by Joe Firmin 2 Minute Read
If you’ve spent any time on our site at all, you’re familiar with our perspective on real estate syndications. If not, spoiler alert… we like them. A lot.
We can’t wait to continue to share about them so that more people have the opportunity to learn about these types of passive investments.
However, we also know that real estate investments are a big investment and are not the perfect choice for everyone. So, not to scare you off or go with a Halloween theme… here are the top four reasons why someone should NOT invest in real estate syndications. Ahhh! The horror!
1) You Can’t Take Your Money Out At Will (Liquidity)
Entering into a real estate syndication deal means you agree to the terms and projected hold time. Your cash invested is illiquid for the duration of the deal until the asset is sold.
If you’re passively investing in a real estate syndication deal and the hold time is 5 years, then you should plan to leave your money invested for the full 5 years, if not longer.
Other investments like stocks and mutual funds are much more flexible, and often times you can decide to sell and have your money back within minutes. In contrast, real estate syndications do not allow you to make withdraws at will.
Upon initiating or entering a real estate syndication deal, you must sign the Private Placement Memorandum (PPM). This document spells out the hold time, liquidity, and other details of the investment. If there’s anything about the idea of investing at least a large chunk of cash and not having access to it for 5 years that makes you uneasy, turn around now.
2) You Have To Invest A LOT of Money
The minimum investment on our real estate syndication deals varies, but at a minimum it will be around $15,000 for a small deal, which is a lot of money.
You could buy a car, pay for private school, or make major headway on a mortgage. There are many options on how such a large value of cash could be used.
Our advice? Don’t put $50,000 into a real estate syndication deal until you’re absolutely sure that THIS is how you want to use this cash.
Want some more advice? If you have $51,000 in your savings account, we don’t want you to invest $50,000 of it into a real estate syndication.
Since your cash investment won’t be available for several years, you’ll need to ensure you have enough saved in a separate emergency fund, created other accessible savings for additional short term goals, and have yet more cash to, well, cover life in general. This is a gut call.
3) You Have to Learn A New Process
Standard rental properties work much the same way as they do in the game of Monopoly. You check out a property, buy it, rent it out, and collect rent each month.
This isn’t Monopoly. Investing passively in real estate syndications requires you to throw all of that out the window. Passive investors almost never set foot on the property, they don’t have a relationship with the lender or the management team, and they’ll never come into contact with tenants.
You will enter into the investment when the asset is already on it’s way to closing. Passive investing is called such for a reason - because you’re not involved day-to-day and because you retain time freedom throughout the process.
4) You Have to Give Up Control 😱
One more major fundamental difference between passive investing and everything else is the level of control you have over the daily decisions made regarding the property, renovations, and tenants.
In regular real estate investments, you retain creative control over improvements, screening tenants, and whether you’re planning to sell within a certain period.
Investing in real estate syndications passively removes all these daily hassles and puts you in the passenger seat. This can be frustrating if you’ve previously enjoyed controlling aspects of the property. However, developing a level of trust in the sponsor team, in this case, is imperative.
If you don’t think you can handle allowing a team of professionals to make decisions for you, you might as well cross real estate syndications off your list now.
Every syndicator and operational team will shout from the rooftops about how great syndications are, and sure, they can be fabulous tools to grow wealth. But no investment vehicle is perfect and, certainly, no single investment style is perfect for everyone.
If any of the above top four reasons not to invest in a real estate syndication triggered you, maybe investing passively in real estate syndications isn’t your cup of joe. That’s cool.
You have the power to choose what’s right for your situation, your family, and your financial goals, and you should absolutely exert that power to its fullest. Be honest with yourself and listen to your gut.
If you’re interested in learning more about investing in value-add investments and becoming a passive real estate investor in real estate syndications, consider joining the Freedom Network. It’s absolutely free to join with no commitment necessary, seriously. If you don’t join, we won’t be able to send you opportunities (sorry, SEC rules). So join today!