When it comes to investing, there are a lot of options to choose from. Many people automatically think of stocks and bonds when they hear the word “investing”, but there are actually other options out there that can be just as profitable. One such option is real estate syndication. In this article, we will discuss the benefits of real estate syndication and why it is a smart way to invest your money.
What Is Real Estate Syndication?
Basically, this is the process of pooling money from investors in order to invest in real estate. It works by having a group of people come together to make syndicating investments. This can be done in two ways:
- Forming a company that will own the properties
This method involves setting up a company of investors who would pool their money together to buy the properties. This can be a good option if you want more control over your assets, but it also comes with more responsibility.
- Investing money into a fund that will then purchase the properties
This is the most common method of real estate syndication. This option is less risky since the fund manager will be responsible for finding and buying the properties. However, you do lose some control over the process.
What Are The Benefits Of Real Estate Syndication?
Like other forms of real estate investment, investing in real estate syndication also comes with its own set of benefits. Here are reasons why it is a smart way to invest your money.
Access to More Profitable Investment Properties
Because you will be pooling your money along with a group of investors, you can afford to buy pricier properties than you could if you were investing on your own. This also allows you to get into the market earlier and purchase properties before they become too expensive.
Diversification
When you invest in a property individually, your investment is tied to that one property. If the property goes down in value, so does your investment. However, when you invest in a syndicate, your money is spread out among multiple properties. So, even if one of the properties goes down in value, your investment is not as affected.
Professional Management
Typically, you are investing in the skills and experience of the fund manager. This person will be responsible for finding and buying properties, managing the property, and making sure that investors receive a good return on their investment.
Having a professional manage your investment can be very helpful since it takes away some of the stress and responsibility from you.
Tax Benefits
Investing in real estate through a syndicate also comes with tax benefits. The profits that you make from your investments are usually taxed at a lower rate than regular income. This can save you quite a bit of money over time.
To know more about the perks of syndication in this aspect, you can check out a “benefits of syndication article” by one of the most trusted professionals in the industry.
Reduced Risk
You are spreading your risk among multiple properties, reducing the amount of risk that you are taking on with your investment. If one of the properties fails, it will not have as big an impact on your overall portfolio as if you had invested in that property individually.
Ability to Earn Passive Income
Passive income is the earnings you receive without having to do any work. This is a great way to make money while you are sleeping or doing other important things in your life.
For example, if you invest in a syndicate that owns a property that is rented out, you will receive passive income from the rent payments. This is a great way to make money without having to do any extra work.
Reduced Liability Exposure
In a real estate syndication investment, you are not liable for any of the debts or liabilities that the property may have. This is because you are investing your money through the fund manager and not directly into the property. This can be helpful if you are worried about getting involved in lawsuits or other legal troubles.
Inflation Resistance
Real estate is a great way to protect your money from inflation. When the cost of goods and services goes up, the value of real estate usually goes up as well. This means that you can make money off of your investment even if the economy is not doing well.
Different Real Estate Syndication Structures
Now that you know the benefits of real estate syndication, it is time to ensure you are getting the most out of it by knowing its different structures, so you will have more confidence that you are putting your money in the right place.
Here are the options available to investors today.
Straight Split
In a straight split, the fund manager and the investors each own 50% of the property. This is usually used when there are more than 50 investors in order to keep things simple.
Master Limited Partnership
A master limited partnership (MLP) is a company that owns real estate and allows its investors to receive tax benefits. It is usually used for larger properties or syndicates with more than 100 investors.
Limited Liability Company
This company offers its owners personal liability protection. This means that if something goes wrong with the property, the LLC members will not be held responsible. This structure is best for smaller syndicates with fewer than 50 investors.
Real Estate Investment Fund
A real estate investment fund (REIF) is a company that allows its investors to invest in multiple properties at once. This structure is also best for syndicates with more than 100 investors.
Waterfall Distribution
In a waterfall distribution, the fund manager gets paid first, then the investors. This structure is used when there are more than two classes of investors (e.g. preferred and common).
First In First Out
In this structure, those who invest their money first get their money back first. This structure is also used when there are more than two classes of investors.
Which Structure Is Right For You?
Now that you know about the different structures, it is important to choose the one that is right for you. To do this, you need to consider how much money you have to invest, what your goals are, and how much risk you are willing to take on.
Once you have chosen a structure, be sure to research the fund manager and make sure that they are reputable. This is an important step in ensuring that your money is being put in a safe place.
Conclusion
The benefits of real estate syndication can’t be stressed enough. Not only that it does not require a lot of responsibility on your part as an investor (while you earn a good amount of passive income), but it also provides you with different ways to structure your investment, so you can find the one that is most advantageous for you.
However, you should remember that its structures are becoming more and more complex, so it is important to understand them before investing. By doing your research and picking the right strategy, you can rest assured that you are making the best decision for yourself.
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