Real Estate Syndication give off a glamorous charm that you can invest passively in a real asset, with all the benefits and none of the hassle. Sounds too good to be true sometimes. In fact, real estate syndication do offer the LP’s a great experience (assuming the sponsor produces). However, there are some drawbacks that you, as a potential LP, should consider.
1. No control over decision making
If you decide to buy a small property and self-manage, you get to make ALL the decisions. This includes how much to rent space for, renovations, turn over, etc. Everything is on you to decide. If you are somebody who likes to be in control, especially with an investment like real estate, maybe investing as an LP is not for you.
2. Your money is tied up until the asset is refinanced or sold
If you are in need of the funds you may invest, you probably should not be investing as an LP. The stock market, a REIT or crowdfunding platforms like Fundrise are different from a syndication in the sense that you can liquidate (easily convert to cash) the stocks or shares of the Real Estate. On the flip side, an LP investment in a real estate syndication should be considered illiquid for the duration of the intended hold period of the asset. Do not drop your last $50K of savings into a real estate deal if you’ll need access to cash in the next few months.
3. High Entry Barrier
In order to invest in a Real Estate Syndication, you will generally need at least $50,000. Sometimes, a sponsor will allow you to invest less, but assume you will be investing $25,000-$50,000 minimum. For most people just starting out or somebody with the need to liquid funds, this can be a lot of money to tie up for an extended time.
4. You do not trust the sponsor
If you plan to invest money in a deal as a passive investor, you must trust the sponsorship group who brought you the opportunity. It is not advisable to invest with someone you haven’t spoken to and built a solid relationship with. And yes, it’s OK to ask for referral of others who have invested with the sponsor in the past.
If you have any questions regarding investing passively, please email me at Jason@3pillarsrei.com