You’ve probably seen housing prices skyrocket over the past few years. Perhaps your own home has increased so much in value that you’re starting to wonder if you could leverage real estate investing to grow your retirement fund.
After all, your income is likely high or you’ve received big chunks of cash from bonuses or stock options that could potentially purchase a piece of real estate that could massively appreciate in value in a similar way as your own home.
This is how most people begin their journey in real estate investing.
Many of my colleagues who have begun to build wealth and understand the fundamentals of investment diversification often get curious about investing in real estate. However, most of them only know about the traditional path of investing in single-family homes or small multifamily properties, like duplexes and triplexes.
That’s what I thought at least.
I started with buying rental properties, even leveraging property management teams in other states where cash flow looked better.
I began investing in Dallas, even though I continued to work in the Bay Area. I learned to vet and trust my local team, but that didn’t mean I didn’t have extra work. I found myself managing the expenses and having to make decisions every week. I even had to deal with a tenant who turned her room into a strip club! No kidding!
These were single-family rentals and even though I had a decent property manager, it was sucking up my precious free time. I also realized this strategy would be hard to scale and when you have one vacancy in a small portfolio, your cash flow can be severely impacted.
Luckily, I found that passive real estate investing through syndications could provide all the same benefits as owning smaller rental properties, yet required a fraction of the work.
If you’ve ever owned single-family homes or small multifamily properties, you know these residential investments can build your wealth, but they also require lots of your time and energy.
In this article, we’re going to take a look at another option – investing passively in commercial real estate syndications.
Investing in individual residential properties does have some benefits.
First, it is possible to get monthly cash flow after all your expenses are paid. It’s very common to make a 20-30% down payment and have a mortgage on the property. This way your tenants are actually the ones paying down your mortgage, building equity and taking advantage of the incredible power of using the bank’s money to acquire real estate. Your income could also be offset by depreciation of the property – one of the tax benefits of real estate ownership.
However, if a tenant does damage, those costs could set you back significantly. You also could experience vacancy and loss of income during tenant turnover. While you might be receiving $200-$300 month income, just one home repair or a couple of months of vacancy can wipe out an entire year of cash flow.
Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each.
Investing in residential real estate rentals can be challenging because, typically, as the investor you’re wearing many hats throughout the seemingly never-ending process. Responsibilities include finding the property, personally guaranteeing the loan, renovating the property, interviewing tenants, dealing with evictions, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up or when you’re ready to buy your next house.
Hiring a property manager holds the promise to give you some of your time back. But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair, costs are still in your court. Not to mention you still need to manage the property manager (not all of them have your best interest in mind). You’re basically running a small business, which can be challenging if you’re working a busy full-time job.
On the flip side, there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s – Tenants, Toilets, and Termites. Oh my! According to CrowdStreet, once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:
Have you heard the phrase “set it and forget it”? In a syndication investment, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.
You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.
It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets.
By working with experienced investment sponsors, you can easily diversify into various markets and asset classes while rest assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.
Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!
You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation.)
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, and none of your other personal assets are at risk.
With personal investments, you make a difference in two to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.
With the top operators we work with, each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications.
Either way, investing in real estate is a great way to diversify your portfolio and mitigate your risk. It gives you the opportunity to invest in real estate in a way you may have never imagined, in the best markets across the U.S. and in a variety of different asset types.
Here at Blue Elm Investments, we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity appreciation, and tax benefits.
If you’re looking for a way to diversify your investment portfolio (even with your IRA), we invite you to sign up for our Investor Club to get access to our current or upcoming opportunities.