PASSIVE INVESTING RESOURCES
If you are a passive investor looking at investing in real estate syndication deals then you've come to the right place! Real estate syndication deals can be a great way for passive investors to diversify their investment portfolio with reliable and consistent cashflow streams and equity build up over time that is not correlated with the stock market. Amongst many other benefits, investors also get to take advantage of significant tax breaks which make this type of investment even more lucrative!
The sole purpose of this page is to provide valuable resources and information needed to make informed decisions when passively investing in real estate syndication deals.
Through hundreds of investor conversations the information below was created to help educate investors on the most import aspects of passive investing in large syndicated deals.
This page is designed to help you understand more about real estate syndications and the many benefits that come by passively investing in them. I've also provided an overview of the top 3 recession-resilient assets classes (value-add multifamily, self-storage and manufactured home parks) that we invest in and believe provide the greatest opportunities for tax-efficient passive income and long term wealth building.
Let's dive in!!
WHAT IS REAL ESTATE SYNDICATION?
In my opinion, real estate is the best way to grow wealth. If you want to invest in what the rich do, get involved in real estate — but I'm not talking about just any real estate.
Real estate has been a staple in many successful investment portfolios for decades, and for good reason. It is a limited commodity that has a proven track record of lucrative returns, the offer of diversification, and resilience to economic recessions. One may hold a number of real estate assets from land to single family homes, and even small multifamily homes. One type of asset structure that is often overlooked, is real estate syndication, specifically for large multifamily apartments, self-storage facilities and manufactured home parks. The reason behind this may be one of many; limited access, high cost of entry, or the lack of “know how” to name a few.
The biggest reason investors participate in real estate syndication is access to deal flow. Not every investor has the time to search and underwrite hundreds of properties to find a gem to acquire. By getting involved with trusted real estate syndication partners, investors gain access to this deal flow and the ability to invest in high quality real estate without the hassles of property management.
What is Real Estate Syndication?
Simply put, real estate syndication is an effective way for a syndicator/sponsor and a group of investors to pool their financial and intellectual resources together to invest in properties and projects much bigger than they could afford or manage on their own. Over 90% of large multifamily purchases are made through a syndication.
The parties at the forefront of a syndication deal include the sponsor (also referred to as the general partner, operator, or syndicator), the limited partners (or passive investors) and the property management team. There are plenty of other team members involved that make the deal work behind closed doors, including, but not limited to, a commercial broker, a team of attorneys, CPAs, and lenders.
Role of a Syndicator
The sponsor/syndicator is the person who initiates the real estate syndication; they are responsible for identifying the market, underwriting the property, securing financing, overseeing the business plan/renovations and the daily activity of the property management company, ensuring strong investor relations, and managing the asset it general.
Role of an Investor
The limited partner, or investor, is the individual (or group of individuals) that provides the equity to fund the deal. The role of investors in real estate syndication is very simple: they invest their money in a real estate project that is run and managed by the syndicator, and they earn a percentage of the project’s profits based on a predetermined and agreed upon rate that is split between all investors and the syndicator.
WHAT ARE RECESSION-RESILIENT ASSETS?
Whether you're in the camp that this economic expansion has long legs or you're starting to get concerned about how to protect your assets in a downturn and minimize damage, I wanted to share three recession-resilient niches that I invest in. These three commercial real estate niches self-storage, manufactured home parks and value-add apartments, have been some of the top performers for decades. I believe one of the reasons they have performed so well for so long is that they handle downturns much better than other asset classes or real estate niches, thus recover faster with less damage to your returns while performing admirably well during good times.
When thinking about your portfolio holistically, there are not a lot of places to hide with stocks when the storms come, and bonds certainly are not in a place to grow your wealth, even though they do a respectable job of protecting the downside. Many investors I talk to are in search of “all-weather” opportunities now - niches that have a long-term track record of growth (the sunny days) but don't get tossed around frantically, nor capsized when the storms arrive.
Why These 3 Assets are “All Weather” Performers
Multifamily Apartments (Value-Add)
With apartments, it’s the most popular niche for folks needing a roof over their head outside of the single-family home. The affordability issue of saving for a down payment and paying the mortgage with the rise of more younger folks and retirees wanting more freedom to live, work and travel anywhere without the cost and burdens of taking care of a home makes this asset class a steady performer in all cycles. Value-add investing in older apartments (1980 – 2005 vintage) with owners who are looking to improve the look (renovations) and operational performance of these assets help protect you somewhat from a downturn. Rent concessions can certainly happen in a severe downturn but unlike new construction, the concessions should be more reasonable as you are primarily housing the working-class service industry that is not impacted as much as the higher wage earner who is more targeted in layoffs.
Why was self-storage able to outperform almost every REIT sector during the most recent recession? When the economy is good and disposable income is on the rise people buy more “stuff” and need a place to store it, which makes sense. Why is this sector somewhat insulated to the impact the recession had on other market sectors? During the recession homeowners were losing their homes to foreclosure or downsizing to apartments and where did they put their stuff? Self-storage units! At the heart of this issue is the fact that Americans have a culture of buying too many things and we can’t seem to get rid of most of it. The demand curve for self-storage seems to be inelastic which helps pull the sector through any major downturns. Estimates are that one-third of storage space is filled with items that have been there for over three years.
Manufactured Homes Parks (MHPs)
The increasing affordability crisis keeps buying a home for many challenging. Over 10,000 baby boomers retire every day with little savings and living primarily off social security. Couple that with little or no supply of new MHPs nationwide being built and you have a very favorable scenario of strong demand and lack of supply. Supply is constrained since towns and municipalities receive little tax revenue from building new parks and many have historical stigmas attached to them. Additionally, since its costly to relocate manufactured homes (for the individual owner) and the lot rent is more affordable, you have a more reliable income stream. Lastly, lot rents are at a relatively low base. Nationwide average is $275 / month. A 5% increase in lot rent annually is typically not going to make a meaningful impact to your unit owner's ability to pay.
In summary, adding one or some of these niches above can help improve your overall performance in not only down markets but also perform well in good times too. That’s why it’s a good idea to consider having some “all weather” assets as part of your overall portfolio. One of the best ways to get involved in these niches are through syndications. Syndications are run by experts that focus on one of these niches. They acquire, manage and distribute cash flow monthly or quarterly during the typical hold period (~ 5 years) and ultimately return your capital with profits at the end of the investment. You, as a limited partner (investor) get to participate by providing investor capital in exchange for returns without having to spend your time involved in day to day management. Do your homework, focus on one sector at a time and research good operators with solid track records. Here's an article on vetting an apartment sponsor that you may find helpful.