Investing in real estate syndication is a fantastic way to generate passive income without having to deal with the day-to-day business of a landlord. However, it takes time and effort to figure out what to invest in beforehand, but the rest is as passive as possible.
When considering investing in syndication, you may have several questions such as: B. where to start, how to make money in a business, what if that doesn’t work, etc.
Like any other investment, investing in syndication has a learning curve, and there is the potential to make some costly mistakes along the way. However, if you want to speed up your learning and minimize the pain, focus on learning from others’ mistakes.
In this post I want to discuss five big mistakes when investing in real estate syndications.
Mistake # 1: No detailed insights into the sponsor and their track record
Many investors out there are making the decision to invest primarily in numbers. They look at the holding period, the returns, the stock multiplier, etc. These details are on the front of every offering memorandum, but they forget that real estate investing is a human game. One sponsor’s competitive advantage over the other lies in their network, track record, skills, and ability to do business well.
For example, a sponsor might have an excellent deal, but if the team managing that deal is inexperienced or poorly equipped, you could potentially lose money on that deal. But let’s say a sponsor has a reasonable deal, but their experience, industry expertise, and strong operations team could take this ordinary deal to the next level and bring you better returns.
Most of the time, you invest more in the sponsor than in the deal itself. Anyone can make up numbers to write on a piece of paper, but few are really good at things.
So spend a lot of time getting to know your sponsor, their track record, and their ability to make things happen.
Mistake # 2: Investing out of FOMO – fear of missing out
I can’t tell you how many times early in my investment career I missed a deal because I was too late to hear about it. After a while, I was so determined to invest in a deal that I took the next opportunity without really looking into it. As fate would have it, I lost a good chunk of my investment on this deal that I could easily have avoided if only had basic due diligence done.
I’m sure at some point in your investing journey you came across a business you wanted to invest in, but the deal was closed before you could get in. At the time, you may have regretted missing out on it, but trust me, quite a lot is going to happen.
There is nothing wrong with a deal, I promise there will be more. I’d rather miss a deal than invest in a bad deal that I could have avoided just by doing a little more care.
There’s nothing worse than hitting a deal that you’re not entirely comfortable with. You’ve been tied to most of these deals for years, so why rush into investing?
Mistake # 3: Don’t understand the lack of liquidity in real estate syndication
Real estate syndication is more of a longer-term investment strategy. You probably won’t see any appreciable returns in a few months, so don’t be obsessed with it.
Focus on the big picture and talk to your sponsor about the realistic schedule for your returns.
Generally, depending on your sponsor’s plan, your funds will be tied up for three to five years or more and it is up to them to decide when to refinance or sell the property. Therefore, these types of investments are more likely to be considered “illiquid” investments. You can’t turn your investment into cash as easily as you can with a stock or mutual fund.
However, they will receive some cash flow and may get some or all of the initial capital back in the event they choose to refinance.
I tell people to assume that you will not be able to access it for 3-7 years.
This may seem like a bad situation, but the oversized returns you get are part of the trade for this lack of liquidity.
If you need to access this capital quickly, I wouldn’t put it in one of these types of investments.
Mistake # 4: Don’t diversify and just invest in one deal
Investing in syndication is a great way to diversify your earnings, but it’s just as important to invest in more than one deal at a time. Diversification across different asset classes can help an investor manage risk and minimize the effects of market volatility. There are several benefits to investing in more than one business. It can increase your earning potential and stabilize your returns.
That is actually the reason why I invest heavily in real estate funds. With one investment, you are automatically invested in several properties.
There are some things that even the most seasoned sponsor cannot get hold of, so it is wise to spread your bets out.
Mistake # 5: Don’t ask any more questions
Before investing in any syndication, you will likely come across a offer memorandum or a summary of the deal. It features the highlights of the deal and makes it look awesome. In fact, at first glance, any business seems to be good.
Only when we dig and ask more questions will we find out what we want to know.
For example, once you’ve learned to recognize aggressive assumptions, you may wonder why an expense ratio seems unrealistic. Once you see it, be sure to ask a sponsor how they’d like to make it a reality.
Even if fees are not specifically stated on the offer memorandum, you should ask for them.
Remember that they want to develop a relationship with you and your hard earned money, and it is your right to ask any necessary questions until you are comfortable investing thousands of dollars.
So please learn how to read a summary and which questions are helpful.
Investing in real estate is one of the most effective and powerful ways to generate multiple streams of income. Sure, there will be mistakes along the way, but the ultimate goal of achieving financial independence is well worth the experience.
However, there is no substitute for reasonable due diligence; This is the only way you can feel comfortable investing in a business. If everything looks good and the math works, pull the trigger with confidence.
If you want to learn more about how to confidently invest in passive real estate investing, visit our Passive Real Estate Academy course. The time has come in September!
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