This is an informative post, originally published as part of our effort to be of service to you the reader, who is interested in investing in real estate. We believe these key elements will give you a stronger understanding and help you to make wiser investment decisions moving forward.
I first got into real estate after the housing market crash, when many homeowners began losing their homes. I’ve always felt great about being able to provide someone with new information that they can then use for their own benefit in their life. Today it’s about working smart, and having your money work hard for you so that you can enjoy life more.
Let’s face the facts. Prices on everything continue to increase. As you get older are you going to be able to retire off a small amount you receive from social security and/or a pension?
- Investing is not an option for most Americans, it’s a NECESSITY IN TODAY’S WORLD.
- Inflation is not just a buzzword you see on the internet, it’s here and will only get worse.
- You can invest in and own commercial real estate and receive all the benefits that come with it. MULTIFAMILY is the most reliable, stable asset you can own
Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth. – Theodore Roosevelt
A real estate syndication is a partnership between several investors. They combine their skills, resources, and capital to purchase and manage a property they otherwise couldn’t afford. They form an entity that will take title to the property(s) which is usually an LLC or Limited Partnership. Every entity is made of up of two parts: The general partner (GP) who usually finds the property, negotiates the purchase, obtains the loan, manages the asset and has the responsibility of making sure everything goes right. Secondly are the limited partners (LP’s) who invest their capital into the deal. They own a percentage of the syndication depending on how much money they invested.
- Limited Partner’s (LP’s) own a piece of the syndication or fund depending on how much money they invested
- LP’s usually receive a preferred return. Once profit is made from the cash-flow the preferred return gets paid first
- LP’s also usually get a split of the equity once property(s) is sold in a pre-determined time
- Typically, preferred return is 6-8% per year and split is 70/30 (70% goes to LP and 30% goes to GP)
- LP’s receive a percentage of the tax benefits depending how much they invested (Depreciation is the biggest one)
- Important note: GP’s are the ones liable if the project goes south not LP’s. The general partner is the one who has to qualify with the bank to get the loan to help purchase the property. LP has their capital at risk only, but in most cases GP has capital invested as well
How can you tell if what you are looking at is a good deal — here are some key metrics that will be able to help you so that when you receive a potential deal to invest in you can quickly glance at it and give it a thumbs up or a pass. For each definition, I have added a link to Investopedia.com for reference.
- Internal Rate of Return – IRR for short – You want a minimum of 15%, if it’s over 20% that’s really great
- Cash on Cash Return – C.O.C for short – If the investment time is 5 years or more you want 100%, or to double your money. If you can double your money in every 2-3 years that is fantastic
- Equity multiple – Multiple for short – An equity multiple of 2.0x is great, you’ve earned two times of what you initially invested.
- Capitalization Rate – Cap rate for short – This number varies greatly depending on the area. In Sant Monica the cap rate could be 3% and in San Bernardino it could be 8%. The higher the cap rate the greater return but also the greater the risk. So essentially if you can find a higher cap rate in a more desirable location that is ideal.
Overall, I hope to have added value to you and given you a better understanding on real estate syndications so that you can make better investment decisions. You do not need to be an expert to invest in real estate and enjoy the benefits. Finding the right partner who has the experience and will allow you to be a Limited Partner (LP) in their deal is a great choice.
If you’d like more information or have any further questions feel free to contact me directly via email at matthew.guerra@principlequalityinvestments.com