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One of the many ways to generate passive income is to buy a rental property. However, unlike most other passive income investment options, real estate investments often require that you actively participate in the business to generate income. Unless you hire a property manager, you’d need to find and manage the tenants, take care of any maintenance, and pay all the bills.
There are many other ways to passively invest in real estate without buying a rental property. One that mimics direct ownership without any of the management responsibilities is participating in real estate syndications. They allow you to become a limited partner in a single real estate asset without lifting a finger to collect the passive income.
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A real estate syndication is when a group of investors pools their money to purchase a property that would be too large for a single investor to buy, like an apartment complex, office building, or warehouse. The sponsor of the deal, known as the general partner (GP), will identify an attractive property they desire to purchase and offer other investors, known as limited partners (LPs), the ability to participate in the deal. The sponsor, usually an established real estate company, will manage the property or hire a property manager on behalf of limited partners. Many sponsors will offer the opportunity to invest in a real estate syndication deal via an online marketplace like CrowdStreet or EquityMultiple or directly through their website.
Real estate syndication deals have several benefits:
One caveat is that most real estate syndications are only open to accredited investors. To qualify, an investor needs a net worth of over $1 million (excluding the value of their primary home) or an income above $200,000 annually ($300,000 if married). While many investors likely don’t currently meet those qualifications, they could eventually qualify if their net worth grows to exceed $1 million. It’s also possible that the SEC could make changes to the definition. Meanwhile, there are occasionally opportunities open to non-accredited investors.
Another detracting factor is that most real estate syndications have a high minimum investment, usually between $25,000 and $50,000. That’s a much higher minimum than many other real estate investments, such as a real estate investment trust (REIT). However, it’s lower than the typical initial investment required to purchase a rental property.
These are also illiquid investments. Many syndication deals have three- to 10-year holding periods, and you can’t sell your LP investment until the GP decides to sell the property.
A final issue with real estate syndication deals is the fees. Most GPs make money through a promote, a percentage of the returns above a certain threshold. They can be substantial, with profits often split 20% to 30%/80% to 70% between the GP and LPs upon a refinance or sale of the property.
Rental properties often require active management, making them a less passive investment. On the other hand, real estate syndications are passive investments managed by seasoned real estate professionals. Further, they provide access to property types an investor couldn’t afford on their own, enabling them to diversify their real estate portfolio. That makes them worth a closer look for those who qualify as accredited investors and have the capital they want to invest in generating passive income from real estate.
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