If you’ve spent any amount of time on our site, you’re probably familiar with our typical schtick. “Real estate syndications are amazing. We love investing in them. They’re the best, yadda yadda.”
And believe me, we stand behind every word of that (including the yadda yadda’s), because investing passively in real estate syndications really has transformed our lives.
But.
We also know that real estate syndications are a big investment and are not the right fit for everyone. Thus, we wanted to share with you all the reasons you should absolutely turn the other way.
That’s right. These are our top four reasons NOT to invest in real estate syndications.
Reason #1 – You Can’t Take Your Money Out At Will
When you invest passively in a real estate syndication, your money is illiquid for the length of the project hold time. That means that, if the asset is going to be held for 5 years, you should expect to have your money in the investment for the entire 5 years.
This is very different from stocks and mutual funds, where you can decide to sell right now, and you could have your money back by the time you finish this blog article. Okay, maybe not that quickly, but you get my point. When you invest in stocks, your money is liquid.
Same thing with a checking or savings account. At any moment, you can decide to spend that money, move that money, or withdraw that money, and you would have complete freedom to do so.
When you invest in a real estate syndication, however, you can’t withdraw your original investment at will.
In fact, when you enter into the investment, you must sign a lengthy legal document (the PPM, or private placement memorandum) that spells out the details of the projected length of the hold time and the illiquidity of the investment.
So you have to be super sure that you will not need access to that money in the immediate future. If you have any doubts, or the idea of having $50,000 or more locked up for 5 years is giving you hives, turn around now.
Reason #2 – You Have To Invest A LOT Of Money
For all the real estate syndications that we do, the minimum investment is $50,000. Which, for anyone, is a LOT of money. It could very well be an entire year’s salary for some folks.
It’s enough to buy a car, pay for private school tuition for a year, or be a down payment on a house. My point is, $50,000 is a lot of money, and there are a lot of things you could do with that money.
Don’t put that $50,000 into a real estate syndication until you’re absolutely sure that it’s the right place for your money.
And, if you’ve got $51,000 in your bank account and you’re thinking of investing $50,000 of that, stop right there. Remember that you won’t have access to this money for the next few years, so before you invest, you should definitely have some reserves set aside for, you know, life.
This high minimum investment can definitely be a hurdle, so if you’re getting sweaty palms thinking about wiring $50,000 and not seeing it for a few years, listen to your gut and pursue other investments.
Reason #3 – You Have To Learn A New Process
Almost anyone you talk to can give you a basic overview of how to invest in rental properties. You work with a broker to find a property, take a look at the numbers to see if it makes sense, then buy the property, rent it out, and collect monthly rent payments. It’s just like Monopoly taught us.
When you start down the path of investing passively in a real estate syndication, you have to throw most of what you have learned about rental properties out the window.
If you’re investing in a multifamily syndication, there’s still the core element of tenants paying rent each month, but beyond that, the experience for you as a passive investor will be very different.
For one, you might never set foot on the property. You won’t have a personal relationship with the broker or the lender or the property management team. You will enter into the investment when it’s already under contract and well on its way to closing.
The process of investing in a real estate syndication can take some getting used to, and you’ll definitely have to take some time to do your research and get comfortable with this new way of investing.
Reason #4 – You Have To Give Up Control
When you invest in a rental property, you get to have full control over pretty much every aspect of the investment. You choose when to buy, where to buy, which property management company to use, which tenants to accept, how you want to accept payment, what improvements to make, and more.
There are countless little levers you can tweak when you invest in a rental property, and you have the freedom and flexibility to do exactly what you want.
Investing passively in a real estate syndication is the complete opposite.
You have very little, if any, control over the investment. You don’t get to make the day-to-day decisions, you don’t screen any of the tenants, you don’t get a say in the layout of the leasing office, you don’t choose the paint colors for the buildings. You don’t get to make any of the decisions.
This can be totally frustrating if you’re used to being in the driver’s seat. As a passive investor, you are truly in the backseat, and you have to put your trust in the sponsor team to effectively run the whole thing.
So, if trust is not your thing, then you might as well cross real estate syndications off your list now, because passive investing will require a healthy dose of trust.
Conclusion
Every syndicator and sponsor team will sing the praises of real estate syndications and passive investing all day long. And sure, real estate syndications can be a great investment. But no investment vehicle is perfect.
When you invest passively in a real estate syndication, you are investing a lot of money and for a long time. The process takes some effort to learn and get comfortable with, and you’ll have to give up control.
If any of those are deal breakers for you, I’m glad we’re catching you now, before you pull the trigger on investing in a real estate syndication.
At the end of the day, only you know what’s best for you and your family, so forget all the pitches about why real estate syndications are so great, take an honest evaluation of where you are and whether real estate syndications are right for you, and don’t forget to listen to your gut along the way.
