Updated: Dec 3, 2018
Being passionate about real estate investing inspires me to tell everyone I know about exciting wealth building benefits of investing in commercial syndications. One thing I hear over and over from my friends who are heavily vested in the stock market, is that “the syndication returns just seem too good to be true”.
In the 5 Reasons I Love Passively Investing in Real Estate, I describe why I love passive investing in detail, but here I address the common question of, how does the money component works in a syndication deal.
Passive investing means the investors can sit back and collect checks
Syndication is basically pooling investor’s money for the down payment and renovations that sponsors need to purchase a large apartment (or other real estate asset). The sponsors do all the legwork to find the deals, the due diligence, financing, property management, and daily operations, and the investors can sit back and collect cash.
Expected Investor Returns
As a passive investor in an apartment syndication deal, you are a “Limited Partner”. This means you are not responsible for any decisions or implications associated with the deal or day to day operations of the asset. As a Limited Partner, investors aren’t burdened by the pesky tenant issues or building mishaps.
I personally invest in every deal that I offer to investors.
Two ways that investors make money in syndication deals are:
1. Cash Flow Distributions: A cash-on-cash return of 8 to 10% per year, paid out in monthly or quarterly distributions.
2. Appreciation: Unlike single family homes, a commercial asset, like apartments, are valued by their Net Operating Income (NOI), not by property comparables. Through asset improvements, like renovations, and operational improvements from expense reductions, the value of the property increases the NOI.
3. Amortization: Revenue rental income and regular operations pay down the debt and builds equity in the property.
Assets are purchased with a strategy of forcing appreciation through renovations, improvements and cost reductions.
Profits at the sale have average returns of 18-20%.
4. Tax Benefits: Investors benefit from tax benefits, such as depreciation and cost segregation, and possible 1031 exchanges into new projects, which defer taxes from return of initial equity.
I find that clients not only love having their wealth growing as the asset is held and improved, but they also really love the monthly cash flow – it’s the cherry on top! This is why I personally invest in every deal that I offer to investors.
An investor’s return usually doubles over the holding period.
Let’s break it down further so you can see just how an investor’s return usually doubles over the holding period.
If your initial investment is $100,000 - it turns into $200,000 over the course of the investment (4-7 years).
→ you get around $8,000 per year (8%) in monthly or quarterly cash flow distributions.
→ on top of that, when the asset is sold in year 4-7yrs, you could expect another $60,000 (20%) from the increase in value.
The Sponsors do all the work to find the deal and get the deal done
The sponsors do all the work to find the deal and get the deal done. They are called the “General Partners” in the deal. At New Heights Investment Group, we are also part of the General Partnership because we are actively involved, with the sponsors in conducting due diligence, identifying value add opportunities, and raising capital.
1. For finding the deal, putting it together, and getting it to close, they
earn an acquisition fee (1-3%) at the time of closing.
2. Most of the deals we do are a 70%-30% split of the cash flow distribution and the proceeds from the sale.
· 70% to Investors
· 30% to General Partners
Believe me, “it’s not too good to be true"
Believe me, it’s not too good to be true. This is how the wealthiest people in the world protect and grow their wealth…. and you can too. Here’s a secret though, you have to find someone who has access to these types of deals. Because they cannot be publicly advertised, they can be challenging for us “regular” people to find. Most of today’s financial advisors, bankers, and retirement planners don’t even know about these opportunities. The SEC regulates these opportunities, therefore some of them can only be presented to accredited investors.
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