In today’s economy, one thing is guaranteed. The world is attempting to ditch the US dollar as the reserve currency and keeping your money in CDs and money market accounts is straight forward unsafe. For decades savers and investors found it safe to keep their money parked with their banks however the current near zero rates of interest and volatility of the U.S. dollar are justified reasons that compel more folks to find better investment strategies for their money. That’s why many investors start looking for investments which keep up with inflation (real estate, gold/silver, commodities, and certain foreign currencies and stocks.)
If Real Estate investing has been on your mind but aren’t sure where to invest, how to find the best deals or how to properly evaluate one, you may want to explore the opportunity of a passive way to invest in a Syndicated Real Estate Fund. A real estate syndicate is simply a group of investors who pool their money to purchase real estate. By pooling their money together these investors are able to purchase larger real estate properties with or without bank financing. This method of real estate investing has been a popular method of financing the purchase and sale of commercial properties such as shopping centers, office buildings and warehouses.
Private Real Estate syndicates raise funds through a private placement which is a security – an ownership interest in a company that owns and operates investment real estate. Unlike the REITs (Real Estate Investment Trusts), these investment vehicles are not publicly traded and are not priced to market on a daily basis. While REITs may have high dividend returns their publicly traded shares are subject to a significant degree of price volatility, an event less likely to occur with private syndicated funds.
Many real estate syndicates are offered as private placements, so it is important for you to understand the process and risk factors related to private placements. One of the most common risk is that the underlying investment is real estate, as a result these investments may be less liquid than shares in a REIT; when time comes the fund may be unable to sell the real property at a high enough price to generate the expected profits; or outside factors such as a further deterioration of the economy might negate the value added through rehabilitation work. Then, there is that uncertainty of unforeseen future expenses, taxes, and liability, all of which being typical real estate issues that seasoned investors are familiar with. My recommendation is that you thoroughly evaluate the risks directly from the private placement memorandum.
Syndicated real estate funds are carefully crafted by using the expertise of attorneys, accountants, contractors, investment bankers, mortgage bankers, and real estate brokers. They are structured in form of a partnership agreement or limited liability company (LLC), whose code of ethics requires full disclosure of all material facts. To further determine whether this kind of investment is for you, you’ll want to find out the experience and accomplishments of all directors and managers, the minimum required investment, the time-frame of your investment, and the potential annual return and capital gains on your money.
What I found enticing is the fact that one can invest in a private real estate syndicate by using his retirement account (IRA). A self-directed IRA is a unique hybrid tool that uses a self-directed IRA custodian and a specialized legal structure. Investments made with a self-directed IRA may grow untaxed provided the income generated is passive income.
Some other potential benefits associated with investments in these funds are:
- Gaining net spendable cash flow through a passive investment. Owning real estate individually requires skills in assessing property values, negotiating purchase agreements, financing, negotiating leases and managing the property. An investor in such a fund has access to a group that has proven knowledge and experience to deal with all aspects of real estate.
- Achieving a higher yield by investing in larger and more profitable properties. By pooling the funds of a number of investors, real estate syndicates can achieve overall better returns when compared to many individual investors.
- Taking advantage of the distressed commercial real estate market by using the expertise of vulture investors.
- Hedging against Inflation. Because inflation erodes the value of hard earned money and reduces the individual purchasing power, investment diversification in tangible assets may potentially represent a more desirable way to maintain your current living standard.
- Potential profit from property appreciation. Commercial real estate value is determined by its level of stabilization. High occupancy rates, stable revenues, carefully assessed expenses, and experienced property managers overall largely contribute to the increase in value.
- Favorable tax treatment. Check with your tax adviser regarding tax savings on private real estate syndicates which may not be available when investing in a public company.
- Various Investment Positions. As an investor, you can choose from a variety of positions that best suits your investment requirements.
Overall I still think it’s a smart move to diversify your investment portfolio with a hard asset such as real estate. But no matter what you invest in keep in mind that a “healthy investment” is the kind that…
- generates substantial revenues for you during good times and bad times;
- is made out of real assets that don’t vanish;
- does not lose its earnings potential with time;
- maintains its capital value;
- keeps up with inflation;
- is made out of assets that satisfy one or more human needs (housing, food, energy);
- can be passed on to your heirs and generate passive income for them.
Finally, if you’re seriously considering placing a chunk of your money into such a fund don’t forget to ask the hard questions such as if the managers and directors are investing their own money in the fund; how can you verify that the company is real and not a hoax; what could go wrong and if it does what happens to your investment. Use common sense and your own instinct, learn as much as you can, make decisions, and act on them quickly so that when the economic dust finally settles, your egg nest will still be there, intact and unharmed.
Contact me if you think investing in a Private Real Estate Fund is for you.