It was time to dip my toes into the water… or rather land. You may have noticed that there are no posts about real estate on this blog. That’s because up until very recently, I knew very little about it and had no spare cash to invest in it until we paid off my student loans earlier this year. But I finally took the plunge into real estate syndications, and I wanted to share how that unfolded.
Where I StartedAs I mentioned, when I first got started with my financial goals and plans, I was laser-focused on my student loans. This is the first year I opened up a regular brokerage account at Vanguard. Up until now, I’ve been resisting all the advice to learn more about real estate and get some money in the game. Like many of you, learning about finances is a journey and requires continuing education. What’s great about being in this physician finance space is having access to folks who have experience with real estate investing. But, even with offers of direct mentoring to buy my first rental property, there was also this fear of the unknown. I was filled with thoughts like, “Ugh, it seems so complicated and a lot of work,” and that kept me from taking that first step. Then I discovered real estate syndication and decided to take another look.
Real Estate Syndications for DummiesFirst, what is a syndicate? A syndicate is a way for multiple investors to pool their money into an entity to purchase real estate. Why? This allows them to invest in much bigger properties than any individual investor could do on her own. Think large apartment buildings, self-storage facilities, senior resident living homes – these are examples of commercial real estate.
Sponsors and Investors in Real Estate SyndicationsSyndicates consist of a sponsor and investors. The sponsor is the one person or company that has experience and manages the deal on behalf of the investors. They generally have skin in the game too, often putting up between 5-20% of the total equity. The investors are people like you and me who would like to invest in this type of real estate, but prefer to be a passive investor, or what’s called a limited partner. Syndications are generally set up as an LLC and the investor owns an interest in the LLC. Let me back up a bit, though. You may be wondering why these seem “new” – at least I did. Up until recently, general solicitation for private offerings was prohibited (meaning no public advertising of securities to investors – like through the internet). You basically had to know someone–a friend, a neighbor, and so on–who did these deals. That’s where the term “country club” equity comes from. The JOBS Act of 2012 relaxed general solicitation rules as long as certain conditions were met, including that each investor is accredited. An accredited investor is an investor who meets 1 of the following criteria:
- She has annual income of at least $200,000 for the last two years with the expectation of earning at least $200,000 in the current year or
- If she’s married, they have a combined income of at least $300,000 each year for the last two years with the expectation of earning at least $300,000 in the current year or
- She has a net worth of at least $1 million, excluding her primary residence, either individually or jointly with her spouse.