A case against real estate syndications

If you like real estate, you may have heard the term “real estate syndications.” This is a fancy term for group investment, where several people get together to acquire a big asset (like an apartment complex), they form an LLC, and there are active investors who manage the property and passive investors who help with the capital for the down payment, and they get to share the profits with the active investors.

This type of investment has gotten very popular, especially in the last 4 to 5 years, and to be fair, for a very good reason: the risk-return profile has been spectacular, and real estate has key characteristics that make it a very good Investment: cash flow, appreciation, equity, leverage, and tax advantages.

However, it is also true that real estate investments are big investments and are not the perfect choice for everyone. So, here are my four reasons why someone should not invest in real estate syndications.

Syndications are illiquid investments.

Investing in a real estate syndication means you agree to the terms and projected hold time. Your capital or money is illiquid for the duration of the deal until the property (an apartment complex, for example) is sold.

It is unlike other investments like stocks, mutual funds, or even REITs, where if you want to take out your capital, you can do so quickly in a matter of days. If you own a rental property, you can do so, and usually, you should expect to receive the proceeds in a couple of months. If you invest in a real estate syndication and the hold time is usually 5 to 6 years, you should plan to leave your capital in the project for the full five years, if not longer. Real estate syndications do not allow you to make withdrawals at will.

If there’s anything about the idea of ​​investing at least $50,000 (the usual minimum investment) and not having access to it for five years that makes you uneasy to turn around now.

Even for physicians, the usual minimum investment is a lot of money.

The minimum investment in real estate syndications is usually $50,000, which is a lot of money for anyone, even for highly paid professionals, like doctors. You may need or use this capital in different ways (remember the 5 to 6-year hold period). You or your spouse may need to buy a car in 1 to 2 years, your older child may go to college in the near future, or you may need to pay for private school for your kids.

Remember to always have reserves before you consider investing in a real estate syndication or anything in general. My advice? Don’t invest in a syndication until you’re absolutely sure that THIS is how you want to use this cash. Even more, if you have $51,000 in your savings account, don’t you dare invest $50,000 of it into a real estate syndication. Always have at least 3-6 months of monthly expenses available in case of an emergency. You need to ensure you have enough saved in a separate emergency fund, create other accessible savings for additional short-term goals or needs, and have yet more cash to cover life in general.

You have to give up control.

When you buy a rental property, you usually take all the decisions in the day-to-day operations, and all the responsibilities fall on you. Actually, many people like this: to have control over their investments.

There is a major fundamental difference between passive investing and everything else; the level of control you have over the daily decisions made in regard to the property, renovations, and tenants.

Real estate syndications are a passive investment, putting you in the passenger seat. Even though this can be great for many people, it can be frustrating for others. In this case, developing a level of trust in the sponsor team is imperative. If you are the type of person who usually wants to take decisions or be involved in everything related to the operations of an investment, syndications may not be a good fit for you.

Syndications, as well as its business plans, are new to many people.

People tend to feel comfortable and invest in what they are familiar with. Even though syndications have become very popular in the last 5 to 10 years, they are not as easy to understand as rental properties. For many people, even doctors, learning a new system or process may not be ideal or they may feel uneasy. That is why educating yourself about this, and other alternative ways of investing outside Wall Street is so important.

Passive investors almost never get to see the property, don’t have a relationship with the lender or the management team, and never come into contact with tenants. Passive investing is called such for a reason – because after you do your due diligence review and analysis of the investment summary, sign the agreement and send your capital, you take the back seat. Of course, you will be in communication with your operators and receive regular updates about the investment but won’t be able to take any decision on the investment itself.

My final take

Real estate syndications are great investments and an excellent way to create wealth and put your capital to work outside Wall Street. However, no investment vehicle is perfect, and no single investment style is perfect for everyone. If any of the above four reasons not to invest in a real estate syndication made you feel uncomfortable, probably investing passively in real estate syndications is not for you, or you need more time to do research and education until you feel good about it. And that’s alright.

It is important to have options and the power to make an informed decision for you, your family, and your financial goals. At the end of the day, there are a bunch of ways to invest in real estate, so don’t feel bad if you prefer an investment vehicle other than syndications.

Harry Nima Zegarra is a critical care physician.

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