A passive investment is one where you provide capital to another party, who then uses that money to finance a business venture. The key word here is "passive" because, as the investor, you are not actively involved in the day-to-day activity of the business itself. An excellent example of passive investment is being a limited partner (LP) in a real estate syndication. The Sponsor (general partner) will find, acquire, and manage the property in a real estate syndication. As the LP, you provide the capital for the purchase and any necessary repairs/updates. The Sponsor takes on most of the risk and all management duties, while the passive investors earn a percentage of the profits—usually around 50% - 75%. Let's take a quick look at how real estate syndications work.
How Real Estate Syndications Work
Typical real estate syndication involves several different players:
The Sponsor – The primary party responsible for putting together the deal and raising money from LPs. The Sponsor is usually an experienced real estate developer or operator.
The Limited Partners (LPs) – These are the people who invest money in the deal in exchange for ownership units. LPs are usually high-net-worth individuals or institutions looking for a passive investment with above-average returns.
The Property Manager (PM) – PMs handle all day-to-day operations and run the property according to the Sponsor's Business Plan.
The Asset Manager – Typically works hand-in-hand with the property manager to help achieve desired financial results set forth by the Sponsor.
Sponsors use their own cash and credit to put together a deal, which they then present to potential LPs. If an LP decides that they want to invest, they will sign an agreement (a Private Placement Memorandum) outlining all pertinent details about the deal, including but not limited to:
1) The amount of money being raised
2) The minimum investment amount per LP
3) The expected return on investment
4) The projected hold period
5) Details about sponsors and managers
6) Risks associated with investing
7) Use of proceeds
8) Closing date and timeline
You'll notice that there is no maximum amount an LP can invest—so if you have $20 million available, you could theoretically write one check for the entire deal. However, most sponsors prefer to work with several LPs because it provides more flexibility and stability should something go wrong with one particular unit or property. In contrast, most passive investors like to spread their capital across multiple properties in different markets. This way, they can create more diversity in their real estate investments while reducing risk.
Conclusion: Real estate syndications offer many advantages over other investments, such as stocks and bonds. They provide potential investors with higher returns while still being relatively low risk. Plus, they offer tax breaks that other investments don't—making them even more attractive to potential LPs. If you're looking for a passive investment with above-average returns, investing in a real estate syndication might be right for you.
If this article piqued your interest in investing in real estate, then congratulations:
Download your Operations Manual Here. In the Operations Manual, you will learn how passive investors leverage Syndication to create Passive Income to grow their wealth for their future generation and create the ability to make an impact!
For more information on getting involved in a value-add multifamily syndication deal, don't hesitate to contact me at Hutch@HSquaredCapital.com or Dr. Heath Jones at Heath@HSquaredCapital.com. You can also visit our website at www.HSquaredCapital.com. We'd be happy to answer any of your questions and help get you started on the path to financial success through multifamily investing!