Real estate syndications: Are they a right fit for me?

Have you been thinking about investing in real estate? There are many benefits to owning real estate, but as physicians, most of us are already busy with our full-time clinical careers. It can be difficult to find the extra time necessary to learn how to purchase and manage a real estate property.

You may or may not have heard of syndications; it allows individual investors to come together and pool their resources in order to invest in a real estate property. Syndications can provide many benefits for busy professionals like physicians who want to invest in real estate but do not have the time or expertise to own or manage a property. The benefits and limitations of investing in real estate syndications are discussed below so you can review and assess if this way of investing is a right fit for you.

Benefits of syndications

1. Passive income. As an investor in a syndication, you can put your capital to work for you, leveraging the benefits of investing in real estate for passive income independent of your time. You can focus on your clinical work with peace of mind as the property is managed by professional teams.

2. Tax benefits. The IRS allows for tangible assets like real estate to be depreciated. This translates to losses on your tax returns, even though you are receiving rental income throughout the year. Unlike earned income from your wages, rental income from real estate investments may be tax-free.

3. No liability. When you invest in a syndication, you are investing as a limited partner. You do not sign on the loan or actively manage the property, so you would not be liable should there be a complaint or lawsuit on the property.

4. Diversification. Real estate is a tangible asset, which can provide you with diversification from paper assets like stocks and bonds. As syndications are managed by professional teams, you can leverage this and diversify your portfolio into several different markets and invest where the numbers make sense.

5. Stability. Housing is a primary need and evergreen investment, providing you with more stability and less volatility compared to Wall Street. A bigger property, like an apartment, provides more stability through economics of scale versus a single-family home.

Limitations of syndications

1. Capital. The typical investment amount is $50,000 for private syndications. Depending on the deal, the minimum investment amount can range from $25,000 – $100,000.

2. Illiquidity. Syndication investments are typically held for 3 to 7 years, with an average of 5 years. Unlike the stock market, you should consider the capital that you invest in a syndication illiquid. You should consider this timeline to make sure that you are not investing capital that you would need to allocate over this time period.

3. Lack of control. As limited partners, passive investors do not have control over how the property is managed. The active role and responsibility fall onto the general partners. This is typically seen as a benefit as you can leverage the time and expertise of the team to manage the properties; however, it should be a consideration for those who do not want to give up control.

4. Access. Many, but not all, private syndications require investors to be accredited investors. As defined by the SEC, an accredited investor is an individual with an annual income of $200K, or $300K if filing jointly, for the past two years, with anticipation of making the same. Having a net worth of $1 million (not including one’s primary residence) also meets the SEC definition.

5. Deal flow. Private syndication offerings are typically only shared with individuals whom the partners already know within their existing networks. You will need to have a pre-existing relationship with the team prior to receiving investment opportunities to review.

Your investment philosophy and financial picture are unique to you, so it is important to evaluate if syndications align with your specific goals. Remember, there are opportunity costs to your time and money when considering any short or long-term investment. Reviewing the main benefits and limitations of real estate syndications before evaluating a deal can help you to see if this investment vehicle is a good fit for your portfolio.

Cherry Chen is an internal medicine physician and founder, The Real Estate Physician.

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