I often get asked, “What’s the best way to get started investing in real estate?” Let me reassure you, there are many ways to get started and that you aren’t alone if you’ve been interested and haven’t quite made the jump yet.
This article will help relieve some of the overwhelm and intimidation wishful investors face in leaping by helping you self-diagnose your status, deciphering what you want, and revealing the best way to get started with those two factors in mind.
What we’ll cover:
Get a Bird’s Eye View of Your Current Situation
Determine Your Why and Goals
Assess Your Risk Tolerance
How Different Investments work
Decide Which Investments Strategy is best for your Situation
Why Invest in a Real Estate Syndication
What's in it for you
Step 1: Get a Bird’s-eye View of Your Current Situation.
Before plopping any amount of money in an investment, you must have a clear view of where you are in life, what’s behind you, and what’s to come.
Maybe you’re just graduating, mid-career, or soon-to-retire. Perhaps you’re looking for a large, one-time payout, or maybe you’re interested in smaller, ongoing interest income. Do you have any amounts in mind like how much you want to invest, how much you’d like to earn, or what your financial freedom number is?
Getting a 30-thousand foot view of your current situation and answering these potentially tough questions about yourself will help you assess the amount of risk you’re willing to face, how aggressive your investment strategy should be, and the timeframe in which you need to see returns.
Step 2: Determine Your Why and Goals
There are potentially thousands of ways you can get involved in real estate investing (house hacking, mobile home parks, syndications, Airbnb’s, corporate housing, just to name a few). In almost every opportunity, you stand to make some money.
Shiny object syndrome is real and can have you frantically leaping from one opportunity to the next, only to discover that this one takes too long, that one is too hands-on, and the one before that was too passive.
This is why it’s so important to determine your personal, most inner reasons for investing - your WHY. Take some time to truly understand your personal and financial goals and identify what you want out of investing. When you know your why you can start planning your way. (start with why)
Do you want to create passive income so you can quit your job and be present with your kids? Are you close to retirement and want to be sure you are financially secure? Are the tax benefits of real estate most attractive to you? What do you really want?
Becoming firm in your reasoning and goals before investing will help you avoid shiny object syndrome and the stress it causes down the road. (why it's critical to know your goals before investing in real estate syndications.
Step 3: Assess Your Risk Tolerance
All investments - stocks, real estate, and even gold - come with risk. Along these same lines, every bit of risk correlates with the potential reward. High-risk investments come with higher potential payouts, and low-risk investments tend to have a lower opportunity for profit.
Your age, investment goals, income, and comfort level all play into determining your risk tolerance. This is why having a clear picture of where you are at and understanding your goals all play a part in putting together your personal investment strategy.
If the idea of potential losses makes you uncomfortable, you should consider beginning with smaller amounts of money so you can learn and gain confidence. Your returns will come in the form of experience and education at first, and with time, as you grow your capital, the financial returns will come around.
Step 4: How do different investments work
Active vs Passive
When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, you as the landlord still have an active role in the investment.
On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
If real estate investing sooms interesting to you, but you would rather avoid becoming a landlord, you are not alone.
Stocks Vs Real Estate
REITS vs Syndications- For individual real estate investors seeking passive income from a commercial real estate investment, there are two common options, REITs and individually syndicated deals.While the goal of each option is the same – to earn a return – there are fundamental differences between them on several fronts including: ownership, access, liquidity, tax benefits, and the number of properties involved.
Step 5: Determine What Metrics Matter
Numbers drive real estate investment decisions. The question is, which metrics matter?
New real estate investors often become confused with the countless methods to evaluate an investment as well as the industry acronyms. Depending on the investment goals and property type, some metrics carry more weight than others.
Here are a few of the most important metrics to understand
Talking about real estate investing without capitalization rates is next to impossible. Referred to as cap rates, these estimate the investors’ potential returns on a property. Use cap rates to compare similar properties in different markets.
Cap rate is calculated by dividing annual net operating income by the cost of the asset (or its current value). As cap rates go up, the return on your investment goes down. (what you need to know about cap rates as a passive investor)
Net operating income (NOI) measures a property’s ability to generate a positive cash flow from operations.
Net operating income = Gross operating income - Operating expenses
Gross operating income: For income-producing real estate, the gross operating income results from rents and fees, while operating expenses stem from all the reasonably necessary costs of owning and managing a property.
Operating expenses: These include property taxes — but not income taxes — vendor and supplier costs, maintenance and repair, insurance, utilities, licenses, supplies, and overhead costs, such as expenses for accounting, attorneys and advertising.
Equity Multiples is the initial investor capital amount invested into a deal. That capital equals the amount of equity an investor has in the passive investment. Thus, the term Equity Multiple simply means the amount your capital (or equity) will be multiplied by the end of the deal.
If a real estate syndication deal has an equity multiple of 2x and a projected hold time of 5 years, that means investors can expect to double their capital (original investment) in that 5 year period.
The equity multiple is the total of the cash flow distributions plus the returns after the sale of the asset. (equity multiple and what it means for a passive investor)
Step 6: Decide Which Investment Strategy is Best for Your Situation
At this point, you have evaluated how hands-on you want to be(active vs passive real estate investing- which is right for you), how risky you want to play(stocks vs real estate a comparison of risk), and how much money you’re willing to invest. With this information, you can narrow the types of investments that best fit your lifestyle and goals.
If hands off fits your goals, then passively investing in commercial real estate syndications might work for you. This is where money is pooled together to buy a large piece of commercial real estate property.
Syndicators do all the research for you, from analyzing markets to meeting brokers, hiring contractors, and much more. They find commercial real estate they think would be a homerun investment and then orchestrate the deal, the renovations, operations of the property, and a few years down the road, the sale.
This is where investors like you come in. You rely on the syndicators’ time, expertise, and team. Meanwhile, your money is invested, and every quarter you receive a distribution check, your portion of the returns earned on the asset. Plus, when the property sells after the hold period, you receive a part of the sale’s profits.
Why invest in a real estate syndication?
Okay, now that you’ve got a decent understanding of what real estate syndications are, let’s talk about what’s in it for you. There are a number of reasons that passive investors decide to invest in real estate syndications.
Here are a few of the top reasons:
You want to invest in real estate but don’t have the time or interest in being a landlord.
You want to invest in physical assets (as opposed to paper assets, like stocks).
You want to invest in something that’s more stable than the stock market.
You want the tax benefits that come with investing in real estate.
You want to receive regular cash flow distribution checks.
You want to invest with your retirement funds.
What are the returns like in a real estate syndication?
Let’s talk about one of the things people are most curious about – the returns you can expect by investing passively in real estate syndications.
A cash flow return, which you would receive in the form of a check or direct deposit either monthly or quarterly from the time the deal closes through the time the asset is sold.
Typically, for the real estate syndication deals that we do, the cash flow returns total 8-12% per year. So, if you were to invest $100,000, you could expect about $8,000 -$12,000 per year in cash flow returns.
What’s the minimum amount I can invest?
Typically, we see a minimum of $50,000 for the deals that we do.
Your money will be illiquid during the length of the hold time (i.e., you can’t withdraw it until the asset is sold). Thus, you should only invest with funds that you don’t need access to for a while and can afford to lose.
How long is a real estate syndication?
While each real estate syndication is different, we typically see projected hold times of 3-7 years.
This means that, for a real estate syndication with a 5-year projected hold time, you should prepare to have your money in the project for 5 years. You will not be able to take your money out until the asset is sold.
Who can invest in real estate syndications?
A large majority of real estate syndications are open to accredited investors only, though some are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks).
In order to be considered an accredited investor, you must meet at least one of two requirements. The first requirement is a net worth requirement. You must have at least $1 million in net worth, not counting your primary home.
The second requirement is an income requirement. You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.
If you meet either one or both of these requirements, then you are an accredited investor.
If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised.
Can I invest in a real estate syndication with retirement funds?
Yes! In fact, this is one way that many passive investors get started with real estate syndications.
To invest in a real estate syndication with retirement funds, you need to first roll over your existing retirement funds (401k’s, IRAs, etc.) into a self-directed IRA account.
We like Advanta IRA for their low fees and great customer service, but there are many self-directed IRA companies out there. (Note: Our COO’s self-directed IRA account is with Advanta. I am not being paid to refer them to you; I just really like them.)
Once your money is in the self-directed IRA account, you can choose what you want to invest it in, and the self-directed IRA custodian will invest it on your behalf.
For a real estate syndication, you will need to provide your self-directed IRA custodian with copies of the legal documents for the syndication (private placement memorandum, operating agreement, and subscription agreement). Then, they will send in the funds on your behalf.
Any returns you make on the investment must go directly back into the self-directed IRA account, never into your personal accounts.
What are the risks of investing in real estate syndications?
All this sounds great, but what about the risks? Great question. After all, a real estate syndication is an investment, and no investment is a guarantee.
One of the biggest risks is the risk of execution. When you invest in a real estate syndication, you’ll see glossy marketing packages, and the sponsors will answer your questions with lofty ideals.
However, when the rubber meets the road, the sponsor team needs to be able to execute on the business plan in the face of unforeseen circumstances. This is why we invest only with sponsors who have a proven track record and who prioritize capital preservation, so we know that they will protect your investments and will do what they say they’re going to do.
What about taxes?
When you invest in a real estate syndication as a passive investor, you are a part-owner in the underlying asset. That means that you get your share of the tax benefits.
One of the biggest tax benefits is accelerated depreciation through cost segregation.
When you invest in a rental property, you can depreciate the rental property on a schedule of 27.5 years
When you invest in a commercial real estate syndication, the sponsors will often order a cost segregation study. What this means is that a cost segregation expert will come and take stock of all the assets on the property – light fixtures, carpeting, etc. – and create a cost segregation report. That report shows which assets are eligible for accelerated depreciation.
What happens after I invest in a real estate syndication?
After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in.
Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or not for a few months.
Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.
Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property.
For example, instead of depreciating the carpeting over thirty or so years, you might be able to depreciate it over 5 years. This accelerated depreciation can front load all the depreciation benefits into the first few years of ownership, which is perfect for a real estate syndication that projects a hold time of just a few years.
Why Should I Invest With Redline Equity? What Differentiates Us From Other Syndicators?
The passive investors who choose to invest with us at Redline do so because of our conservative approach, personalized touch, transparency, and trustworthiness.
Unlike some other sponsors, we’re conservative when we underwrite deals to protect our investors from any type of market correction. We have plenty of reserves at closing and grow that reserve while we hold the property. We always buy for cash flow from day one and use long-term debt to ride out a recession if necessary, and we’re projecting higher interest rates (and lower values) when it’s time to sell.
Personal Connection - We never really felt a connection with the huge investment firms doing dozens of deals a year and we certainly don't want that experience for our investors. Our owner, Andrew Schutsky, builds a personal relationship with each and every investor - you will be speaking with him directly vs. a member of an investor relations team. Our goal is and always will be quality deals over quantity.
We are transparent, sending investors progress reports around the status of our business plan on a monthly basis. We also make ourselves available to our passive investors, responding to email within a few hours if at all possible.
We also align our interests with our passive investors. Each Redline General Partner (as well as affiliates) invests a significant amount of capital in each deal. We become investors alongside our passive investors which helps to achieve alignment of interests.
Finally, we build trust with our passive investor community by way of an educational platform. I host an investing podcast and prospective investors tend to feel like they already know me through the podcast, Crushing Cashflow or have spoken in person or on the phone several times.
And I’ve created this resource to help you make better decisions about investing in multifamily syndications!
The reasons why you trust one GP with your money over another is, of course, based on your personal preferences, so look for one who aligns with your goals and makes you feel comfortable.
Conclusion
Investing in real estate is as big of an endeavor and as exciting as you thought it was, which means it can also be overwhelming. As you can see, there are many ways to begin investing in real estate. It will be easiest for you to determine your own, personalized approach by clearly answering the questions presented above, step-by-step.
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