- February 17, 2021
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
A few months ago, my husband and I got a call from one of our tenants.
“There’s mold in the basement.”
Mind you, this came from a tenant who was barely making rental payments each month and eventually just stopped paying altogether. She was having financial difficulties long before the mold was an issue, and she conveniently used it to justify why she didn’t have to pay rent from June-September. This situation happened during the height of the COVID-19 pandemic when the courts were closed, and the eviction moratorium was in place across the country. Without the rental income, we had to dig into our own pockets to pay for the mold remediation in the end.
The whole situation is not one I am fond of recalling and one which I don’t wish upon anyone else who is a landlord!
How We Got Here
We always knew real estate was a powerful wealth-building vehicle, so we set on a path to amass our portfolio of cash-flowing single-family and small multifamily properties that would enable us to live financially free one day.
We were married with two young children when we decided to kick-up our real estate portfolio a notch. See, we had a small portfolio of properties already, but we knew we had to scale for the numbers to have an impact. During this time, my husband, a residential realtor, was working on growing his business, and I was working at my W-2 finance/accounting job where reporting deadlines & requirements were increasing in number and complexity by the day! We were busy professionals!
Outside of work, we firmly believe in the importance of spending quality time with our kids. My weekends, pre-COVID, were mostly centered around taking the kids to birthday parties, sports practices, games, and playdates, while my husband had open houses or appointments with his clients. We were also busy parents!
So, seven units into this endeavor, we came to realize that scaling up with kids and working full-time is TOUGH and actively investing in real estate sure brings with it its fair share of headaches. Tenant evictions, mold, broken air conditioner, a leaky roof, termites, you name it, the list goes on.
Don’t get me wrong, we’ve learned so much from being active investors, we love our property manager, and we’re glad to contribute to society & provide clean and safe housing for our tenants.
However, and you knew there would be a “however”…
We’ve also had a taste of what it’s like to invest passively. Over the years, we’ve been fortunate to see real estate investing up close and personal on both sides of the fence. We’ve invested passively in multifamily syndications and served as co-sponsors on six deals and counting, on the syndication side.
At the end of the day, as busy professionals, what works for us without adding additional stress and work on our plates, is investing passively in real estate syndications. We get to invest in a powerful asset and get great returns, without lifting a finger.
What is a Real Estate Syndication?
Quite simply, syndication is a group investment where a group of investors pools their money to invest in something together that they otherwise would not be able to afford on their own. In the case of a real estate syndication, investors come together to invest in multimillion-dollar commercial real estate assets, like apartment complexes, self-storage buildings, and mobile home parks.
The beauty of a real estate syndication is that you can leverage other people’s time, energy, and expertise.
As busy professionals with kids, we can use all the leverage we can get.
In syndications, the Sponsors or the General Partners are active investors. They are the ones who have intimately researched the market & have data to support why they believe it has the potential to generate the types of returns they are expecting from the deal. They have a relationship with the real estate brokers, they have visited the properties and conducted both physical due diligence and lease audits, and they will be the ones working with the property managers daily to ensure the project’s success.
As a passive investor in a real estate syndication, I get the opportunity to partner with a team with a strong track record. The only work involved for me is picking the investment. Every deal I partake in helps me diversify my portfolio. I am investing in different cities and states where the returns are stronger, with different sponsors, and in different asset classes. All the while, I am doing next to no work.
That’s right, you heard it correctly. I get to invest in real estate without having to do any work.
So when the tenant in unit 101 is late in paying his rent? No problem, my bank account is fine.
Does the neighbor have complaints about unruly tenants in apartment 1C? I don’t have to deal with that either.
Is the toilet not flushing properly? The property maintenance guy will take care of that!
Someone else who is just as invested in this property, if not more so, like the Sponsors, gets to manage all of these issues. I get a nice typed-up email each month on the property’s progress and updates.
Can you see how as a passive investor, this frees up so much of your time so you can do what you want to do? Like taking your kids to his baseball game without getting a rude awakening call that a tenant’s toilet is overflowing?
What’s the Catch?
By now, you must be wondering, what’s the catch? This sounds way too good to be true. I thought the same thing when I first started.
I hate to disappoint you, but there is no catch.
In a real estate syndication, everyone works together, and everyone wins.
As my mentor likes to explain it, “Think of a real estate syndication like an airplane ride. The sponsors are the pilots. They do the actual work of flying the plane. If a warning light goes off, the pilots deal with it.
The passive investors, on the other hand, are the passengers. They get to enjoy the ride while reading, watching a movie, or dozing off. They don’t have any responsibilities in making sure the plane gets to the right place safely. They’re just along for the ride.
The Sponsors get a cut of the deal for their work, just as a pilot gets paid for flying the plane. The lion’s share of the returns, though, go to investors, even though they’re doing the mouse’s share of the work.”
In syndications, just as in an airplane ride, we’re all in it together, and we’re all heading to the same destination.
What do Returns Look Like?
Returns in syndications can vary because every deal is different. The asset itself is unique in every syndication, and so is the business plan. Some properties are stabilized and newer, so, therefore, require fewer renovations. Others maybe a little more distressed and will require more work.
While all deals are different, one consistency is that we have a minimum return requirement for the ones we invest with. We look for opportunities where the cash-on-cash return is between 8 to 10 percent per year, and the business plan is to hold the property for a projected 5-7 years. When factoring in the profits from the asset’s sale at the end of the 5-7 years, the average returns are around 15 percent per year. Not bad, right?
For example, if you were to invest $100,000 in one of these real estate syndications with us and the business plan is for five years, you could expect around $8,000 per year in cash flow distributions. On top of that, when the asset sells in year 5, you could expect another $60,000.
What that means is that in 5 years, you would likely double your initial $100,000 investment all without lifting a finger or fixing a single broken toilet. We happened to have done a webinar on how passive investors get paid in syndications if you want to learn more.
How to Invest in a Real Estate Syndication
The process of investing in a real estate syndication is a bit different than buying your own single-family rental property. There isn’t a broker per se that you can go to and ask to see some multifamily properties that are being syndicated.
Instead, to find real estate syndication opportunities, you need to find sponsors who have deals currently under contract. Often, because of SEC regulations, sponsors cannot publicly advertise deals, so they can be hard to find unless you know someone who knows someone.
Luckily, now you know someone who knows someone. (Hint: It’s us.)
At Sage Investing Group, we specialize in both sourcing investment opportunities and connecting passive investors to other sponsors in growing markets. We do the hard part of finding the deals and vetting the sponsors so we can bring a variety and the best ones to our investors.
We got into this business because we’re looking for deals we want to invest in ourselves. When a deal meets our strict criteria, we like to share it with our investors and give them the opportunity to partner with us.
What Does Sage Investing Group Get Out of It?
Our mission is to use our 35-years of combined risk management and real estate investing experience to help busy professionals like you. Real estate syndication sounds excellent, but we understand what it’s like getting into this space and not knowing who to trust, what to look for in a deal, and what all the returns numbers even mean. We remember going through extreme measures using our auditing hats to vet deals and the sponsors. We understand not everyone has the time, desire, or experience to do what we do.
Regarding how our business operates, we work hard to meet brokers and other sponsors in our space. Our objective is to build strong and purposeful relationships with them so that they’d think of us when there are great investment opportunities available. Whether we’ve sourced the deal ourselves or are partnering up with other sponsors, we thoroughly vet the markets and the sponsorship teams, and we stress-test the assumptions used in the underwriting to ensure they’re reasonable and conservative. All in the name of mitigating as much risk as possible for our investors and us.
Regardless of which way a deal comes about, the Sage Investing Group gets a cut of the Sponsors’ fees (also known as the acquisition fee), and we get a share of the equity. That means as an investor, you don’t have to worry about paying us any extra fees on top of your investment. You decide whether you want to invest in a deal and how much you want to invest. Whatever you put in is your stake in that deal.
We know real estate is one of the best wealth-building vehicles out there, and we want to help busy professionals like you participate in this investment vehicle without sacrificing your livelihood. Having been in your shoes once, we know it doesn’t have to be mean more tenants, toilets, and termites in order to scale-up and get to your financial freedom.
We look forward to chatting with you soon about our syndication opportunities if this sounds interesting to you.