If you’ve decided that incorporating real estate into your investment portfolio is a no-brainer and realize that you don’t have the time or desire to be an active investor (another great choice!), then investing in a no-hassle, hands-off, Real Estate Syndication is the best option. These investments enable multiple participants to pool capital together to purchase a real estate property that delivers passive income and appreciation to the investor.
Now that you’ve made the decision and are ready to invest, where do you start? Like any other type of investment, each real estate syndication can vary greatly. When evaluating an opportunity, you’ll need to consider a number of factors such as the property (or properties), the location, the business plan, etc. If you’re overwhelmed by all of these details, how will you know which opportunity is right for you?
Will you pick the first opportunity presented if the numbers seem to work, and the property looks nice? Or maybe you end up not investing at all, because you’re afraid you don’t know how to pick the right option. This is why before reviewing any opportunities, the first step is to define your investment strategy. Once you do this, you can review each opportunity through this lense, allowing you to quickly determine what is best for you based on your goals and situation. Let’s explore the different investment strategies:
Strategy #1: Income
The goal of this strategy is to create a passive income stream from your investment that will cover your living expenses and ultimately replace the need to generate active income from a 9-5 job. There are a number of reasons why this would be an investors main objective, but they all boil down to one thing…the desire for more time. If you can replace the income from your job with income from your investment, you’re now retired and can spend more time with who you want and where you want.
This strategy focuses on properties that have positive cash flow, providing dividends for investors on a monthly or quarterly basis. Real estate syndications can typically cash flow between 7-10% per year. Let’s take a look at an example:
Investor A is planning to invest $500,000 over the next 5 years with a goal of generating $50,000 per year in passive income. This means they need an investment that provides cash flow returns of 10% per year:
$500,000 x 10% = $50,000
Investor A can now easily evaluate opportunities and invest in only the ones that meet or exceed this benchmark.
Strategy #2: Growth
The goal of this strategy is to produce the largest return over the life of the investment. With this strategy, the investor is more focused on multiplying their capital (and net worth) with each investment, and less concerned about receiving passive income on a regular basis. Investors often utilize this strategy while generating active income, and then invest those returns into income producing investments once they are ready to become more passive.
This strategy focuses on properties and locations where appreciation is expected. Because this is more speculative it is considered a riskier strategy, but can also be much more rewarding. This is where market analysis and due diligence play a big factor in reducing that risk as much as possible. Focusing on value-add opportunities where there is built in appreciation, as well as markets with positive trends in population and job growth is a great way to do this.
Strategy #3: Income and Growth
Why not find investments that can provide the best of both worlds? This is one of the reasons we love Real Estate Syndications. While they are typically cash flow positive from day one, value-add improvements and operational efficiencies can reduce expenses, increase occupancy and raise rents to generate higher cash flow over the life of the project (usually 7-8% annual return). An increase in cash flow means an increase in net operating income, leading to appreciation of the property and greater returns upon sale.
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