Real Estate Syndications - What To Know BEFORE Investing [My Experience]

I've been investing in real estate

syndications for close to 10 years now

and have learned quite a few things

along the way that I wish I would have

known before getting started investing

is a passive limited partner in real

estate deals is a great way to get

exposure to the Southside class to

participate in some of the best tax

benefits available to investors and

access all of this upside within a real

estate investment vehicle that's

actually passive however there are some

major pitfalls the potential downsides

to consider before getting involved with

syndication deals so to share some of

the biggest lessons that I've learned

through investing with a wide variety of

different sponsors across multiple

different product types located in

multiple Geographic markets across the

US in this video I want to walk through

some of the biggest pros and cons I've

experienced when going this route and

some things that you may want to factor

in before getting started

thank you

so let's start with the pros here and

one of the biggest benefits of going

this route is the tax treatment

associated with Direct commercial real

estate ownership now this obviously

isn't tax advice and every situation is

going to be different but generally by

investing in authentication you'll be

considered a member of an entity that

owns a commercial property and because

of that direct ownership you get to

participate in the tax status that comes

along with that ownership and as a

commercial property owner you get to

deduct depreciation expenses from your

pro radashare of the income generated by

the property and this can be one of the

biggest benefits of investing in

syndications especially since the tax

cuts and jobs Act was passed back in

2017. the tax cuts and jobs act

introduced bonus depreciation for Real

Estate owners which allowed investors to

depreciate up to 100 of the components

of a property with a five seven or 15

year useful life in the first year of

ownership and even though this benefit

is now being phased out in 20 increments

starting in 2023 this is still a huge

benefit for investors that want to

reduce their tax burden and depending on

the value allocation between the land

and the building being acquired this

paper loss in the first year of

ownership can end up being substantial

often far in excess of the property's

taxable income before depreciation is

deducted which can ultimately result in

distributions from operating cash flow

being completely tax-free and

significant carryover losses that can be

used to offset future income generated

throughout the ownership period now in

addition to the tax benefits of

investing in syndications one of the

things I like most about investing

directly in individual deals versus

investing in restock or a discretionary

fund is that this allows you to

essentially cherry pick the invest

assessments that you believe in most by

buying public restock you're essentially

buying a piece of an entire operating

company which could be great for

diversification purposes but by doing

this you're also saying yes to all

properties the company holds within

their portfolio but by investing

directly in syndications you're able to

confine your Investments only to the

specific product types and Geographic

markets that you believe in most and

even the specific business plans that

you feel most comfortable with so if you

only want to invest in stabilized

industrial properties in the southeast

United States for example investing in

syndications will allow you to do that

this ends up being a huge benefit to

investors that have a strong belief or

conviction about where the market is

headed and want to take big bets to

maximize the potential upside and this

also allows investors to avoid other

sectors of the industry that they

believe might be in Decline and want to

reduce their exposure to now tax

benefits and the ability to choose your

deals are both huge upsides but one of

the biggest benefits of investing in

syndications is that unlike other forms

of direct real estate ownership this is

actually a passive investment even

though you'll be a partial owner of a

company and you'll be able to

participate in the tax benefits

associated with that direct ownership in

The Limited partner position you are not

going to be the one responsible for

acquiring managing or selling your deals

especially if you already have a career

you enjoy and you don't have the time or

the desire to spend your nights and

weekends talking to Brokers and touring

properties going the passive investing

route can be a great way to build a

portfolio by investing alongside a group

of Partners you also get the added

benefit of being able to invest in

larger institutionally managed deals

which can often significantly reduce the

risk associated with your Investments

and this also tends to maximize your

potential buyer pool in a variety of

different market conditions now even

though there are a lot of positives of

going this route there are also some

pretty notable downsides to consider and

the first thing to note related to the

cons of passive real estate investing is

that by investing as a passive limited

partner you're going to pay fees and

promoted interest that created drag on

your returns passive investors pay fees

at almost every part of the investment

cycle whether that's an acquisition fee

when the property is initially purchased

an asset management fee throughout the

ownership period a construction

management fee during a renovation or a

disposition fee at the time the property

is sold investors and syndications also

typically give up a significant portion

of their profits assuming the sponsor

exceeds a predetermined preferred rate

of return which can also materially

impact LP distributions when it's time

to exit the deal now in my experience

between all fees and promoted interest

is paid to the sponsor or the active

partner on the deal with project level

Returns on a deal in the High Teens so

between about a 15 and 19 percent irr

the drag on LP returns is usually going

to be about 200 to 400 basis points

essentially meaning that if the

investment at the project level earns a

16 irr the limited partners on the deal

are usually going to earn somewhere

between about a 12 and 14 irr on their

Equity investment and while this is a

substantial drop off from Project level

returns when you step back and compare

these types of returns to other passive

investment vehicles with similar risk

profiles and often less favorable tax

treatment the 12 to 14 percent

annualized return is still really strong

performance especially over a five seven

or ten year period so even though it

doesn't necessarily feel good to give up

a few percentage points to the active

partner on a deal this drag can start to

feel a lot less relevant When comparing

this performance to other options in the

market now in addition to fees and

promoted interest another notable

downside of going this route is the lack

of control you have over your

syndication Investments which can make

it really difficult to plan from several

different perspectives as a passive

limited partner you won't have control

over the amount or timing of operating

cash flow distributions you'll receive

you won't have a say in refinancing

decisions when an acquisition loan

ultimately matures and you also won't

have control over the timing of a sale

regardless of your personal

circumstances and these things can start

to turn into problems if you're relying

on your real estate portfolio to fund

your lifestyle or your retirement since

distributions can quickly change based

on market conditions and this can also

be a problem when it comes to tax

optimization if you're trying to

minimize capital gains when a property

is being sold to me this is probably the

biggest downside of going this route and

if you have a unique tax situation and

you want to have full control over your

Investments and when you choose to exit

your deals you may want to think twice

about LP investing now the last con I

want to mention here might seem a little

bit trivial but this can actually become

a significant issue as your portfolio

starts to grow over time and this is

that the timing and the cost associated

with filing taxes for these Investments

can start to get cumbersome in a few

different ways by investing directly in

a real estate partnership you'll

generally receive a form K1 at the end

of each year for each deal you invest in

and these forms are going to be required

to file your tax returns however when

you actually receive these completed k1s

can vary a lot from partnership to

partnership and since business taxes

generally aren't even filed and until

the middle of March each year this often

results in your personal tax return

either coming down to the wire or having

to file an extension some tax

professionals will also calculate your

tax prep fees based on the number of k1s

you need to file which can make these

costs sometimes even more than the

actual distributions you'll receive from

some of your Investments especially on

deals where you've cut smaller Equity

checks in the five to ten thousand

dollar range your personal tax situation

can also start to get really tricky when

you're investing in properties in

different states requiring you to file

multiple state tax returns regardless of

the location of your primary residence

which can again increase your tax prep

cost and increase the complexity of your

personal tax returns overall there are a

lot of things to think about before

investing in syndications but if you're

looking for a way to invest in real

estate in a way that's hands off allows

you to pick and choose use the specific

deals you want to add to your portfolio

and also allows you to participate in

the tax benefits that come along with

direct property ownership investing as a

passive limited partner is definitely a

path that's worth considering and if you

want to learn more about how to analyze

real estate investment opportunities

whether you're a passive investor or an

active investor putting together your

own syndication deals as always make

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if you like this video and want to see

more content on this channel on the

specifics of real estate syndications or

fund structures make sure to hit the

like button and let me know and if

you're watching this and you've invested

in syndications in the past let me know

in the comments what your experience has

been like and anything that surprised

you about this process as always thanks

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and I'll see you in the next video

thank you