When considering investing in a real estate syndication, it’s crucial to understand the key details involved. Unlike selecting stocks or mutual funds online, investing in real estate syndications requires knowledge of hold times, entry barriers, and specific expectations before committing to a deal. As an informed investor, you should be aware of the reasons behind your investment choice, necessary qualifications, the investment process, and the expected payout timeline. Fortunately, you’re about to discover all the essential information.
What is the duration of a real estate syndication?
Unlike stocks, ETFs, or mutual funds that can be traded daily, real estate syndications have projected hold times. While each syndication may differ, typical hold times range from 5 to 7 years, sometimes longer. These extended periods account for property renovations, management transitions, increases in occupancy rates, and adjustments to market conditions. Consequently, you should plan to invest your capital for 5 to 7 years (or as specified in the investment summary and memorandum) since you won’t be able to withdraw your funds until the asset is sold. Is 5 to 7 years a little too long? Ask us about opportunities to invest for as little as 1 year.
Who can participate in real estate syndications?
You might be wondering if there are any restrictions or regulations involved. Is it an exclusive investment opportunity? Well, you’re partly correct. The majority of real estate syndications are open to accredited investors, although some also allow non-accredited sophisticated investors (those who understand real estate syndications and their risks).
To qualify as an accredited investor, you must meet either of the following criteria:
- Have a net worth of at least $1 million (excluding your primary home).
- Earn $200,000 per year as an individual or $300,000 jointly with your spouse, maintain this level of income for the past two years, and intend to maintain it this year.
If you meet either of these requirements, you are considered an accredited investor.
If you’re not an accredited investor yet, there are still real estate syndication opportunities available, but you may need to search more diligently. Public advertising for non-accredited investor opportunities is restricted, hence the perception of secrecy surrounding them.
What is the process for investing in a real estate syndication?
Whether you’re accredited or not, you’re likely eager to learn how to invest in these elusive real estate syndication deals you’ve been hearing about. Here are the basic steps involved:
- The sponsor announces the availability of the deal for funding, typically through email.
- You review the investment summary deck and decide to invest.
- You submit a soft reserve, indicating the amount you wish to invest.*
- The sponsor conducts an investor webinar where you can acquire more information and ask questions.
- The sponsor confirms your spot in the deal and provides you with the PPM (private placement memorandum).
- After signing the PPM, you wire your funds or send a check.
- The sponsor acknowledges the receipt of your funds.
- The sponsor notifies you when the deal is closed and informs you about the next steps.
*Real estate syndications usually operate on a first-come, first-served basis. Thus, sponsors use a soft reserve to gauge investor interest.
By submitting a soft reserve, you express your interest in the deal and indicate the amount you want to invest. However, a soft reserve doesn’t guarantee you a spot in the deal or bind you to the investment. You can change your mind or withdraw your reservation later.
Pro tip: If you’re uncertain about investing $50,000 or $100,000, consider placing a soft reserve for $100,000. This secures your spot in the deal. If you decide later to invest only $50,000, you can easily adjust your investment amount. However, if you initially reserved $50,000 and later want to increase it to $100,000, you might not be able to if the syndication is already oversubscribed.
What happens after I invest in a real estate syndication?
So, you’ve made up your mind, conducted research, and secured a real estate syndication deal. What comes next?
After sending in your funds for a real estate syndication deal, your active participation concludes. Now, you can sit back and wait to receive cash flow.
Depending on the specific deal, you may receive monthly or quarterly cash flow distributions, which could start immediately or after a few months.
Regardless, you should begin receiving monthly updates as soon as the deal is closed. These updates will provide information on the latest occupancy rates and renovation progress.
Every quarter, you will receive a detailed financial report on the property. Additionally, during tax season, you will receive a Schedule K-1 for your taxes, reporting your share of the income and losses from the property.
As the projected hold date approaches, the monthly updates you receive may include details about a potential sale. Once the asset is sold, you can expect the return of your original investment capital, along with your share of the profits.
Now You’re Informed and Ready to Go!
At this stage, you’ve progressed from curiosity to interest and have become knowledgeable about passive investing in real estate syndication deals. All that remains is to find a suitable deal and get involved! You now have a thorough understanding of who can invest, the hold time, the investment process, and what to anticipate. Moreover, we’re here to address any questions or provide guidance throughout the journey.
Happy investing!