Reasons include diversication, tax benefits and outsize returns, Other benefits include benefiting from the sponsors experience and an automated investment. It's kind of like investing in the stock market. The investor owns the stock but does not need to worry about managing the corporation. Owning real estate via syndication is similar. Investors may work with a sponsor/manager buying a small project where they are the sole investor or a larger project with hundreds or even thousands of investors.
The sponsor is the person or company who finds, organizes and is in charge of operations for the project. It's not an easy job as first you need to learn how to find and underwrite investments who meet a minimum rate of return for themselves and the investors. It has to be a high enough return that meets investor returns and the sponsors compensation for organizing and managing the project. Sponsors go through 100s or 1000s of investment opportunities to find a good one.
Diversification means putting your eggs in different baskets. It means spreading your money around when investing in case an investment fails or does not earn an adequate return. Experts typically recommend a 20% allocation to real estate. This can be higher or lower depending on your goals and understanding of real estate investments.
Tax benefits from real estate are depreciation, interest deductions, tax free cash out refinances and 1031 exchanges. Depreciation states that assets lose value over time. The government assigns a number to the lost value and allows businesses to deduct it from their taxable responsibility for buildings, equipment and more items. This helps owners of real estate defer taxes sometimes until death. Real estate loan interest is tax deductible which allows owners to reduce their tax responsibility by the amount of interest paid per year. Tax free cash out refinances are when owners borrow money based on the higher value of a property they own and are not required to pay taxes unless the property is sold. For example if you purchased a property for a million with a $750,000 loan, but 5 years later its worth $2 million you could borrow $1.5 million and pay closing costs of $50,000. That means you have $700,000 in cash tax free until you sell the property. 1031 exchanges is a subject in and of itself but it basically allows owners to defer the tax of a property they sell by buying another property within a short period of time.
Outsize returns are possible in real estate investing depending on the market and investment strategy. For example our strategy value add investing is a good opportunty for outsize returns. This is buying properties that require renovation and where rents are below the market rate for the area. Sponsors could renovate units and position them at a premium rent in the market. Although time consuming and management intenstive this is a good way to earn outsize returns. It requires a good understanding of the market, execution of the management and construction plan within a particular schedule, and a little luck that market rents don't change by the time the plan is completed. Typical value add projects take between 3-5 years.
The most important thing is selecting a good sponsor. Someone that has experience and who you are comfortable working with for several years. The investor does not need to understand investing themselves, landlord tenant laws in the market, construction fundamentals or anything else. They should have a basic understanding of business and finance to read over the investment documents and weigh the risks and returns.
Hands off operations is another great benefit for investors. The investor will typically get monthly or quarterly reports. They will not have to speak to management companies, contractors or vendors. They will just speak to the sponsor and/or the investment relations person at the company. They are working on your behalf while you are traveling, working on your business or spending time with your family.
In conclusion, syndicated investments though not for everyone are a great opportunity to earn outsize investment returns, reduce or delay taxes and more. If you are a hands on person and are willing to learn this may not be a route to take as investors don't have much decision making power for syndicated investments. In this case it is better for you to work on owning and operating your own investments. Maybe even become your own syndicator. However, if you want to be hands off and use other peoples experience this may be a good investment strategy to add to your portfolio.
My name is Denny Troncoso and I am an experienced real estate syndicator and mortage broker. I hold a masters degree in real estate from the University of Central Florida and have purchased millions of real estate in Florida working investors. If you would like to learn how invest in my next project or need a loan on a residential, commercial or business investment contact me at info@cosocapitalgroup.com.
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