The stock market is a popular investment vehicle due to its easy barrier of entry and the many user-friendly apps that make trading a breeze. However, if you are tired of the daily fluctuations of the market, it may be time to look for alternative investment options.
Multi-family investing may be a suitable option, due to the numerous benefits it has, as I’ve discussed in other posts. However, it certainly has its “flaws” (if you can call them that).
Below, I am going to break down the good, as well as the potential setbacks an investor will experience when they invest in a multi-family syndication.
Pros:
Passive Investment
Due to the structure of the syndication, generally there is a General Partner and a Limited Partner. When you invest your capital as a limited partner, you do not have any active participation in the management of the asset, and therefore, you strictly receive hands-off cash flow.
Asset Manager with experience is responsible to all daily tasks
On the flip side, the General Partnership (GP) are the ones who will actively oversee the operations of the asset and manage the property. When you have an experienced operator or asset manager, the deal will (hopefully) run smoothly and you’ll receive a nice and steady return on your money.
Syndications allow individuals to be involved in larger deals
If you have $100,000 for example, you can choose to buy something by yourself with the $100,000 – likely an asset worth about $400,000 max (when you use leverage), or you can invest the $100,000 in a much larger deal, maybe $10,000,000+. Because many investors are pooling their resources, they can now buy a much larger asset than they would on their own. (Team work makes the dream work)
No tenant phone calls or other landlord issues
This goes hand in hand with the first reason. Because the role of the limited partners is to be passive, you can rest assured that you will not be fixing toilets for your tenants. That’s the GP job.
Cons:
No active decision making over the property
While the LP investors get to receive fully passive cash flow, they give full control of the operations and decision making to the operating group (GP). It isn’t a drawback if the investor wants to be hands off, but the decision making is something you need to be OK with surrendering.
Real Estate’s lack of liquidity
Unlike a stock that you can buy or sell at any given moment, Real estate is considered illiquid. What this means is that when you invest in a real estate deal, you should assume (and check in the offering documents) that your money will be invested in the deal for 5-10 years, generally. There are cases where it may be less, but it’s important to do your due diligence on the operator’s plans for the asset.
Reliance on the Deal Sponsor
When a good operator can make a good deal a great deal, the opposite is true as well. If the operator of the asset does not have adequate knowledge, they can take a good deal and make it a bad one very quickly. To avoid this, it is important to really know your operator and deal sponsor to make sure that they can explain the business plan before you invest with them.
If you have any questions or comments about this post, or you would like to learn more about investing with us, please feel free to connect with me over email: Jason@3pillarsrei.com