Why not invest in a syndication

Real estate syndications are an incredible investment opportunity, but there are certain criteria individuals should consider to before investing in a syndication. This type of investment requires more than just rudimentary understanding of the industry and each particular investment in order to make sure it fits personal investment and financial goals. 

Above all, you as an investor should start with the following set of primary questions:

• Do you hold extensive debt?

• Do you need to build up your savings / emergency funds (six months to a year of reserve funds to substitute your income)?

• Would you rather have liquidity and complete control over your investments?

• Do you mind sharing your profits?

• Do you only want quick turnaround investments to produce returns?

• Are you apprehensive of taking risks on long-terms projects?

If you answered “Yes” to any of these questions, you should consider passing on investing in real estate syndications (at least for the time being) because they might not be the right vehicle for you.  If, however, every question was answered “No”, then investing in syndications may be a viable option for you.  But let’s flesh out the considerations that potential syndication investors should evaluate further.

The following consideration, for example may be a pro to some investors, while being a no-go to others.  Syndications do not allow passive investors to make decisions in buying and managing an asset. Therefore, passive investing does not fit some investors’ natures, because plenty individuals have a desire to make business decisions and be involved in the investment; in short they need to be aware what is happening with their money at all times.  Such investors might have issues with not having command of the investment process.

However, other investors will fully embrace the idea of passive investing in real estate syndications, since the point is to essentially sit back and let the professionals take care of their investment.

If the idea of passive investing makes you uncomfortable, then investing in syndication is probably not be the best choice for you.

Moreover, as a passive investor you are investing in a syndication team,

which involves paying them to manage the project, so this will cause the investor to be in a agreement that a certain portion of the profits will go towards paying the general partnership team to ensure that the syndicators get paid. It is important to remember that since they are doing the heavy lifting and actually creating the profit (most of the time), their service won’t be free. Again, investors that want to retain control may not be comfortable with this arrangement.  Real estate syndications are designed to separate the roles of active and passive investors, therefore someone who prefers not to pay for their part of the arrangement should definitely consider investing on their own. The beauty of this process is that expert syndications will charge what they are worth and deliver the expected profit on both ends of the process.

To reiterate another point is that this is a long-term type of investment,

so individuals that do not wish to wait for the syndication team to generate the promised margin of profit would likely grow impatient.  This may be a drawback and even a no-go for some investors, since the mere fact that these types of investments take time to develop.  Investors will not be able to pull out of the deal prematurely because syndications, typically are illiquid investment that will tie up funds for five to ten years. The bottom line is that if you don’t have the funds specifically allocated for long-term investing, then real estate syndications are not for you.

Lastly, an investor should be comfortable with risks and bumps in the road.

While the syndicators take calculated risks into account as part of strategic planning, no one may guarantee specific results. An investor that cannot deal with the risks that might be necessary to carry out a successful investment project, should consider investing elsewhere or even not at all. Real estate is cyclical, which can have ups and downs that are incomparable to most industries.  There is also the potential to hit higher rewards.

Hence, while investing in real estate using a syndication is not for every investor, it remains a very strong option to add another stream of passive income, save on taxes and diversify your portfolio through this very profitable industry.

Note, this article is written in collaboration with Zach Digirolamo.

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