In today’s episode, we re-release our exclusive masterclass on building wealth through passive real estate investing. In partnership with Tribevest and their Chief Storyteller, Julian McClurkin, we covered passive investing in real estate.
This episode is a must-listen for anyone who wants to understand more about passive investing in real estate syndications. We delve into the basics of real estate syndications, the pros and cons of passive syndications, and most importantly, how to pick a sponsor. Whether you’re a beginner investor or an experienced one, this episode will serve as an excellent refresher for you.
About Julian McClurkin
Julian McClurkin has literally traveled the world throughout his professional basketball career as a Harlem Globetrotter, supporting and entertaining families and communities. Leveraging his engagement and relationship-building skills, Julian now joins Vision Realty, having built a diverse portfolio in real estate sales, investing, and renovations.
Here are some power takeaways from today’s conversation:
- [00:00] Introduction
- [07:47] Why it would be better to invest in real estate than index funds
- [10:20] Ways to spread the risk of investing
- [15:13] Types of investors who qualify for syndication
- [22:26] The process of investing in syndication
- [26:27] Passive Syndications: pros and cons
- [28:38] The tax benefits of syndication
- [36:10] What the velocity of money means
- [40:37] What “full cycle” means for investors
[07:47] Real Estate Investing vs. Index Funds
Investing offers various options, one of which is index funds that can give good returns over time with minimal effort. However, investing in real estate provides steady cash flow via rental income and can force appreciation by improving the property, which is not possible with index funds. Real estate investors can benefit from the syndication operator who handles the process, allowing them to enjoy the perks of their investment. On the other hand, index funds bet on the value of paper assets and do not offer cash flow or dividends as in real estate investments.
[22:26] The Process of Investing in Syndication
Investing in syndication involves upfront due diligence, including vetting the sponsor and analyzing the deal using tools like a sponsor screener and deal analyzer. Once you’ve invested, you’ll receive documents like a private placement memorandum and subscription agreements to sign. You then send the wire and wait for cash flow, receiving monthly or quarterly distribution checks and reports to keep track of the property’s performance.
[26:27] Passive Syndications: Pros and Cons
Passive syndications have major advantages, such as the ability for investors to benefit from the experience and expertise of a syndicator, who acts as a sponsor or manager for the investment, allowing them to invest in larger deals. Syndicators may also use tax advantages such as cost segregation and bonus depreciation, which can help investors reduce their tax burden. However, passive syndications also have downsides, including the lack of control investors have over the asset and the lack of liquidity, which can tie up capital for several years without the option of selling the investment, making it challenging for investors who need access to their funds in the short term.
[28:38] The Tax Benefits of Syndication
When investing and making money, taxes are the biggest factor working against you. However, investing in real estate allows you to reduce, defer, or even eliminate almost all of the tax burden as the tax code is written to benefit real estate investors. Depreciation can be used to offset almost all of your passive gains, which means that if you invest in syndication correctly, you won’t have to pay tax on any of the cash flows you receive, and it will be deferred, with recapture happening later. By investing in more syndications, your tax bill will go down significantly.