If you're interested in real estate and are looking for ways to add more passive income to your portfolio, real estate syndication could be a great addition to your overall investment strategy.
Like any other investment, it's important to do your homework before committing your funds. How does real estate syndication work, what are the pluses & minuses, and how do you choose the right sponsor?
What Are Real Estate Syndications?
In a real estate syndication, the syndicate is typically led by a sponsor, or General Partner (GP). The sponsor is responsible for identifying and evaluating potential investment opportunities, raising capital, managing the day-to-day operations of the property, and eventually sell the asset.
The investors, typically referred to as Limited Partners or LPs, bring capital to the deal. Investors are typically made up of accredited investors, institutions, or a combination of both. By definition, the LP's involvement in the property is "limited". They receive income distributions from the GP in regular installments (typically monthly or quarterly), with a return on investment coming from the property's eventual sale.
It's important for accredited investors to carefully evaluate the terms of any real estate syndication in which they are considering participating, and to thoroughly research the sponsor and the specific investment opportunity.
First of all, consult with a licensed financial professional to discuss your specific situation before jumping in. Once you're comfortable with investing, here are some potential next steps to take in your due diligence.
- Make sure the sponsor is investing in the types of properties and the markets that interest you.
- Reach out to your network to see if there's anyone that has any firsthand experience and recommendations for syndicators.
- Follow & interact with syndicators and their teams on social media.
- Reach out to talk with syndicators directly to learn more about their philosophy, people and business. (Shameless plug, if you'd like to learn more about Blue Lake Capital, click here and fill out our potential investor form, our investor relations team would love to connect with you!)
Once you've done your due diligence, you'll feel more comfortable investing with a real estate syndication that aligns with your goals.
Syndications vs. Other Investment Options
Syndications aren't the only way to invest in real estate, of course. If you've looked into real estate before it's likely you've considered buying rental properties or investing in Real Estate Investment Trusts (REITs).
Owning rental properties has a lot of benefits, including property appreciation, tax benefits and, if you're an effective operator, regular monthly cash flow.
Owning rental property is hardly a source of passive income, however. You'll have to deal with tenants, collect rent, fill potential vacancies, address any issues with maintenance and upkeep, and so much more.
REITs are comprised of income-producing real estate properties across various asset classes and sectors. It's easy to own a REIT since they're publicly traded on the stock market, making this a very liquid asset that provides passive income through regular dividends.
One of the downsides of REITs is that investors don't provide the tax benefits of participating in syndication or direct ownership. REIT investments are taxed the same way other equities are, and the value of the REIT share price is subject to market fluctuations.
Compared to owning rental properties or investing in REITs, syndications can provide the best of both. They provide regular cash flow like REITs with the property appreciation and tax advantages of owning real estate, just keep in mind that syndications are typically illiquid and can have high minimum investments.
What Type of Returns Should You Expect?
Syndications usually provide returns to its LPs in two ways. They pay investors through regular cash flow created by rent and, ultimately, investors receive their original investment back along with any appreciation when the property sells.
Returns can vary depending on a number of factors. Typically, a syndication will last at least 3-5 years and provide a strong annual yield. The yield can vary depending on current market conditions and property performance but will normally be paid out in monthly, quarterly or annual distributions. This is what's referred to as a cash-on-cash return.
A good sponsor will help increase value in a property through renovations, improvements, and adding amenities that will help attract high quality tenants. This will result in earning higher rents and drive appreciation of the asset. When the sponsor decides it's time to sell the property, the LPs will benefit from that appreciation.
There are a lot of variables that can impact the returns & timing of a syndication. For example, during COVID, a lot of groups were initially on the sidelines waiting to see what was going to happen. At that time, we continued to bet on multifamily real estate; that was a bet that paid off for us and for our investors.
These days, conditions have changed. We can't expect to see rents increase as much as they have the past few years, finding & negotiation good deals is much harder, and having strong underwriting is critical, along with a strong focus on operations to try and maximize the properties value. This makes your due diligence process even more important.
Is Real Estate Syndication Right for You?
Does this sound like you?
- You're interested in real estate investing but don't want to be actively involved in managing a property.
- The idea of passive income and the tax benefits that come with syndication is very interesting to you.
- You're an accredited investor who can commit to the minimum investment, in most cases anywhere from $25,000 - $100,000 and up.
- You don't need immediate access to your funds and are comfortable with a multi-year holding period.
If you found yourself nodding your head in agreement, it's possible that investing in real estate syndication could be a good addition to your overall investment strategy:
Key Takeaways
- Before joining a real estate syndication, do your due diligence. It's crucial to thoroughly research the offering, as well as the individuals or entities managing the investment. It's also important to carefully read and understand the terms of the syndicate agreement or PPM before committing.
- There are a lot of options when it comes to investing in real estate, including owning rental properties and investing in REITs but, for the right investors, joining a syndication can provide benefits that other investments can't.
- If you're an accredited investor, make sure you're comfortable meeting the minimum investment criteria and that you won't need access to those funds right away.
- If you meet the criteria and generating passive income and potential returns though property appreciation interests you, real estate syndication could be a key piece of your overall investment strategy.
The information provided here should not be considered financial advice. As with any investment, it's crucial to make informed decisions and consider if it aligns with your personal financial goals and risk tolerance. Make sure to consult a financial professional before taking any action.
Despite the current economic challenges, we're keeping our deal flow active. Multifamily real estate an asset class that remains strong and, from our view at least, is still a very solid investment. If you're interested in getting involved with multifamily syndication and want to find out more about Blue Lake Capital specifically, please reach out, we've got big plans for 2023!
Be well, be strong, and keep pushing forward!
About Ellie Perlman
Ellie Perlman is the founder and CEO of Blue Lake Capital, a woman owned multifamily real estate investment firm focused on partnering with family offices and accredited investors to build and preserve generational wealth. Since its founding in 2017, Blue Lake has successfully acquired and operated multifamily assets across high-growth U.S. markets, completing $1B+ in transactions.
At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.
In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.
Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.
Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.
