This is how wealthy people invest in real estate

It was a fine sunny spring afternoon about three years ago. I had set up a meeting with a prospective investor, Stu, at Starbucks. Why Starbucks? You probably guessed it – it provides a comfortable and semi-private environment for people to chat and enjoy a grande cup of expensive (but mediocre) coffee. As a result, Stu and I both opted for mineral water.

At one glance, Stu was a normal guy who blended in, which obscured how much money he’d been sitting on for some time.

We exchanged the usual courtesies and had the normal banter about the warmer weather this early in the spring. I asked about Stu’s family. He described his family: his wife, who was over 30, and his two children, both of whom were adults and lived alone. So I urged myself to ask Stu about his investment goals. He paused for a second and then asked where I came from in his own quiet way.

As I told my story, our conversation flowed like we were old friends. I made a few more questions about Stus and his wife at work. He casually replied that they both had worked at banks in the past but retired early to enjoy life. I was impressed and surprised at the same time, because I don’t meet many retirees who prefer to diversify into new forms of investment.

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Why the rich choose to syndicate

I decided to ask Stu directly, “If you’re already enjoying your retirement, you really don’t need more money to build your wealth, do you?” Stu basically agreed, explaining that the main goal of him and his wife was to help her Continuing to build wealth to help others rebuild what they could keep and produce for their families.

Next I asked how they could build their fortune. He smiled and admitted that most of his family’s fortunes were originally built by his parents – mostly his father, who discovered real estate syndications long before home computers existed, and back when real estate syndications were called “private placements.”

At this point, Stu said that he doesn’t quite understand how so many wealthy people (like his family) have been able to take advantage of real estate syndications while many other investors are missing out on the boat. “Of course,” Stu mused, “there are risks associated with this type of investment as with any other, but the benefits far outweigh the risks.” So Stu and I discussed the issues people should consider before entering into real estate syndication invest. They are conveniently identified and discussed below.

A real passive investment

Your job is to research and understand what syndication is and then evaluate an offer; At this point, your job is as good as done. So, if an investor has a home business or practice, is a professional with a successful career, or just enjoys his or her life and doesn’t want to spend time with tenants or toilets, then investing in syndications is the way to go!

Preservation of your capital

While this depends on the strategy of each individual investor, many are looking for ways to keep risk down and minimize losses. It is not uncommon for syndications to average 8-10% of the cash-on-cash return over roughly five to ten years.

The stock market may aim for an annual return of around 7%, but it has many disadvantages. Most importantly, the stock market doesn’t offer nearly as many tax benefits and is absolutely unpredictable.

Rely on calculated risk

When it comes to real estate investing, careful underwriting is vital. Experienced syndication operators ensure that the risks associated with a particular investment are considered in their underwriting.

Take advantage of tax advantages

There is no doubt that real estate is one of the smartest ways to reduce your tax burden. This can be accomplished in a number of ways: Depreciation, Cost Segregation, 1031 Exchanges, Opportunity Zones, and Tax Losses (to name a few). And all of the above tax strategies can be used when investing in a wide variety of property syndications.

In general, real estate offers great tax advantages. It all comes down to hiring a CPA professional who not only knows their way around tax compliance, but is also familiar with real estate and can offer tax strategies to help you plan.

Generate residual income

You check the offers, decide in which individual asset or real estate fund you want to invest, subscribe and transfer the funds. That’s it; your job is done. “Really?” Really! From then on, sit back and let the operator do the work while you collect your monthly or quarterly dividends straight to your bank account.

Risks to Consider

No investment is without risk. Here are a few things to consider before jumping into syndications.

No management decisions

If you invest passively in a syndication, you are essentially foregoing your say in the investment. However, this has a bonus: you invest as a limited partner and therefore your liabilities are limited to your original investment.

It is not a typical liquid investment

If you buy a stock or a mutual fund (or anything on the stock market), technically speaking, you can always sell it. This type of liquidity is not possible with real estate syndications. The way real estate syndications are structured, an investor basically invests and forgets until the deal has a capital event or the property is sold.

However, there is some flexibility when it comes to investing in closed-end funds. Closed-end funds usually have what is known as a “lock-up period” – which can be a year or two – after which you can close your investment.

Longer duration

If you are planning to invest in a value-adding project or even a new build, you should be prepared for the long term. It can take a while for a project to go through its full cycle. The usual subscription period is usually five to seven years. So, as long as you invest money that you don’t rely on within that time frame, you’re good to go.

Grow your wealth through passive investments

As one of my favorite investors of all time, Warren Buffett once said: “If you can’t find ways to make money while you sleep, you will work until you die.“The greater the number of concurrent passive investments, the better off you are. Not only do they generate passive income, they also help you save on taxes.

Before leaving Starbucks and going our own way, I asked Stu if this was enough material to get the message across – so more people could start using the same strategy that wealthy people like him have been pursuing for years. Stu looked at his notes, nodded, and thanked me.

After all these years, I still think back to that conversation with Stu about the incredible investment strategy that: first, generates passive income for you while you sleep; second, you can save on taxes; and three also has a positive impact on communities in some cases. Hope you can take something out of this and apply it to your own investment plans.

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