than syndications.
Harry Nima Zegarra is a critical care physician.
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