The Truth About Real Estate Syndications

Real estate syndications have gotten a pretty bad rap over the years, with some really high-profile failures and a lot of negative press.

But even though the bad actors in this industry tend to make most of the headlines, getting involved with these deals can be one of the best ways to get exposure to commercial real estate, without having to go through the process of finding properties to invest in and managing those assets.

So in this post, we’ll walk through both the positives and negatives of investing as a passive, limited partner in real estate syndications, and some of the key things to look out for if you decide to go this route.

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What Is a Real Estate Syndication?

To step back and define what a real estate syndication is, this is essentially just a partnership between equity investors to own and operate a commercial property.

In these types of deals, there’s an active general partner that manages the investment, along with one or more limited partners that typically only contribute capital.

Pro #1: Truly Passive Investment

One of the biggest things that makes these deals so attractive to investors that don’t have the capacity to actively manage deals is that these are truly hands-off investments that don’t require your time.

As a passive, limited partner, you won’t be the one responsible for collecting rent from tenants, negotiating leases, managing construction projects, or finding deals, which can make these great options for busy professionals without much free time who still want exposure to this asset class.

Pro #2: Tax Benefits of Direct Ownership

What’s also great about these types of deals is that even when you’re investing as a passive, limited partner, you’ll generally still get all the tax benefits of direct ownership in commercial real estate, which can be a huge benefit for investors with high annual incomes.

In a lot of cases, due to things like bonus depreciation and interest expense deductions, passive investors will actually show a loss at the end of the year for tax purposes, even if they’ve received operating cash flow distributions throughout the year. This can create tax-deferred income for investors, or operating losses they can carry forward to future years.

Pro #3: Invest in Specific Properties

Beyond just the tax benefits and how passive these investments are, where real estate syndications really shine is that these deals allow you to invest in one specific property, rather than an entire real estate operating company.

A lot of people look to REITs for exposure to commercial real estate, which typically involves buying shares of a public company that owns hundreds or thousands of properties across multiple geographic markets.

But by investing in syndications, you get to choose each individual property you’re involved with, which gives you the opportunity to analyze the market, the business plan, and the projected returns of each deal.

This means that you can double down on a specific city or specific property type that you believe in most, so if you want to get exposure to industrial development in South Florida, for example, this is something you could directly seek out.

Con #1: Complex Tax Situation

Even though there are a lot of upsides to investing in these deals, there are also some pretty significant downsides to be aware of if you decide to go this route.

The first thing that’s really difficult to unravel is that, once you’ve made a handful of passive investments, your personal tax situation can start to get more complex.

Most real estate syndications are structured as pass-through entities for tax purposes, meaning that each investor is subject to their own income tax rates on the proportion of income and capital gains they earn. This also means that if the properties you’ve invested in are located in different areas of the country, you may need to file tax returns in each of those states.

For example, if you live in California but invest in properties located in Oregon and Colorado, you might need to file tax returns in all of those states. And if you’re working with a CPA that charges on a per-return basis, the costs associated with these filings can add up quickly.

What can also be surprising to newer passive investors is that most real estate partnerships won’t have their final tax forms ready for investors until March or even early April in some cases, which means you’ll often need to file an extension on your personal tax return.

Con #2: No Control Over Major Decisions

Another downside of investing in these deals is that, as a passive, limited partner, you also don’t have control over the timing of major decisions related to the property, which can impact your taxable income and the cash flow you can generate.

For example, if you owned a property outright and decided to sell an unrelated stock position at a major gain in January, you probably wouldn’t choose to sell that property at a gain in that same calendar year.

But when you’re involved in a syndication, you don’t have a say about when a general partner decides to exit an investment, which can make it really difficult to plan and optimize your taxes.

Selling a property also means the cash flow distributions you may have gotten used to on a monthly or quarterly basis will no longer be available, so if you were relying on that income to pay for regular living expenses, this can add a lot of uncertainty to your investment portfolio.

The general partner on a deal usually also has full control over decisions related to major capital expenditures, refinance timing, and even the amounts of operating cash flow distributions made to investors, so even if a property doesn’t end up being sold outright, you could still see your cash flow fluctuate significantly over time.

Con #3: High Investment Minimums and Accredited Investor Requirements

The last thing I want to talk about that tends to trip people up about these investments (especially early-career professionals that are just getting started) is that investment minimums can be extremely high on these deals, and there are often income or net worth requirements just to get your foot in the door.

Investment minimums on real estate syndications typically range anywhere from about $50,000-$100,000 or more, which can take a lot of time to save up for, depending on your income level.

And when you do make enough money to get involved with these deals, they’ll often start out being a significant portion of your net worth, which can make it really hard to diversify and manage your risk.

In some cases, you’ll also need to qualify as what’s referred to by the SEC as an “Accredited Investor” to invest in certain opportunities, which comes with its own set of requirements that are also difficult to meet.

Accredited investors need to have a net worth of at least $1 million (excluding their primary residence), or they need to have an annual income of at least $200,000 as an individual or $300,000 as a married couple for the last two years.

These requirements were put in place by the SEC to make sure that only investors who can afford to lose the capital they’ve committed are able to get involved in these types of private offerings, but this is something to be aware of if you’re looking to go this route.

How To Learn More About Real Estate Deal Analysis

If you want to learn more about the process of analyzing passive real estate investment opportunities, or you want to build the technical skills you’ll need to put together your own real estate deals, make sure to check out our all-in-one membership training platform, Break Into CRE Academy.

A membership to the Academy will give you instant access to over 120 hours of video training on real estate financial modeling and analysis, you’ll get access to hundreds of practice Excel interview exam questions, sample acquisition case studies, and you’ll also get access to the Break Into CRE Analyst Certification Exam, which covers topics like real estate pro forma and development modeling, commercial real estate lease modeling, equity waterfall modeling, and many other real estate financial analysis concepts that will help you prove to employers that you have what it takes to tackle the responsibilities of an analyst or associate at a top real estate firm.