Home News Forget Buying a Rental Property. Consider This Passive Income Investment Instead

Forget Buying a Rental Property. Consider This Passive Income Investment Instead

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One of the many ways to generate passive income is by purchasing a rental property. However, unlike most other passive income investment options, real estate investments often require active participation in the business in order to generate income. Unless you hire a property manager, you will have to find and manage tenants, do maintenance, and pay all bills.

there are many other ways Invest passively in real estate What mimics direct ownership without buying a rental property but without any management responsibility is joining a real estate syndicate. They allow us to become exclusive partners in a single real estate asset without lifting a finger to collect passive income.

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What is real estate syndication?

Real estate syndication is the pooling of funds by a group of investors to purchase a property that is too large for a single investor to purchase, such as an apartment complex, office building, or warehouse. Deal sponsors, known as General Partners (GPs), identify attractive properties for purchase and offer other investors, known as Limited Partners (LPs), the ability to participate in the deal. The sponsor is usually an established real estate company that manages the property on behalf of the limited partner or hires a property manager. Many sponsors offer the opportunity to invest in real estate syndication deals through online marketplaces such as CrowdStreet and EquityMultiple, or directly from their websites.

Reasons to consider real estate syndication deals

Real estate syndication deals have several advantages.

  • obtain passive income: Cash distribution from GP to LP will begin once acquisitions are stabilized. Since you are an investor in real estate, not a landlord, it is truly passive income.
  • Participate in the property’s long-term upside potential: LP owns the underlying shares. As such, they benefit from higher realized value through refinancing and eventual sale of the property.
  • Invest with experienced real estate professionals: GPs tend to have more experience owning and managing properties through market cycles. As such, LP investors can invest alongside experienced real estate professionals with a strong track record.
  • Diversify your portfolio: The value of a private real estate investment does not follow the daily fluctuations of the stock market. As such, they are better than listed REITs in diversifying an investor’s portfolio from the volatility of the stock and bond markets.
  • Access to properties you’ll never buy: A real estate investor may be able to afford a few duplex or single-family homes, but may not have the funds to purchase an apartment complex or office building. Real estate syndication allows you to own a piece of real estate that you could not otherwise purchase.

Cons of real estate syndication

One caveat is that most real estate syndicates are only open to accredited investors. To qualify, an investor must have her net worth of at least $1 million (excluding the value of her primary home), or an annual income of at least $200,000 (or $300,000 if she is married). is. Many investors may not meet these qualifications right now, but they may eventually qualify if her net worth rises above her $1 million. Also, the SEC may change the definition. On the other hand, there are occasional opportunities open to non-accredited investors.

Another negative factor is the high minimum investment for most real estate syndicates, typically between $25,000 and $50,000. This is a much higher minimum than many other real estate investments such as real estate investment trusts (REIT). However, it is lower than the typical initial investment required to purchase a rental property.

These too illiquid investment. Many syndication deals he has a holding period of 3 to 10 years and cannot sell the LP investment until the GP decides to sell the property.

The final issue with real estate syndicate deals is fees. Most GPs make their money through promotions, which are percentages of revenue above a certain threshold. They can be substantial and often the profits are split 20% to 30%/80% to 70% between the GP and LP when the property is refinanced or sold.

Real estate syndication offers a passive alternative to rental properties

Rental properties often require active management, making them less of a passive investment. Real estate syndicates, on the other hand, are passive investments managed by experienced real estate professionals. In addition, it provides access to types of real estate that investors could not have purchased on their own, allowing them to diversify their real estate portfolios. As such, they are well worth a closer look for anyone who qualifies as an accredited investor and has capital that they wish to invest to generate passive income from real estate.

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