5 Reasons to Invest in Passive Real Estate Investments
There are many things you can invest your money into. Stocks, bonds, cryptocurrency, real estate among other things. Each of these options has a different level of return and risk associated with the investment.
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Most people are invested in stocks, bonds and mutual funds through their own brokerage accounts or through their 401(k) or IRA retirement accounts. While these can be good options, and they certainly are the most talked about in the mainstream media, they certainly are not the only options, and may not be the best option on a risk-adjusted basis.
My preference is to invest in real estate and there are many ways to invest in real estate. You can buy your own rental properties, invest in a REIT, or act as a lender to loan money to other folks for them to use invest in real estate with an agreed return for your loan. For this article, I’m going to focus on investing in real estate passively through real estate syndications.
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Syndications are when a sponsor, the person(s) who find and manage the investment, get multiple investors to pool their money to buy a large property. The sponsor is also referred to as the General Partner (GP) and the investors are referred to as Limited Partners (LP’s). Investing in a syndication as a limited partner (LP) is a truly passive investment in real estate which means after you invest your money, you do not need to participate in any management of the property.
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Investing in real estate is an excellent option as an alternative to investing in stocks, bonds or mutual funds. Why? Real estate syndications can offer a great return with very little effort, especially when considered on a risk-adjusted basis as real estate can be very low risk by comparison to stocks. This is especially true if you invest in a property that has an experienced sponsor as part of the GP team.
So, what are the major benefits of investing in a passive real estate syndication? There are five key ways you can benefit from these types of real estate investments:
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One of the greatest benefits of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining money after property expenses are paid is distributed to the investors as cash flow.
Not all real estate syndications pay cash flow, and some that do pay will pay quarterly rather than monthly. However, if you put $50,000 into a syndication that has an 8% cash on cash return, that means the investment would pay $333 per month ($50,000 * 8%/12 months/yr = $333/month). Since you invested in a syndication, the cashflow comes to you totally passively, which is the best kind of cash flow I can think of.
Leverage is what allows investors to pool only 25% of the money to buy a property, rather than the full 100%. The reason only 25% is required is that the bank (lender) will put up the remaining 75%, but the bank only charges the mortgage payments and doesn’t expect any of the investment returns from the property while the property is owned or upon the sale. All of the investment returns are distributed between the GP team and LP investors.
Without leverage, so much more money would be need to be raised for each property. This would both make raising money and buying properties much more difficult, but it would also dilute the percentage of ownership and, thus the returns, for each investor.
Equity is basically the difference between the value of the property and the debt owed on the property. So, if the property value is $5,000,000 and the debt owed is $3,000,000, the equity is $2,000,000, or 40% in this case.
As the mortgage is paid down, and the value of the property appreciates with the improvements being executed by the management team, the equity in the property increases. Equity is what is captured at the sale of the property as part of the total gain. It also allows for the property to be refinanced as the value is increased. A refinance can be done to return some, or all, of the LP investor’s initial capital while still allowing the investors to own the asset and benefit from the cashflow and continued appreciation.
This is a beautiful thing as the returned capital can be re-invested into another property while still owning the original one. Thus, now owning two properties for the price of one.
Appreciation is a major element of determining the total return from an investment. It is a big component of determining the IRR of an investment. IRR is used across the investing industry to offer a sort of comparison between different investments.
Appreciation is the difference between the purchase price of the property and the price of the property when it’s sold (or the current value of the property if it’s not yet sold). The key aspect to a value-add property is to drive up appreciation by increasing the value of a property through raising revenue (rent, fees, etc.) and lowering expenses. Thus, increasing the net operating income for the property which increases the value and the appreciation.
When you invest in a real estate syndication, you the investor get your portion of the benefits of depreciation, mortgage interest deductions, as well as a whole host of write-offs for several other related expenses.
Real estate investors often show losses on paper, while actually making money through cash flow. These paper losses can help to offset other income, which is another aspect as to why real estate can be so lucrative.
Moreover, when investing in commercial real estate syndications, you can take advantage of cost segregation and accelerated depreciation, which further increasing the tax benefits that you realize.
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Advantages of Investing in Real Estate
Through investing in real estate syndications, you can take advantage of cash flow, leverage, equity, appreciation, and tax benefits. These aspects of investing are the 5 key reasons why investing in real estate has so many advantages.
If you’re interested in learning more about real estate, check out more of my education articles on my website at www.progresscapitalgroup.com/education. Or, sign up for my newsletter at www.progresscapitalgroup.com/newsletter.
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