If you’ve never invested in a real estate syndication before, often the biggest surprise is the minimum investment amount.
Seeing a minimum amount of $50,000, $75,000, or even $100,000 can be quite shocking when you’re only used to investing in shares of stocks and ETFs.
First-time syndication investor seeing a $100K minimum
Seeing a minimum amount of $50,000, $75,000, or even $100,000 can be quite shocking when you’re only used to investing in shares of stocks and ETFs.
First-time syndication investor seeing a $100K minimum
I often talk to new investors who see these minimums and immediately think “I don’t have that kind of cash just lying around.”
And while it may be true that they don’t have that much cash sitting in a bank account ready to wire, they are typically overlooking investable capital they have in other places. So let’s go over some common (and less common) ways to fund a syndication.
Personal Capital
Of course, if you do have the cash available, that’s always the easiest and most direct way to invest.
And it’s common for investors I work with to reorient their savings strategies and existing investments to create more liquid cash for private placement investments. Some examples:
Liquidate existing stocks or ETFs held in a taxable brokerage account
Reduce or eliminate contributions to traditional retirement accounts like an IRA or 401(k)
Stop putting excess savings into a taxable brokerage account and instead hold as cash in a savings or money market account
There are pros and cons to each of these, and you should consider what’s best given your personal circumstances.
But investing in syndications with cash gives you the highest amount of flexibility and control in your investment decisions without any external restrictions or other obligations.
Retirement Accounts
If you have a W-2 job, the largest portion of your wealth (not counting your house) is probably sitting in traditional tax-advantaged retirement accounts like a 401(k) or IRA.
This wealth is often overlooked because:
Most people never think about it their retirement (set-it-and-forget-it)
For those that do, there’s a misconception that it can’t be used to invest in real estate or other private placements
Just like you can roll an old 401(k) into an IRA, you can roll an existing IRA into a self-directed IRA (SDIRA) and take complete control over how the funds are invested. Investing in syndications with IRA money takes a couple extra steps to set up, but the benefits are enormous – you can finally put a large chuck of wealth to work in real, cash-flowing assets.
An alternative to setting up an SDIRA is to completely liquidate an existing IRA. I don’t necessarily recommend this, but I know investors who chose to accept the extra taxes, penalties, and fees associated with an early withdrawal in exchange for complete freedom in how they invest that money. Your mileage may vary with this approach.
Equity from Existing Real Estate
If you purchased a house before 2020, you’re probably sitting on a good amount of equity. Tapping into this can be another good source of capital to invest in syndications.
There are a few avenues to access it:
If you have existing rental properties (where you’re an active landlord), you could sell them and invest the proceeds in a passive syndication
Work with a bank to refinance your residence or existing rental properties, or to establish a line of credit secured by them (HELOC)
Work with a Home Equity Investment (HEI) company to trade a portion of the existing equity in your residence or rental properties for cash
Again, there are pros and cons with each. If using a cash-out refi or line of credit, it’s important to ensure you can still cover the interest payments through other means if the investment is slow to produce cash flow.
Consider Your Options
When it comes to funding real estate syndications, there are a range of options to consider, existing cash being just one of them.
Each option has its own advantages and considerations, and it's important to assess your individual financial circumstances, investment goals, and risk tolerance before selecting a suitable funding method.
But by understanding that there are multiple options, you can more confidently pursue real estate syndications and take advantage of the wealth-building opportunities they offer.
Do you have questions on any of these “alternative” methods? I’m always happy to discuss in more detail and help you think through the best choice for you. Let’s talk.