Passively investing in a real estate syndication can be a great way for busy professionals to diversify their portfolio and realize some of the benefits to investing in real assets, and do so without having to take on the headaches associated with being a landlord. If you would like to review a few of the benefits associate with owning real estate, you can read a blog post on the subject matter here.
For those already interested in becoming a passive investor, the next hurdle to overcome is how to get started. There are a lot of various options and knowing how to identify the best option for you can be a daunting task. I know this, because I started my apartment investing journey as a passive investor myself before deciding to take on a more active role. I spent a lot of time trying to educate myself prior to investing and wanted to use the knowledge that I gained to help streamline the process for you. In order to utilize your time efficiently and not overwhelm you all at once, I decided to create a series of articles titled Passive Investing Made Simple that break this material into a few shorter, easier to digest articles.
In this first installment, I’m going to cover a few concepts that you should understand as well as key terminology that you need to know before you invest.
What is a real estate syndication?
A real estate syndication is when a group of investors pool their resources to acquire and manage a real property. A typical syndication structure includes general partners and limited partners.
The general partners (GP) are the active partners running the day-to-day business. Their the ones that find and acquire the deal, perform the due diligence, close the deal, and operate the business after closing. The general partners may also be referred to as “sponsors”.
The limited partners or (LP) are the passive investors. The LP will usually bring capital to the deal necessary to close and operate the business plan. This capital may include the down payment, rehab costs, sponsorship fees, management fees and anything else needed to execute the business plan.
Net operating income or (NOI) is an important value to evaluate and monitor when analyzing commercial real estate. The NOI is all revenue from the property minus operating expenses (excluding debt service).
The capitalization rate (Cap Rate) is the rate of return that the property is generating, or is expected to generate. The cap rate can be calculated by dividing the NOI by the purchase price or market value of a property.
A distressed property is one where vacancy is low in comparison to the rest of the market. This may be due to poor management, significant deferred maintenance or a variety of other factors. You can usually expect low cash flow initially from a distressed asset, but larger returns once the property is stabilized. A distressed property is usually associated with a higher risk and higher reward profile.
A value-add property is one that is generally stable with near average vacancy rates, where the sponsor has identified ways to add value by increasing revenue and forcing appreciation. These value-add strategies may include unit renovations, exterior renovations or adding amenities to achieve fair market rental rates.
Please take some time to learn these concepts and reach out if I can answer any of your questions. Part 2 of our Passive Investing Made Simple series will discuss the structure of a typical syndication.
If you’ve found this helpful, visit https://goldribboninvestments.com/ to learn more about how we help others invest in real estate without having to become a landlord. We genuinely hope you start your journey for financial freedom today. You and your family deserve to live a life that provides unlimited amounts of joy, and real estate can help you get there if you take action. Build a life full of Freedom, Wealth and Impact.
Adam Lacey
Managing Member at Gold Ribbon Investments
