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Is Investing In A Multifamily Real Estate Syndication Risky?




Without risk there is no reward. If you are thinking about investing in a real estate syndication you may be asking yourself “is real estate syndication risky?” As you approach a new investment opportunity it is natural to ask such questions; after all, isn’t investing just a balance of risk and reward? In this article we dive into whether real estate syndication investments are risky and what factors may make them risky. Specifically, we will focus on private syndications of individual apartment complexes.


What Is Real Estate Syndication? - Real Estate Syndication 101

Real estate syndication is one of the fastest ways to help you achieve your real estate investing and financial goals. To put it simply real estate syndications are group investments where people with capital and skills come together to purchase, manage, and profit from a real estate investment. There are various roles within a real estate syndication but through out the overall syndication cycle each member plays different roles.




Is Real Estate Syndication Risky?

Before we even answer the question of “is real estate syndication is risky” perhaps, we should look at the base of real estate investing in general. This would lead you to ask, “is real estate investing risky?” Better yet, you should ask, “Is investing in general risky?” The answer is yes. Just like any investment, by the very nature of it being an investment, real estate investing requires that there be some level of risk to earn a reward (i.e., a return) on your money. Because real estate investing is risky, real estate syndication investments bear risk as well.


To define something as risky however also means that relative to another alternative option there is more chance of a negative outcome than if you choose the alternative option. In this case we can compare investing in general to not investing (i.e., saving your money and leaving it in a savings account). Most savings accounts provide a paltry interest rate of a fraction of a percent - far less than the rate of inflation which is typically 2-3% per year. This means that the value of your money is eroding each year. You are, in a sense, losing money and getting a negative return by keeping your money in a savings account. Real estate on the other hand provides inflation adjusted returns as real estate often appreciates at the rate of inflation or faster not to mention the additional cash flow and other ways real estate pays you.




Is Investing In A Real Estate Syndication Riskier Than Other Types Of Real Estate Investing?

Ok, so we compared investing versus not investing, how does real estate syndication risk stack up against other types of investment opportunities? If we compare real estate syndication to investing in real estate by yourself, all things remaining the same, there is one fact that holds true; when you invest by yourself you bear all the risk, when you invest in a real estate syndication the risk is shared amongst the different partners within the syndication.


Depending on who you are and your risk appetite you may see being responsible for all the risk in an investment opportunity as less risky that sharing the risk amongst other investors. This of course would be a subjective opinion. If you are a well-seasoned and successful real estate investor, with lots of money and time then perhaps you will want to take on all the risks and responsibilities and will have confidence that the investment will perform better.


A new investor will not have the luxury of falling back on their years of experience to make a good investment. It would be less risky for a new investor to partner with other more experienced investors in a real estate syndication and get the benefits of their knowledge and expertise in making the real estate investment successful. An experienced investor could also benefit from these syndication partnerships as well – if not because they need the other investors, then rather because syndication may be a faster way for the experienced investor to do even more deals than if they tried to grow their portfolio alone.





Is Investing In A Real Estate Syndication Riskier Than Investing In The Stock Market?

Some real Estate Syndications may be available only to Accredited investors. While stocks can be purchased by almost anyone with a bank account, a social security number and a heartbeat. An accredited investor may not necessarily have a post-graduate certification proving their prowess in making investing decisions, however, based on meeting certain income and net-worth guidelines set by the U.S. Securities and Exchange Commission, they are believed to be in a better position to take on investing risks. This limitation of access doesn’t make syndication itself less risky than stocks, but it does add an element of protection for investors as the individuals allowed to invest are somewhat prescreened for capacity to invest.


When comparing the stock market and real estate, many may compare characteristics such as liquidity, market fluctuations and predictability and ability to mitigate risks. These characteristics are subjective – depending on your investment philosophies and goals you may view one trait as an advantage or another as a disadvantage. Someone that is looking for high liquidity and wants to make a return by actively deploying their capital and getting a return in a short period of time may view real estate as riskier since real estate is highly illiquid. On the other hand, someone that does not want to be concerned about constant market fluctuations and changing returns based on the latest headlines might find more comfort in the illiquidity and predictability in cash flows from real estate.


Given the above characteristics are so subjective you need to also look at the expected returns compared to the perceived risk for a better conclusion. Real estate is seen as one of the best risk-adjusted investments as the perceived risk of real estate is lower than stocks that have a similar return profile. Real estate is an investment of limited supply and the value will never be $0 while stocks on the other hand can crater in value almost overnight, become delisted, illiquid and have a $0 value (hopefully you would have sold long before that happens).


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