Exploring Real Estate Debt Funds and Syndications

As a working mom, you’re looking to build wealth for yourself and for your family. You’ve likely heard over and over again that real estate is one of the most effective ways to do that. However, if you’re anything like I was, you are probably unsure where to start. Understanding how real estate debt funds work can help you determine if passive real estate investing is right for you. If it is, we’ll even guide you to resources to get started with real estate debt funds. 

The Basics of Real Estate Debt Funds

If you’re new to the concept of real estate investing, there’s a good chance you haven’t yet heard of debt funds. A good way to think of debt funds is to think of them as the bonds of the real estate world, whereas buying property is akin to purchasing stocks. The comparison holds, but it is also worth noting that debt funds won’t be as predictable as government bonds. 

After the 2008 crash, real estate debt funds started to increase in popularity. While the number of people involved in funds is growing, it is still a niche part of real estate investing. 

A debt fund typically aims to connect a borrower, who is usually a project developer, with access to short-term capital. They use this funding for large-scale projects, such as shopping malls and apartment complexes. Periodic payments are made to investors from interest and security charged against the loan and the assets respectively. 

Things to Note About Debt Funds

Building wealth isn’t simply about growing income. Understanding how money is taxed is an important pillar of growing wealth. As such, it is necessary to know how debt funds are taxed. If you generate income through a debt fund payout, it will be taxed like ordinary income.

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To shelter that income, you need to open a self-directed IRA, or SDIRA. You need a special self-directed custodian or provider to fund an SDIRA. When choosing a provider, it is important to research the different costs you may incur and how much support you’ll receive from the provider. Check out all the details of self-directed IRAs here. 

How I Got Started in Real Estate

Originally, I brushed off the idea of real estate investing. It seemed like it would be complicated and require more time than I wanted to expend. Instead, I chose to laser focus on paying down my loans. Eventually, though, I realized that real estate investing doesn’t have to be overly complex. Plus, it can certainly be passive. 

When I decided to grow my wealth with real estate, I used real estate syndications to get started. Real estate syndications are powerful investments that can help you build wealth. Let’s take a deeper dive into syndications to see how they might fit into your investment portfolio. 

What Are Real Estate Syndications?

Often times, people are turned off to the idea of investing simply because of the terminology involved. That makes sense. When it sounds like someone is speaking a foreign language, of course, your confidence might start to wane. To understand how real estate syndications work, let’s start by breaking down several key terms:

Syndicate

When a group of investors pool their money, a syndicate is formed. This syndicate uses the pool of money to purchase real estate. Since the money is pulled from multiple people or groups, real estate can be purchased on a much larger scale compared to what an individual investor could likely purchase. 

Commercial Real Estate

Syndicates often purchase commercial real estate. Rather than buying residential real estate, such as a single-family home, commercial real estate is a much larger investment, not just in terms of the price tag but actual size as well. Common commercial real estate syndications might involve senior living facilities, self-storage buildings, and high-rise apartment complexes. 

Sponsor

The sponsor is also sometimes called a syndicator. This person or group is responsible for identifying the real estate project and setting up the purchase. They are involved in locating the property and finding investors to support their purchase. In an equity syndication, the sponsors generally put forth up to 20% of the equity. 

Investor

If hearing the word investor makes you think of someone who is glued to a stock ticker, rest assured that is not the only type of investor in the finance world. In syndications, investors are passive investors. That means that the investors contribute the funds, but the active work related to the real estate project is handled by the project sponsor. Remember that in order for it to be a syndication, there is a group, or pool, of investors backing the project. 

A Closer Look at Real Estate Syndications

In short, a real estate syndication is a deal between a group of investors and a sponsor that allows a group of investors to purchase a real estate project that they wouldn’t have access to on their own. Because it is a type of passive real estate, investors don’t have to worry about having the time or experience that is required in active real estate investing. 

Until 2012, real estate syndications were not talked about much. Why? Public advertising was actually prohibited until the JOBS Act of 2012 relaxed some of the rules around syndications. One of the most important criteria that still stands is that syndication investors must be accredited. 

To be an accredited investor, you will need to make at least $200,000 a year as an individual or $300,000 as a married couple. You also need to have earned this level of income within the last two years. Another way to have accredited investor status is to have at least $1 million in net worth outside of your primary residence. 

Most syndications require between $25,000 and $100,000 to start investing, However, some may allow you to buy in with $10,000. In addition to having the money to buy into the syndication, you will also be asked about accredited investor status. 

What Are Equity Syndications?

When you invest in an equity syndication, you aren’t just a lender; you become an owner as well. That is because investors in equity syndications are granted partial ownership of the project. That means that you are not only entitled to a return on your loan, but you can also receive a portion of the profit when the real estate project is resold or refinanced. It is worth noting that equity projects tend to take longer to complete. A ballpark range of at least 2-3 years should be helpful when determining if this type of investment is right for you. 

What Are Debt Syndications?

Debt syndications will have you harkening back to your Monopoly days because you and your fellow investors become the bank. Approved borrowers can access your pool of funds to complete their real estate projects. Throughout the length of the project–usually 18 months or less–each investor receives monthly dividend checks for pre-determined amounts as the borrower repays the loan. Unlike equity syndications, investors in debt syndications do not have any ownership rights. However, your investment is protected in that you have the right to foreclose should the borrower default on their repayments. 

What Are The Big Differences Between Equity and Debt Syndication?

One of the biggest differences between equity and debt syndications is how they make money. Both syndicates earn money on the loan interest and the fees. However, only equity syndicates earn money when the property is (re)sold or refinanced. 

Another major difference between the two types of syndication is in regards to ownership. In an equity syndicate, each member possesses partial ownership. That means that they have both shared ownership and shared liability. On the other hand, members of a debt syndicate do not actually have any ownership, so they have no liability risk either. 

Returns are a third distinguishing factor between equity and debt syndication types. In order to receive final returns on an equity syndicate, the project has to increase in value, whereas debt syndicates are entitled to the return regardless. 

Getting Started with Debt Funds & Syndications

The idea of getting started with real estate can be daunting. It’s important to remember that real estate isn’t always about rolling up your sleeves to flip properties or being on-call around the clock as a landlord. Passive real estate opportunities, such as syndications, exist, and they can be great tools to generate wealth even while you sleep. 

If you’re ready to take the next step passive real estate investing, check out Dr. Peter Kim’s Passive Real Estate Academy. In this 4 week online course he will teach you everything you need to know to vet and analyze a syndication deal so you can be confident investing in it. It only runs a few times a year. As a special bonus to my readers, if you purchase through me, you will receive some timely bonuses. I announce them as the course date approaches, so stay tuned!

Disclaimer: Please note that some of the links below are affiliate links. This means that I may receive a commission if you purchase through one of my links. I highly recommend all of the products & services because they are companies that I have found to be helpful and trustworthy. I use many of these products & services myself.