Each of us has limited time, resources, knowledge, and experience. As physicians, the majority of our time, along with our resources, has been devoted to our medical education and clinical practice.
Real estate syndications can be an attractive investment vehicle for busy professionals who do not have the time or experience to actively manage real estate. As an investor in a syndication, you can put your capital to work for you. As a limited partner, you are an equity owner which allows you to leverage the benefits of investing in real estate for passive income independent of your time.
So, what does this mean for you as an investor interested in real estate? Like many, I thought the only way to get involved was to invest into a rental property. While rentals can do well, I quickly realized early on that I didn’t want to actively manage properties or be responsible for tenants, toilets, trash, and termites!
There are benefits and risks to both active versus passive investing. We discuss each briefly below to highlight the main differences and encourage you to explore these as well to see which is a better fit for your investment philosophy.
Active: You are responsible for finding, evaluating, acquiring, and managing the property.
Passive: The sponsor (general partner), rather than you (limited partner), is responsible for evaluating, acquiring, and managing the property.
Active: You are responsible and need to spend time gaining knowledge of the market, neighborhood, and property, as well as the systems and processes required to manage a property.
Passive: The sponsor is responsible for doing the market research and to be up to date on the local real estate news and trends in helping evaluate, acquire, and manage the property.
Active: You are responsible to obtain funding and to make sure there are ample reserves for repairs, maintenance, and operations of the property. You sign the loan.
Passive: Your capital is limited to the equity you invest into the project. You do not sign on the loan and do not bear the burden should the property not perform.
Active: You are the sole responsible party as you are signing the loan. With single-family rentals, you do not have the economies of scale that commercial real estate offers. Occupancy is 100% or 0%.
Passive: The sponsor is responsible for finding funding and signing on the loan. There is less risk with economies of scale of several units.
In summary, syndications allow for busy professionals like yourself to invest capital and put your hard-earned money to work independent of your time or effort. It is an ideal vehicle that allows investors to take advantage of the benefits of real estate investing through leverage.
Cherry Chen is an internal medicine physician and founder, The Real Estate Physician.
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