There may be some instances where you shouldn’t invest in real estate syndication. In fact, there are 4 reasons you should not invest in real estate syndication in 2023. Real estate syndications offer both risk and the potential for a highly rewarding investment opportunity. This process involves multiple people or organizations collaborating on the investment, renovation, management and/or investment in a particular property.
Although real estate syndication is a great way to diversify your portfolio and grow your wealth, it is important for investors considering real estate syndications. You must understand the risks involved within this type of investment strategy. In this blog we will discuss 4 reasons you should not invest in real estate syndication in 2023.
I Love Real Estate Syndications
Personally, I LOVE real estate syndications and what they have done for my family and I. But, that doesn’t mean they are right for everyone.
In this article, I will walk you through 4 reasons real estate syndications may NOT be the right fit for you. At the end of the day, you are the only one that knows what your goals are and what your comfort level is, but this will provide a few things to think about when deciding what to invest in.
Real estate investments can be large investments; the minimum investment can range from $25-50K and up so you want to make sure you feel comfortable when participating in an investment as a limited partner, or LP.
Here Are 4 Reasons You Should Not Invest In A Real Estate Syndication
1. Your money is in for the duration of the investment (hold time) and is illiquid during this time.
- This may not be a big deal to you depending on your season of life or where you are funding your investment from. But, if you are lending the money from a cash account and you may need access to those funds within the timeframe of the investment, it may be best to select another investment vehicle. On the other hand, if you are investing from a retirement account and can’t touch the funds for 15 years anyway, it may not matter whether the funds are liquid or not.
- Other assets, such as stocks and mutual funds, are far more flexible, and you can typically sell and get your money back pretty quickly. Real estate syndications, on the other hand, do not typically allow for withdrawals.
- However, there is a benefit to this. This “obstacle” often prevents investors from pulling funds out if the economy becomes uncertain. Unfortunately, people often try to “time” the market and end up buying high and selling low. Because your funds are locked up, you are forced to wait it out.
You Need A Significant Amount Of Money To Invest
2. You need a significant amount of money to invest with.
- The minimum requirement for syndications range from $25-50K and up. We have recently had a couple offerings we were able to roll out with a $25K minimum. However, that is pretty rare. The minimum investment is typically $50K+.
- This can be a lot of money for anyone and this amount takes most families a long time to save up. Because of this, you want to make sure you feel comfortable with the deal and the operators and have properly done your due diligence before jumping in.
- Make sure you have funds available elsewhere for emergency situations or when life happens along the way.
You Have To Learn A New Structure And Terminology
3. You have to learn a new structure and some new terminology because syndications are different than what you are used to.
- Residential rental properties work a lot like the game of Monopoly. You find a property, acquire it, rent it, and receive rent each month. (They always forget to tell you about all the expenses in that game.)
- Syndications are different – you may never see the asset, speak to a tenant or manage the renovations. But in good news, you never have to deal with the issues that come up or deal with the day-to-day headaches that can come along with being a landlord. You get to keep your time, and your peace of mind.
- Commercial real estate terminology is different as well, so you will want to understand the meaning of cash-on-cash returns, internal rate of return, equity multiple, forced appreciation, cap rate, etc. This will help you more thoroughly understand your investment and the value of it both today and in the future.
You Don’t Have Any Control
4. You have no control.
- Personally, you don’t have control of the asset once acquired. All of your faith and trust will be placed in the sponsors, the asset management team and the property management company. You will get monthly or quarterly updates on the asset but you will have no say in the decision making process.
- However, you do have control before you wire your funds. You are in control of your due diligence and vetting the team so you feel like your money is in good hands. We always recommend you ask questions if you have any!
- It’s important to review the documents, the investor presentation and any webinars available. This is to make sure you understand the business plan and feel comfortable with the team in place before you invest.
Most syndicators will tell you how amazing real estate syndications are and that they can be fantastic vehicles for wealth creation. This can be true and, honestly, this is my belief. However, no investment vehicle is perfect, and no single investing approach is ideal for everyone.
If any of the above reasons I mentioned for not investing in a real estate syndication strike a cord with you, it may be that passively investing in real estate isn’t for you. And that’s okay.
Making the right financial decision for you and your family can be a daunting task. You have to consider multiple factors, from your current and future financial needs to your age and family situation. Along with that, there are many more aspects. Your goals and future plans that need to be taken into consideration before making any major financial decision or investment.
We, at Ohana Investment Partners, are here to help however we can. We will answer questions and walk with you through your investing journey. We would love to hop on a call and get to know you and your goals better. We are here for you and look forward to partnering with you.