What Are Real Estate Syndications?
Syndication is a strategy commonly used by real estate investors that allows multiple people to pool their resources and invest in large real estate projects. This process of pooling resources with other investors to invest in a large property or real estate project can often be seen with investments such as an apartment complex (commonly referred to as multi-family for investors) or a commercial retail development. Syndications can also be for raising capital for a multitude of other investment projects such as storage, mobile home parks, oil and gas, and more.
Real estate syndication is not just the process of pooling financial resources, though. Syndication also extends to pooling intellectual resources to make educated decisions about the properties you and your partners invest in. In a syndicated relationship, one party may invest the money, while another invests labor and time to find the property and run the day-to-day operations.
Self-Directed IRAs for Syndications
This is where Self-Directed IRAs come into play. While some may have larger amounts of personal cash available for investments, other Americans simply don’t have extra personal money in the amounts needed to get involved in real estate syndications.
Syndications have become much easier to participate in recent years, as investors and sponsors can easily connect online and at marketing events that happen all over the country. Being able to use Self-Directed IRAs to pool money together has made doing real estate syndications much more accessible for the average person because you can contribute relatively small amounts of investment or retirement money to a real estate project that is interesting to you and reap the benefits accordingly.
Adding Self-Directed IRAs to your investment strategies will not only allow you to create money for the future but will help you today, too.
Using a self-directed IRA in real estate syndication
Rather than go all in on your own, you can have your self-directed IRA partner up with a syndicate. This lowers overall investment costs compared to buying real estate directly since expenses are spread out over multiple investors. Plus, if your IRA is short on the necessary funds to directly invest in commercial property, participating in a syndicate is a great way to include this asset in your self-directed retirement portfolio.
As with all self-directed investments, you, as the investor, are expected to do your full due diligence in this case, about the syndicate and the property or properties it plans to include in its portfolio. And, like any other asset, all income and expenses related to this investment flow through the self-directed retirement plan, which will earn returns on the investment until the syndicate is complete. Note that when using your self-directed IRA to invest in syndication, you may NOT also act as a general partner; investments should be limited partnership only.
Investments Methods for Using a Self-Directed IRA
There are three ways/investment options that self-directed IRA account holders can buy real estate assets.
1. Direct Purchase
A direct purchase is exactly what it sounds like. With it, the self-directed IRA owner uses account balances to purchase a commercial investment property. In doing so, they have sole discretion over which property to purchase and they are the sole beneficiary of the rental income and profits that it produces.
But, it also means that the account holder is 100% responsible for acting as the property manager and overseeing the upkeep of the property. Of course, it is possible to outsource this responsibility, but it is still necessary to “manage the manager”, which can be time-consuming and requires a significant amount of expertise. For this reason, some account holders may prefer a more passive approach.
In a partnership approach, the account holder may partner with one or more other investors to utilize IRA funds to purchase a property.
The benefit of this approach is that it requires less upfront capital for each individual investor and less individual time to devote to managing the property. In some cases, there may even be a lead partner who handles all major property management and investment decisions, allowing the other partners to have completely passive involvement.
The downside of the partnership approach is that investors have to split the profit with the others. In addition, there can be occasional disagreements over property management decisions like whether to do some renovations or when to sell the property.
Remember, one of the allowable investment types is shares in an LLC. As such, there are certain types of real estate investment structures, like private equity syndication, that utilize an LLC to purchase and manage the property. In such a structure, there is a real leader that is responsible for finding, financing, and managing the property and individual investors who purchase shares in the LLC and benefit from the cash flow and profits produced in proportion to their share of ownership.
The benefit of this approach is that it is a completely turnkey investment opportunity for account holders in the sense that the deal leader does all of the leg work, while all investors have to do is collect their distribution income. In addition, it may provide investors with a chance to gain fractional ownership of an institutional quality asset that they may not be able to afford on their own.
The downside of investing in LLC shares is that individuals may not have any say in which properties their funds are used to purchase and/or in major investment decisions, these are all left up to the deal leader. In addition, the deal leader may charge fees that can cut into profits over time or they may require holding periods of 5-10 years during which time investors are unable to liquidate their shares.
Of these three methods, one is not necessarily better than another, but one may be a better fit for an individual’s circumstances. For example, a direct purchase may be a good fit for investors with significant account balances, a long investment horizon, and the time and expertise needed to manage the asset. Or, the LLC approach may be a better fit for investors who have smaller account balances and a preference for working with a third party to manage the property.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
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What is a self-directed IRA?
A self-directed IRA is a type of individual retirement account that allows you to invest in a variety of alternative assets, including real estate.
Can I invest in real estate with a self-directed IRA?
Yes, you can invest in real estate with a self-directed IRA. This can include a variety of real estate investments, such as rental properties, fix-and-flips, and apartment syndications.
What is an apartment syndication investment?
An apartment syndication investment is a type of real estate investment where a group of investors pools their money together to purchase and manage a large apartment complex or multiple properties. The investors share in the profits and risks of the investment.
How do I know if apartment syndication is the right investment for me?
Investing in apartment syndication can be a great way to diversify your portfolio and potentially earn higher returns than other investment options. However, it is important to consider your investment goals, risk tolerance, and financial situation before investing. You should also do your research on the investment sponsor, the property, and the market to ensure it is a good fit for you. It is always recommended to consult with a financial advisor before making any investment decisions.