What physicians need to know about real estate syndications

Physicians have not been immune to the economic impact of the pandemic. There have been several furloughs and reductions in RVUs. Although physicians are high earning professionals, many start careers well into their 30s and are saddled with tremendous debt, and the need for financial planning cannot be ignored.

There has been a lot of buzz about investing in commercial real estate through syndication. This option may become more and more viable with the rapidly changing world around us. The prediction is that commercial real estate will be sold at a discount with more people working from home and restrictions in gathering sizes becoming the new norm.

So what exactly is syndication? Syndication is when a group of investors pool money together to invest in a property. Usually, these are large commercial property assets, such as apartment buildings, self-storage facilities, office buildings, distribution centers, and manufactured home lots. There is a sponsor who finds and analyzes deals that are brought to the group to invest in. The group is tied together through a limited liability corporation or limited partnership. There is then a contract that delineates how proceeds are split between sponsor and investors. Syndication combines money with knowledge to create a powerful wealth-building tool.

Syndication can be a very lucrative passive investment, but I caution you to consider both the risk and benefits when deciding to invest in one. Planning must take place before jumping into real estate investing.

Below I explain both the risks and benefits so that you can judge for yourself if syndication is a good fit for your needs.

Benefits

1. Passive

Time is money. We are all busy, and not everyone wants to manage their own rental properties. Real estate is not everyone’s passion. Syndication allows the investor to take a more passive role by allowing a sponsor to find, buy, and manage a property using pooled investor money, taking advantage of the sponsor’s expertise in real estate.

2. New opportunities

Commercial real estate can be quite costly, and many people are not able to enter the market using their own resources. You may want to diversify your real estate portfolio with commercial properties or get started in real estate investing by dipping your toes in syndication.

3. Smaller investment amount

Less upfront cash is usually needed with syndication. If you are putting a down payment on a property, this usually requires 20 to 25 percent purchase price. This can be quite a bit of money to pour into one property if you are in an expensive market or interested in a luxury property. For risk-averse investors, this can seem like a scary proposition at the beginning, and syndication can be a slower introduction to real estate investing.

Risks

1. Sponsor

You must carefully vet the sponsor. You are trusting someone to present a property that will have a good return on investment. You will need to know his/her resume and ensure that enough experience exists to choose and manage properties appropriately. It can be difficult to know if the person is credible, and you should not rush this process. This is your hard-earned money. Trust but verify. You need to know who you are getting into business. A business partner is a relationship that requires trust, communication, and commitment.

2. Funds are not liquid

You are not able to take your money out at any point you want. You need to keep the money in the property as specified by the sponsor. Unlike in owning your own property where you can flip it, refinance, or take out a home equity line of credit to use to invest elsewhere, your money is stuck in the syndication. Make sure you do not need the money right away.

3. Lack of control

The sponsor makes decisions about the investment. You do not get to control the rents or manage the property. As an investor, you are essentially funding the purchase. Great as a passive investment, but leaves you with little control.

Syndication is a great way to diversify your investment portfolio, but you need to go in with your eyes wide open. You have to know and trust the team you are investing with. The best investors know their investments inside and out.

Fola Babatunde is a cardiologist.

Image credit: Shutterstock.com

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