Because of my role at Left Field Investors, I speak to a lot of people who are new to syndications, and one of the most common questions I get is “Why isn’t everyone doing this?” It’s an appropriate question to ask as they hear for the first time that the typical syndication might pay you 8% annually (mostly tax-free) and possibly double your investment in five years or less (also possibly tax-free or tax-deferred). It sounds too good to be true – especially to most investors who have spent the bulk of their investing career being exposed to the Wall Street marketing machine. Why doesn’t your financial advisor recommend these types of investments? The main reason is that they don’t get paid if you don’t invest in a Wall Street-sponsored product. Most advisors aren’t financially incentivized to push anything other than the standard Wall Street products so they don’t know about “alternative” investments, they probably don’t understand them, and they don’t expose their clients to them.
The end result is that most people don’t invest like this. And by “this”, I mean most people don’t invest in real assets that produce real cash flow. Most people put money into their 401(k)s and hope that it grows to a sizable amount to allow them to retire someday. Of course, all of that 401(k) money goes into paper assets – stocks, mutual funds and bonds that are sponsored, pushed, and advertised by banks and financial companies. Some people invest outside of their 401(k)s, but they typically stay clear of anything that Wall Street classifies as “alternative” preferring the “safety” of standard paper assets where appreciation is the main way to increase your wealth. Of course, to lock in the appreciation, you have to sell your asset to someone else for a higher price than you bought it.
Instead, if you own a real asset that produces cash flow you don’t need to constantly worry about the value of the asset because it is producing a return of cash to you on a consistent basis. Instead of having your wealth invested in paper assets and worrying about the ups and downs of the market, people who invest in syndications collect monthly “mailbox money” while the syndicator works to force the property to appreciate rather than wait for the market to appreciate. How do they force the property to appreciate? The syndicator can improve the property – upgrade units, install washer/dryers, add amenities. All of this increases rent which increases the value of the property. This increase in property value is somewhat independent of the broader real estate market – meaning you are not beholden to the “market” to increase the value of your investment.
The end result is that you receive cash flow regularly until the asset is sold after the operator has forced appreciation so the asset sells for significantly more than it was bought for – which means a large chunk of cash in your pocket.
There are (at least) six reasons why most people don’t invest this way.
Reason #1 – I’ve never heard of syndication investing!
Most people have never heard of passively investing in real estate syndications. Until recently, there was no easy way for ordinary people to access syndication investments as they were only available to the wealthy. Some changes to SEC rules and tax law in 2012 allowed certain accredited and sophisticated investors to access these deals. Most people still don’t know about these investment opportunities but that is changing as podcasts and communities have become more prevalent and are exposing more and more people to syndications and real estate investing. If you have read this far, you now know there are options beyond Wall Street!
Reason #2 – Real estate investing is only for the rich!
Many people have the mindset that investing in real estate is only accessible to wealthy people. It doesn’t help that the SEC and other regulators use wealth as criteria for investors to qualify for some investments, but it just isn’t true that you need to be wealthy to invest in real estate. There are many crowdfunding platforms that give access to investments in many different real estate asset classes, and there are syndication sponsors that accept investors with no income or net worth minimum requirements. Anyone can invest in syndications!
Reason #3 – I don’t have enough money to meet the minimum investment requirements!
It is true that syndication minimums are high – often $25,000 or even $100,000. These investments are also extremely illiquid, so not only do you need a large chunk of cash, you also need to be confident you won’t need that cash back for 5 years or longer. What do you do if you don’t have $25,000? Find some friends and invest together! There are many ways to do that – my favorite is Tribevest (full disclosure, I am an investor in the company). They have a platform that helps you get a group together, form an LLC, get a business banking account, and start saving money for your first investment. I am in five investment groups through Tribevest including one where each member contributed only $100 per month and we invested in our first deal last year. Investing with friends and family can reduce the minimum investment amount!
Reason #4 – I don’t know where to find syndicators or deals or even where to start!
This is an understandable fear – if you want to know where to go to buy paper assets, you just turn on the TV and an advertisement will tell you exactly what to do. That isn’t the case for syndications – it takes a bit more effort, but the good news is there are a lot of great places to find information and start learning. My bias might be seeping in, but Left Field Investors is a great place to start! There are plenty of other communities that help new and experienced investors. These groups host virtual meetings and produce podcasts, blogs and other educational materials. Many of these groups are free while some have both free and subscription areas of their websites. The bottom line is there is plenty of information out there and plenty of people willing to help you get started. Do some research and join a Community!
Reason #5 – I’ve heard this will complicate my taxes!
Your taxes will certainly be different if you invest in syndications, but it is also likely that you will pay less in taxes. The tax code is written to incentivize certain behaviors and there are some nice tax benefits to investing in real estate. Most of the income you receive will be offset by depreciation, so much of the tax you would owe from cash flow on your investments will be deferred. Avoiding tax (legally) is one of the fastest ways to build wealth, with tax deferral being a close second. Instead of a 1099 that reports your Wall Street gains and losses, you will get a K1 that will show your gains and losses. The nice thing about syndications is that gains will go in your pocket and the losses will offset those gains. Use some of your tax savings to hire an accountant!
Reason #6 – I don’t have the guts to put my hard-earned money into “alternative” investments!
I know, the last time you did something “alternative” you ended up with a tattoo and a nose ring. You may or may not have regretted that decision, but I bet it got you some exposure to new people with different ideas. Tattoos and nose rings are not alternative anymore and neither are real estate syndications! At the risk of sounding repetitive, just as a community can help you find new investments, it can also help you overcome your fear of doing something different. Joining a community will expose you to people who are already doing it and they can help you through the fear of making a syndication investment. If you spend some time in a Community, you will meet people who you may come to know, like and trust and that could be the basis for getting comfortable with your first syndication investment! Be brave and join a Community!
Make the change with the help of some new friends!
Making any change in life is difficult – it’s usually easier just to continue doing what you have always done. I was a Wall Street paper asset investor for 25 years before I found real estate and a better way. I spent some time actively investing in real estate buying rental properties and apartment buildings, but when I found syndications, I found a way to be a professional investor by leveraging the operational expertise of others. I used to check my brokerage statements daily or weekly – watching them go up and down with the whims of the market. Now, I don’t pay much attention to the value of my assets – I pay attention to the cash that the assets generate. It’s a much less stressful way to accumulate wealth, not to mention it accelerates the wealth accumulation process. So what’s the best way to get started on this journey? Join a Community with like-minded individuals who you know, like, and trust. I recommend Left Field Investors, but any Community will help get you started!
Jim Pfeifer is one of the founders of Left Field Investors. He is a full time investor living in Dublin, OH. He has invested in over 30 passive syndications in his quest to become financially free through the acquisition of real assets that produce real cash flow. You can connect with him at firstname.lastname@example.org.
Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.