Real estate is the way to go if you’re looking for ways to make passive income – and you should be.
You might think it’s too complicated or you don’t want the hassle of scouting properties. Maybe you get hives thinking about fixing up a property, and managing tenants. In addition, securing enough money to buy suitable properties seems like a top of mind challenge for many.
Admittedly, the ability to raise a sizable chunk of change can be a barrier to real estate investment. This is especially true when it comes to the world of commercial real estate. Instead of hundreds of thousands, the price tag can run into the millions. Plus, commercial properties are usually larger, they have more maintenance needs, and tenants’ leases can be trickier to negotiate. The potential for a good return is certainly there, but geography and other factors may limit the promise of a high-earning portfolio.
Real estate syndications can help passive investors overcome these barriers since they’re essentially crowdfunding options for commercial properties. That said, real estate syndications aren’t the same as real estate investment trusts and do come with some caveats. In this article we’ll look at what a syndication is – how they work, and who can benefit.
Syndications are a bit different from other forms of passive real estate investments. Instead of buying shares in a REIT, your money goes directly to a single commercial project. The property could be a hotel, a downtown high-rise office building, or a shopping center. With a real estate syndication, the property may not exist yet, it may be in the planning stage. It might be in the pre-build stage when the project needs enough funds to get off the ground.
Besides targeting a single commercial property, real estate syndications involve active and passive investors. A sponsor takes a more active role, while passive investors provide the lion’s share of the money. Sponsors are the ones who scout out commercial real estate, identifying which projects have good return potential. They also manage the details, including hiring contractors for builds and everyday operations.
Because a sponsor has a more active role, they earn fees. These fees are for securing the property or project and are usually separate from the project’s equity earnings. Although passive investors provide most of the money, they don’t take an active role in managing the project. Their return comes from equity and dividends funded by rental income and can provide a passive income for these investors. The more an individual invests in a project, the higher their potential share of the property’s profits will be.
Say passive investors collectively contribute 90% of the capital for a hotel. You fund 10% of the 90%, so your share and stake in the property is 9%. You can earn that percentage of the project’s profits after the sponsor sells the hotel. Before the property is sold, passive investors can earn dividend income at a targeted annual return rate. The return rate might be 5% for some projects, but it could be as high as 10% for others.
The thought of investing in commercial real estate can be intimidating, so you may hesitate to do it. If you are one of the hesitaters – you may be emboldened by Lifestyle Investing expert Justin Donald, who recalls, “I, too, had a challenging time taking the leap into real estate. I knew I would do well but kept hesitating because of a limiting mindset that said I had to have all the money upfront – and needed more money to even begin. Now I know, if the deal is good enough, the money will show up.”
Real estate syndications are one way to have that money “show up.” You’re not footing the entire bill, since there are other investors involved. Together, you can raise the capital to invest in commercial properties that will provide sufficient income. And with online crowdsourcing platforms, you don’t have to network your way to a sponsor. You can explore real estate syndication opportunities from your home office or neighborhood library.
Still, you will need to observe the rules of the game. The JOBS Act of 2012 made investing in real estate syndications more accessible. But you must qualify as an accredited investor, which means your annual income needs to exceed $200,000. The yearly income threshold bumps up to $300,000 if you’re married. And you have to meet these benchmarks for a minimum of two years in a row.
Another way to qualify as an accredited investor is to have a net worth of $1 million. This figure cannot include your main home’s value or equity. If you meet these qualifications, though, you can add real estate syndications to your lineup of investments.
Some of the benefits of investing in real estate syndications are built into the nature of the transaction. You don’t have to be a commercial property expert to earn money. In fact, you don’t have to know much about commercial real estate at all. It’s the job of the sponsor to have and use this expertise to all of the investors’ advantage.
Another built-in benefit is you don’t have to come up with a large sum of money to invest. If you were to purchase or fund commercial projects by yourself, the sum would be huge. Sure, you might be able to secure financing through loans and angel investors. But it would take time, resources, and paperwork to do it. Real estate syndications let you invest without these barriers. You get in the game sooner with less financial risk.
As a passive investor in a real estate syndication, you’ll have no day-to-day property management headaches. Nor do you face the same liability exposures as direct owners do. You do, however, give up control of the property and its performance. Like with any investment, the possibility of not making money exists. Plus, syndications aren’t the most liquid investments. You’re typically in it for the long haul.
Online crowdsourcing platforms make it easier for people to earn passive income from real estate, including commercial properties. One of the year’s dominant technology-related real estate trends is fractional ownership, which could be considered a real estate syndication’s close cousin.
Real estate syndications can be a profitable option if you want to diversify your investments. You won’t have to deal with the typical barriers to owning commercial real estate, and you could stand to earn a healthy return.
Felix is the founder of Society of Speed, an automotive journal covering the unique lifestyle of supercar owners. Alongside automotive journalism, Felix recently graduated from university with a finance degree and enjoys helping students and other young founders grow their projects.