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For anyone who is serious about building wealth through passive income, diversifying is key. Owning 20 single-family homes might provide enough rental income to suit your purposes. But if that is the entirety of your portfolio, a single economic event can destroy your income.
Maybe you need to expand into apartment buildings or garage unit complexes, but you don’t have the cash flow to do so. If that’s the case, real estate syndication. A syndication can give you access to higher-value assets without you having to. bear the entire monetary burden. This is how syndication can be favorable and allow you to expand your passive income.
A syndication isn’t just something that occurs with classic television. With real estate, it’s a way for multiple people to lend financing toward a high-quality asset. Typically, there are two types of participants: sponsors and investors.
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The sponsor is the user or entity that arranges a real estate transaction and then manages the asset. Sponsors are expected to invest some of the capital themselves, but the majority of the investment will come from investors. Sponsors obtain a control payment for their services.
If the property becomes profitable, investors will receive the preferred return rate stipulated in their investor deal. So if they invested $100,000 and have a return rate of 8%, they would receive $8,000 per year. Any profit remaining after the sponsor fee and the preferred returns would be distributed based on the contracted split structure.
Rentals can provide the sponsor and investors with a long-term source of income. With syndication, it’s less difficult to get a multi-unit apartment, retirement home, or larger advertising property. Commercial homes generate a more robust source of income than residential homes. .
There are vital things to keep in mind before opting for an asset to sponsor or invest in for the purpose of generating rental income. If the asset has been around for a while, what are its old returns?Just because an asset receives an influx of money doesn’t necessarily mean that its profitability will increase. Also, the economic trajectory of dominance around assets. If giant employers are slowly leaving the region, hiring increases over time would possibly not be justifiable.
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Property appreciation is an increase in a property’s value over time. This can be due to ordinary economic growth or actively increasing the asset’s value through renovation.
Selling an asset in a major economic era can be very profitable. As the time must be right, you have to be attentive to the economic projections, which is usually the task of the sponsor.
Buying an asset for the purpose of flipping it tends to have a much quicker turnaround. The sponsor will need to find a property, estimate the cost of improvements and renovations and present the plan to investors.
A benefit of flipping properties rather than keeping them long term as rentals is pricing confidence. An area’s local economy is unlikely to collapse between the time a property is purchased and when it is upgraded and sold.
Holding an asset for the long term allows for its appreciation over time, but it carries dangers of economic slowdown or site damage. Although uncommon, it’s conceivable that a wave of apartments will hit the market, leaving landlords scrambling for a limited number of tenants.
Distribution is rarely suitable for everyone. Investors have limited flexibility when it comes to commitment, compared to making an investment alone, and it can take only years to recoup the investment. Investors also have limited control, especially since the syndicate/sponsor manages the assets for them. And then there’s the behemoth that requires upfront investment for many syndication deals.
“Don’t invest with your own money” is an attractive concept. While sponsors are expected to provide some capital, a syndication provides access to real estate titles that in the past were out of reach for many. With the right control and for investors, this can be a difficult way to supplement a portfolio of passive sources of income.
The data provided herein does not constitute an investment, tax or monetary recommendation. You consult a licensed professional for recommendations related to your specific situation.
Justin Donald, founder of The Lifestyle Investor, helps marketers and business leaders invest to create a passive source of income and freedom.