Passive income. It’s almost magical – you do nothing, and money shows up in your mailbox (or bank account).
Many people spend years chasing it. It’s a noble pursuit.
But they often end up pursuing activities that aren’t actually passive. Real estate is a great example. Google “passive income options” and real estate is sure to make every list you find. But here’s the thing:
Owning a rental house and being a landlord (what “investing in real estate” looks like for most people) is anything but passive.
A fist-sized hole “mysteriously” appears in the drywall
Your phone rings at 3:00am - the toilet is clogged. Again
An unexpected HVAC replacement wipes away a full year of cash flow
Hiring a property manager might help some, but even then, they’re still calling and asking how you want the latest problem handled.
Doesn’t sound like passive income to me.
Of course, since you’re reading this newsletter, I assume you’re familiar with real estate syndications, the only truly passive way to invest in real estate.
The ability to invest in real assets without being a landlord, getting a share of the profits, and reaping tax benefits is a sweet deal. Plus, diversification opportunities with minimal legwork are pretty attractive.
But…syndications aren’t for everyone.
Each investor is in a different stage of life, has a different level of risk tolerance, and maintains different goals (that they may not even realize they have).
So before you invest in a syndication, see if all of the following describes you and your current situation:
1. You have at least $50K to invest
Most private real estate syndications have minimum investment amounts between $50,000 to $100,000.
Ensure you have the minimum investment (retirement money in an IRA works too), plus your standard emergency fund, and any other savings you need for your life.
You should never invest in a syndication with money you can’t afford to lose. Don’t put your last $50K into a deal, no matter how good the deal looks.
It also never hurts to ask the sponsor if they will accept less than the stated minimum. A lot of sponsors will, especially if they have a good relationship with you.
2. You’re ok with someone else taking the reins
If you’re short on time but heavy on cash, and want someone else (a professional team) to identify, acquire, and manage properties while you reap the rewards, syndications are a good match for you.
Being an LP in a syndication is very hands-off. You’ll probably never see the property in person and will never have to worry about the day-to-day operations. The sponsor/GP deals with all the headaches for you.
For many investors, this is the dream. But if you’re a control freak, you might actually not like this arrangement.
The passive investors have little-to-no control or input in the operations of the property. So make sure you’re ok with the sponsor making all decisions on your behalf.
3. You want a long-term investment
You already know that real estate is a relatively illiquid investment, meaning that it takes more than the click of a button to sell and get your cash back.
This applies to investments in real estate syndications as well. Most syndications have a hold period for five or more years.
So don’t invest with cash you’ll need for a down payment on a house next year, or for your daughter’s upcoming wedding.
But if you’re looking for a steady, long-term approach to preserving and growing wealth, and you’re ok with your investment capital being at work for 5+ years, syndications are a good fit.
4. Sharing returns in exchange for less work is attractive to you
A real estate syndication involves two groups of investors:
The passive investors (LPs) who put up most of the money
The active investors (GPs) who do all of the work
From the LP’s perspective, the trade-off for having a truly passive investment is sharing the profits with the GPs who are performing the work. It’s common for LPs to receive 70-80% of the profits, with the GPs receiving the other 20-30%.
New investors occasionally balk at the idea of not getting 100% of the profits, especially if they’ve invested in real estate on their own previously.
But someone has to do the work. And most passive investors find the trade-off to be a very attractive proposition.
Are you ready?
If you meet the four criteria above, syndications are highly likely to be the investment vehicle you’ve been searching for.
You’ll enjoy investing in real estate without the hassles of being a landlord, while diversifying your portfolio, saving on taxes, and hedging inflation.