Passive income is one of my favorite ways to make money. It is income that you receive without exchanging your time to receive that money. Investing in real estate has a spectrum of options from the completely passive like one of the investments that you will discover today to the completely active like fixing and flipping houses yourself.
Most people get started with investing by buying and selling individual stocks. While this is fairly passive if you hold for a long period, there is always the question of whether this is the right time to sell. Ultimately, when invested in stocks, you make your money by making a decision on when to sell and then pay the taxes on the gains at that point. Another option is day trading which can be lucrative, but also risky and is far from passive.
While I was working at a big tech company, the majority of my wealth was either from my salary or from the stocks I received as Restricted Stock Units (RSUs). It honestly created uncertainty seeing my net-worth ebb and flow with the stock market.
In this post, I want to dive into my favorite way to invest passively – something called multifamily syndications.
What is a real estate syndication?
A real estate syndication is when a group of investors come together to purchase an asset like an apartment building that they wouldn’t otherwise be able to purchase or manage on their own. They pool funds to purchase a real estate investment.
A famous example of this type of investment is the purchase of the Empire State Building in 1961. This syndication was led by Helmsley and Malkin. They raised $33 million from more than 3000 investors with a minimum investment of $10,000.
Within a syndication, there are two major groups. The syndicator or the active investor team that does the heavy lifting of putting an opportunity together; and the passive investors who invest in the deal but are removed from any day-to-day activities and do not do any active real estate work.
The passive investors (also known as the limited partners) have the best of both worlds. They can make an informed decision on what to invest in by learning about a particular deal from the active investor (also known as the general partner), but once they make the decision to invest, the rest is completely passive. The passive investor can sit back, receive passive income, tax benefits from partially owning real estate, and often a significant upside at the sale of the real estate property.
The syndicator does the legwork of analyzing markets, sourcing potential deals, underwriting, managing the asset, sending distributions to passive investors, and selling the asset. All of the information about the business plan is presented upfront so the passive investor understands when to expect distributions and when the full deal is planned to exit.
Why have you not heard of this type of investment before?
The U.S. Securities and Exchange Commission (SEC) previously only allowed accredited investors to participate in these deals but has recently opened this to a larger group of individuals under strict guidelines. An accredited investor is someone whose net worth is over $1 million excluding their primary residence or makes $200k/year (or $300k/year for a married couple), which is less than 10% of the US population [1].
For the most part, these investment opportunities were and still are hard to find and often only available to those with a very high net worth. There are strict rules around advertising these investment deals so finding out about them is through word of mouth or a lot of research.
We really like investing in large multifamily via syndications
Multifamily is a great performing asset class in real estate and you can learn more about that in “Why this Engineer loves investing in Multifamily”. Syndication is a great way to make investing in this type of asset accessible to more investors. Without bringing a group of investors together, the amount of capital to acquire such a property is often north of 5 million dollars and can be in the 10s of millions of dollars. Not everyone has that kind of cash and even those who do may not want all of those eggs in one single basket. Syndication is a way to get into this performing asset class with a smaller investment size.