Real Estate Syndication: Pros and Cons

real estate syndication can be a powerful investment structure and there's a reason it's used so often in multi-family real estate but wherever there's pros there are also cons in this video i'm going to walk you through the pros and cons of multi-family real estate syndication so make sure you hit the subscribe button right now so you don't miss more videos about building wealth through multi-family real estate and if you don't know me i'm seth ferguson a 12-year real estate veteran host of a real estate tv show host of a real estate investing podcast and i'm also the author of the real estate book sell for more so let's get right into it and talk about the pros and cons of real estate syndication so let's start off and draw our two lists here so we have our pros and cons i always like to start with the good news first so let's start with the three pros i want to cover and then we'll cover three of the cons so pro number one is passive investing and i should say it's true passive investing because what the syndication allows investors to do is participate passively in these large multi-family properties the only thing the investor is risking is their capital as opposed to a partnership structure or a joint venture where everybody is considered to be active let's say you're investing in a partnership in whatever property it is and you are the person bringing your capital so you're investing the money and somebody else is managing the deal if that deal goes belly up even though you're just bringing your capital under the law you are considered to be active so you're also taking on the added risk of you know the lender coming after you lawsuits in the case something happens with the property so investing in partnerships can't be considered a true passive investment because you're actually active and i'll put a link right up here to a video i did comparing partnerships joint ventures and passively investing in syndications so this is definitely a pro if you are a business owner if you are a lawyer accountant programmer a developer if you are a high income individual you want to be able to invest passively and not incur additional risk just because you're investing in a real estate investment so passive investing is definitely pro number one and pro number two is cash flow and i'll just put scale right here a lot of investors when they first get started investing in real estate i went through this too when i first started is they will buy single-family homes duplexes triplexes smaller multi-families one of the big challenges with operating on such a small scale is cash flow because the scale isn't working in your favor first of all financing is incredibly tough when you're operating on the residential side you usually don't get interest only payments and that really helps your cash flow as you're implementing your value-add plan your expense ratio is incredibly high when you're operating on a smaller scale and even your property management fees you're paying 10 to 12 percent of your gross revenue and that's just going to management uh so scaling is definitely a benefit of participating passively in a syndication uh maybe an investor maybe you have enough capital to acquire a single-family home but like i said there's all those disadvantages of operating on such a small scale let's say you have a duplex and one tenant moves out 50 of your revenue disappears overnight just like that that is incredibly tough and incredibly challenging so what syndication allows you to do is it allows you to take advantage of all the benefits of scaling up investing in much larger properties but it allows you to pull your capital with all these other investors so everybody in the syndication can take advantage of the added stability the cash flow the predictability all those benefits your expense ratios are going to be between 40 and 50 depending on the type of property you're investing in as opposed to something much higher with a single-family home or a duplex so strong cash flow struck cash flow is key it is the lifeblood of real estate investing so being able to participate in much larger investments that gives you the benefit of scaling up in terms of size that is definitely a pro of syndication and last but not least let's talk about some tax benefits when you scale up so this will piggyback on number two when you scale up you can take advantage of something called cost segregation this is basically depreciation on steroids and i'll put a link right up to here to a video i did talking about bonus depreciation and cost segregation you're basically stripping out everything that's not related to the building and the actual land itself and depreciating it right up front to give you paper losses and that will significantly reduce your tax liability these come about because of syndication and the scale is working in your favor so many investors that invest in real estate syndication yes they want their money working incredibly hard in the deal but number two they also want to do it in a very tax efficient way nobody wants to pay more tax than they have to and syndication allows you to to take advantage of depreciation and other tax credits bonus depreciation to really minimize the tax you're going to pay on all the gains that you you earn in the syndication and in that investment now let's move over to the cons of participating in the syndication and yes there are cons and the first one i want to talk about is control if you are a person who wants to manage the investment if you want to be active if you want to be making key decisions on where the investment goes well being passively invested in the syndication is not for you and that would be a con many people enjoy the benefits of passively investing in a syndication because they're busy running their business they're busy earning a high income and they don't have time to start a brand new real estate business from scratch and to vote many many many many hours a week in running that real estate business but if you want to be hands-on if you want to manage everything if you want to choose the paint colors choose the flooring decide which tenants come and go when to sell when to refinance who to refinance with all those key decisions syndication is not for you because syndication is structured to bring in passive capital passive investments from passive investors who want their money their investment to be managed by a real estate expert if you want to be that real estate expert be hands on this would be a certain con when it comes to syndication con number two is real estate is e liquid and what i mean by liquid is you can't sell it tomorrow you can't get out of the deal tomorrow with syndications depending on the type of project you could be invested in for three years five years seven years ten years it's it's really dependent on the the project and what has to be done real estate is not liquid if if you own stocks you can sell tomorrow you might be selling at a loss but you can sell no matter what tomorrow depending on the price real estate it's not that simple and especially so in syndications because there are rules put in place with how you can exit if you can even exit the syndication sometimes you can't exit for the first two years then there's a penalty sometimes you can only sell to other shareholders in the syndication it all depends on how that deal is structured and set up so if you're looking for an investment that's incredibly liquid where you can just get out tomorrow if you have to a syndication is not for you and this would be a certain con but on the flip side a lot of people like the eliquid nature of real estate because it forces you to make wise decisions really consider the investment you're entering into and then you put your money in it goes to work and you forget about it you can't access it and spend it on something else your money is tied up it is dedicated to that investment and that's why many passive investors enjoy investing in the syndication because they do their due diligence they do their research they find a good real estate investment opportunity they invest in it and whenever the deal exits whenever the property is sold they receive their big check as well as all the cash flow along the way and then they can roll it into another syndication that's a benefit but if you're looking to get in and out and move around and really trade real estate like you're trading stocks real estate syndication is not for you and con number three is i'm going to call this prerequisites what i mean by prerequisites is there are conditions criteria that must be met for somebody to invest in a real estate syndication if you're buying stocks as long as you have the money you can go out and buy a stock uh for whichever company you want whether it's coca-cola uh enbridge bank of america it doesn't matter when you're investing in real estate syndications oftentimes you must be an accredited investor and i'll put a link right up here to a video i did explaining what the criteria are for an accredited investor you have to hit income thresholds you have to hit asset thresholds for you to be able to participate in most real estate syndications because most indicators work in what's called the exempt market so if you don't qualify as an accredited investor well this would certainly be a con of a syndication because you can't access that investment opportunity and this is why the general public doesn't even hear about the best real estate investment opportunities out there because they're not allowed to be advertised to the general public they're just presented to accredited investors so there are so many incredible real estate investment opportunities out there that people simply just don't hear about because they're not accredited investors so if you don't meet the criteria for an accredited investor well the entry is denied into that syndication and that would be a con real estate syndication that all boils down to your goals does the syndication meet your goals if you're looking for tax benefits if you're looking for strong cash flow and scale and stability and if you're looking for passive investing syndication is a great option for you but if you're looking to control and be hands-on with the investment if you're looking to get in and out really quickly and if you don't meet the accredited investor criteria while there are a lot of cons when it comes to participating in the syndication if you can even participate in it so it all comes down to your investment goals so if you'd like to learn more about the deals i'm currently looking at head on over to callseph.com and set up a free 20-minute phone call with me and if you like this video if you found this useful hit the like button leave a comment let me know what you think and until next time happy investing you

Channel: Seth Ferguson - Multifamily Real Estate Investing

Views: 1,106

Rating: 5 out of 5

Keywords: real estate syndication, real estate syndication business plan, real estate syndication explained, real estate syndication for dummies, real estate syndication investing, real estate syndication structures, multifamily real estate syndication, real estate investing, multifamily real estate, multifamily real estate investing, syndication real estate, syndication real estate investment, apartment syndication, multifamily syndication, multifamily syndication structure

Id: 09HfOxKlLxo

Length: 11min 49sec (709 seconds)

Published: Thu Nov 19 2020