Three Ways to Invest In An Apartment Syndication
How To Invest In A Real Estate Syndication
Real estate syndications come in many shapes and sizes, enabling investment in many different asset classes, from mobile home parks to self-storage facilities and apartment complexes to shopping centers, to name a few. Real estate syndications also have many advantages including passive income, stable cash flow, tax advantages, diversification and leverage. Because it hedges against inflation, real estate is a beautiful method to diversify an investment portfolio.
As a passive investor, the ‘heavy lifting’ of managing the day-to-day operations of the real estate syndication is done for you by the sponsor team. This saves the passive investor a ton of time and energy, allowing them the time freedom to focus on other projects while building wealth through real estate.
Though real estate syndications have many benefits, it’s also important to understand the drawbacks of these investments. These non-traditional investment options are notoriously illiquid, meaning that if you need access to your capital investment during the course of the project it will be difficult to get those funds back. Keeping a large sum of money illiquid for several years does not align well with all investor’s goals.
The minimum investment amount can vary depending on who you work with, but typically most syndications require a $50,000 minimum.
It's also critical that you collaborate with a reputable real estate syndication sponsor. If you take a chance on someone new to syndication, you are significantly increasing your risk.
While it may be tempting to work with trusted friends or family members, this strategy only works if the sponsor has extensive real estate syndication experience.
You can, fortunately, avoid these drawbacks. Ensure you have an emergency fund or that your other investments, such as equities, are liquid before investing in a real estate syndication.
If you have other sources of funds, the illiquidity of real estate syndications is less of a concern.
Options for Funding Your Real Estate Syndication Investment
One of the most common questions that come to mind when a passive investor is learning about real estate syndications is how to fund the investment. A fifty-thousand-dollar minimum investment is standard, and since that’s probably more than you can dig up from between your sofa cushions, you’ll need to strategically plan so the distributions come back to you to in the most tax advantaged and financially beneficial way.
There are three primary financing alternatives for your syndication venture. The option you choose will be determined by your overall financial position, investment goals, what you intend to do with the distributions, among other factors. There isn't a one-size-fits-all solution, so be sure to spend time thinking through the options outlined below to consider which is most appropriate based on your goals.
Individual Investor
Individual cash investment is the quickest and most straightforward method. This entails investing independently with money saved up or other liquid assets, signing the documents and wiring in the funds from your account.
You’ll receive distributions directly into your account as an individual, and you benefit from the tax advantages of owning real estate. There's no need to keep track of your distributions or tax deductions because you'll get a K1 in the spring with all the information you need to file your taxes. When you invest personal funds, you get all the benefits, tax deductions, distributions and other perks of being a real estate syndication investor.
Individual investors should think about asset protection options like insurance or a trust that specifies a chosen beneficiary. Because the operator team does not collect beneficiary information, you should make sure that it is written explicitly in your legal documents if something unforeseen happens.
LLC or Trust
Using an LLC rather than managing your real estate business as a single proprietorship might restrict your legal exposure by preserving your personal assets. While there are rare exceptions, such as in circumstances of gross negligence, in legal actions against an LLC, the only assets at stake are those that the LLC owns. If your LLC owns two rental properties, for example, those are the only assets that would be at risk if a renter sued you. You can even form a separate LLC for each property you own to further secure your assets in the event of a lawsuit.
Buying an investment property with an LLC might be a terrific method to keep your business and personal finances separate. It can be considerably easier to keep track of your rental income and expenses if all income is transferred to the LLC and all property expenses are paid from the LLC using a separate bank account in the LLC's name.
Retirement Accounts
Select types of retirement accounts can be used to invest in real estate syndications. There are many different financial products available, but the two primary types are Self Directed IRAs and Self Directed (or Solo) 401ks.
Self-directed retirement accounts are typically (but not always) managed by custodians who are responsible for executing the limited partner paperwork on a real estate syndication and wiring in your funds. Be sure to select a custodian that can do this in a timely manner because many real estate syndications fill up quickly.
Be sure that you carefully review the laws pertaining to your self-directed retirement account. Many of these stipulate that all distributions from a real estate syndication need to be placed back in the account, meaning the owner cannot use those monies for short term cash flow.
Conclusion
Investors who don't have the time or inclination to manage their own properties but love the cash flow and tax advantages of real estate will find that passively investing in a multifamily syndication is a terrific solution. Many investors seeking passive income are attracted to the ability to invest in real estate without managing the asset on a day-to-day basis.
There are many different things to consider when deciding how to invest in a real estate syndication, such as the state you live in, if you have children and their age, if you have any significant expenditures on the horizon, when you hope to retire, how you plan to utilize the distributions and what heirship designations you require. In the end, the best option for you depends on when you'll need the cash and how you'd like the tax benefits to be utilized.
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