What is Passive Investing Through Syndication?

by | Jul 5, 2022

If you hang around the real estate investing community for any amount of time, you are going to hear a lot about investing through syndications.  For those of us that have been doing this for any amount of time, this terminology is about as normal as discussing the news, weather, and sports.  But for those that are new to real estate investing, it can be a little overwhelming and intimidating at best.  In this article I’ll discuss what passive investing through syndication is and why it can be a great tool to have in your investing tool belt.

Active Vs. Passive Investing

First, let’s discuss the difference between active and passive investing.  Active investing in real estate is what most people think of when they think about real estate investing.  Imagine HGTV’s many, many shows that show the very glamorous life of buying the “ugly house on the street” and then turning it into the “prettiest house on the street” in just a few short weeks with a couple of funny interactions with the construction crew the TV personality just happened to find walking the isles of Home Depot.

There are many different versions or variations of active investing (wholesaling, buy and hold, BRRR, short term rentals, and many others), but what the reality TV shows do not share are the razor thin margins, the cutthroat world of acquisitions, and the many unglamorous aspects of the business that make it very tough for the average active investor with a W-2 to be successful with this as a side hustle.  As someone who has played the active investing game while trying to show up and perform 100% in a W-2 job, it’s not really all that it’s cracked up to be.

Passive investing by design is very boring compared to the high energy, high stakes, and perceived high rewards that are portrayed by the active investor community.  On a normal day as a Passive Investor, you might receive some updates via email on your investments, receive some solicitations from new operators that are trying to earn their way into your passive investment portfolio, and you’ll likely want to confirm that the disbursement deposits are hitting the correct bank account on the predetermined date.

Passive investing is simply, picking the right “jockey,” and then watching the jockey run around the track.  Sometimes your jockey finishes in first place, and other times she comes in 2nd or 3rd, but if she doesn’t break her leg, you’ll both move on to race another day and she will only get stronger and faster.

What is a Syndication

Now, let’s define what a real estate syndication is.  A real estate syndication is an investment structure that allows you to bring a group of investors together to invest in a specific real estate opportunity.  This type of structure can be used to invest in almost anything, and some of the most common real estate syndications include apartments, mobile homes, self-storage, land, development, ATM machines, and even bit-coin mining.

Roles in Syndications

Next, let’s discuss the two main roles in syndications:  General Partners and Limited Partners

The General Partner is the “jockey” that is in control of the day-to-day operations of the business.  They are responsible for finding the deals, doing the due diligence, setting up the financing, raising the capital, creating and executing the business plan, dealing with the operational challenges that come up 24 hours a day, managing the cash flow, and ultimately distributing the profits to all of the partners throughout the hold period.

Good General Partners have been involved in the business for years, and they have perfected their business procedures to make sure the business plan is executed as effectively as possible.  The success of the syndication will often rely on the skills and experience the General Partners bring to the deal.

The Limited Partner is the individual or the individuals that are bringing the liquid capital to the syndication deal, and these funds are usually used for the down payment or the rehab of the real estate being purchased.  In return, the Limited Partner generally receives some type of quarterly or monthly distribution as well as an additional return when the business plan is successfully completed at some point in the future.  The Limited Partner is not involved in the day-to-day activities of the business plan, and they don’t have to deal with the issues that arise throughout the period that the business plan is being executed.

The main responsibilities of the Limited Partner are to complete due diligence on the General Partners (the “jockey”) and the specific deal, review the regular communications from the General Partners that provide updates throughout the hold period, tell everyone you know every time you get a deposit into your account without doing any active real estate activities, and continue to earn good money from your W-2 or other business activities to keep feeding the passive investing machine you are creating.

Whether you determine that Active Investing or the Passive Investing is the best route for you and your needs, syndications are a great model to consider if you are interested in maximizing your returns while also taking advantage of scaling faster by combining your efforts with other investors and professionals in the space.

To wrap this up, my wife and I were able to 10x our monthly passive income through the syndication model in about the same amount of time as it took to build a small single family rental portfolio.  As a result, our focus will be to continue investing in real estate through the passive investment model with syndications.

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