Why You Shouldn’t Passively Invest in A Syndication
Maybe Real Estate Syndications Are Not For You.
It’s either happened to you or someone you know. It’s a slow afternoon at the office and you’re searching for tickets to go on your next trip. You see a steal of a deal, an unbelievably deep discount, we’re talking crazy amazing savings. If you’re lucky you booked it, if not you may have put it off until later, refreshed the page and – poof- it’s already gone.
Have you ever stumbled on a deal or opportunity that seemed just too good to be true? That’s how many people feel when they first hear about all the benefits of passively investing in real estate syndications. Not wanting to miss out on this great opportunity they are quick to jump in. Investing in a real estate syndication is likely a bigger commitment than that trip you were planning. So, to prevent any buyer’s remorse, here are 5 reasons passively investing in a real estate syndication may not be right for you- at least right now.
You have no idea what a syndication is
If you’ve made it this far and you’re still scratching your head asking what a syndication is chances are you’re not ready to invest in one. Syndications are team/ partnership-based investments where active investors partner with passive investors to purchase an apartment community or other income producing real estate.
The passive investors invest capital while the active investors (sponsors) do the hands-on work to make the investment successful. Both groups share in the profits generated from the investment. This partnership has specific requirements and expectations of all involved. Not understanding this ahead of time can lead to dissatisfaction on the part of the passive investor. It’s in your best interest to educate yourself on these requirements and expectations before investing in your first deal.
You don’t trust the sponsors
When investing in a real estate syndication you are more so investing in the team sponsoring the deal rather than the deal itself. Imagine you give two sculptors the same block of stone. They could create a sculpture based on the same subject, yet their end results may look completely different. You’re choosing to invest with a sponsor that will sculpt and form for you the best results, a sponsor whose abilities you are confident in.
This is a team/partnership-based investment, any contempt or lack of trust between partners will cause an unpleasant experience at best and a failed investment at worst. A lack of trust should be examined because it may simply be due to a misunderstanding. Clarifying your uncertainties with sponsors by asking them questions, speaking with referrals or taking more time to build the relationship before investing is a simple solution to this challenge.
You need to have full control
Most passive investors do not have the time, skills or desire to lead a real estate investment. They choose to invest passively because it permits them to enjoy all the benefits of real estate investing without all the hassles or responsibilities. This is a great setup but for it to work, the passive investor must relinquish control to the managing partners in the syndication.
When you decide to invest, you are agreeing with the managing partners’ choice for team members as well as their business plan. This agreement is the first and only decision you will make. This means you can’t choose the interior décor, the contractors, the landscaping or -gasp- even which shade of blue to paint the accent wall. For some people, not having to make these decisions is the best freedom money can buy. You are investing large sums of your hard-earned money so it’s understandable why some people would want hands-on control.
If you are someone who needs to be in control of these decisions, major or minor, passively investing may not be right for you. If you are someone who tends to micromanage, second-guess or find fault with your partners, these behaviors will strain the partnership. While it is important for you to ask questions and be informed about the progress of an investment, maybe even helpful for you to make some suggestions, the final decisions will rest with the managing partners. For this reason, you must trust that they have your best interest in mind, and that they have the knowledge needed to make the appropriate decisions. If you are someone used to being an active investor or who needs to be in control it may be better for you to become a managing partner or review the many benefits of passively investing to increase your comfort level before doing so.
You may need the money soon
Life happens. People move, get sick, have kids, get married, get sued and the list never ends. A passive investment in a real estate syndication is illiquid. This means that the money you invest will be tied up in this investment for as long as 3-5 years or more depending on the business plan. If you have good reason to believe that some life event may happen to you during that time and not having access to your invested funds may cause undue hardships, you may be better off postponing your investment. There is a process for receiving your funds back prior to the maturity of an investment. However, this can be a lengthy process with no guarantees. Instead, secure the funds you would need for this anticipated life event and whatever excess remains can then be invested.
You don’t have enough money
While real estate investing is not gambling there is still some risk. There is the possibility you can make phenomenal profit but also the risk that you may lose every dollar you have invested. Putting your entire life savings at risk, even if it is invested in a lucrative deal, has a funny way of keeping people up at night. Most investment opportunities have minimum requirements for investors. If this minimum dollar amount is a substantial amount of the money you have then you may be better off in a smaller deal or waiting until you have accumulated more money to invest.
There you have it; the reasons you shouldn't passively invest in a real estate syndication are:
You have no idea what a syndication is
You don't trust the sponsors
You need to have full control
You may need the money soon
You don't have enough money
If any of these reasons hit home for you, it may be best to take the corrective steps suggested before passively investing in your first real estate syndication. This will allow you to fully appreciate the wonderful world of opportunities this method of investing provides.
Doing so will not only make you more confident and comfortable with the process, it will also allow you to act in a more timely manner the next time opportunity knocks and you will be able to respond before -poof- its gone!
Interested in learning more about investing in multifamily apartments? Give us a call or check out some of the other free resources we have available at Investupmultifamily.com.