Thoughts on real estate syndicates?
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As someone who has been a GP in multiple real estate syndications, I would say do it if you find a team that you can really trust, i.e. 1) if they get into trouble, they would find a way to make you whole, or still give you a small return, 2) they have enough of a successful track record that they have the financial ability to do that 3) one that is open about their bad deals n what they learned from them 4) really understand the loan they have on the deal, e.g. fixed rate for how long, rate caps in place, cost of rate caps and how they compare with property cash flow/reserves, prepayment penalties.
Overall, they are great passive investment vehicles in that there is very little work you have to do after vetting the sponsorship team and the deal. Be wary that they often send your K1 late, so you may need to file for tax filing extensions. Also, unless you are a real estate professional,you cannot use passive losses (the depreciation) to offset any of your active income. I would also ask how are they divvying up the depreciation, because it isn't always tied to your % ownership. Also ask for an early heads up if they are going to sell the deal bc that depeeciation recapture can really hurt you unless you invest in something rlse that gives you passive losses to offset it the year they sell.
Thank you for the thoughtful response! Do you recommend syndicates or buying a property? Which has a better return in your experience.
If you want truly passive, invest in a syndication. I generally expect a 1.5x to 2x return within 3-5 years. Generally long-term rentals yield weak cash flow and short-term rentals yield 3-4x the CF of long-term rentals.
Buying your own property gives you control, and you can choose to never sell it, but it is such a headache dealing with the property. So I have a property manager for my own units, but I am still involved way more than I'd like to be. Also, I just don't get economies of scale, since small multifamilies are only 2-4 units vs syndications which could have 100-500 multifamily units, or self-storage, or what have you. My rentsl just got flooded recently, to fix it will cost $20k. It will be many years before I may make my money back. I tell myself is that I'm also getting the tenants to pay down the debt, as well as appreciation, and depreciation write-off.
Yes
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There are pros / cons. What are some of your investment goals?
Building passive income takes time, and during acquisition/growth, that's not usually your goal. If you decide you want to add RE syndicate to your investments, I would make it an allocation (certain %), but not the whole strategy. My understanding is the fees and risks associated with waiting for an exit can make these less advantageous investments.
There's a good bit of resources out there to realize your dream - google "FIRE movement", "Bogleheads", "Bigger Pockets" to name a few. Several, if not all, would discuss this strategy and others at length.