People who are thinking of investing in real estate consider a few different paths, typically. They may consider buying a single-family home, renovating it a little bit, and renting it out. Then, they’ll likely eye expanding their portfolio to include more properties and slowly build wealth that way – through capital appreciation and rental income. However, what people sometimes overlook is the value of group investment in real estate. Indeed, many times what a group of people can accomplish has a much broader impact and higher ROI than what one person on their own can do.
If you’re considering investing in real estate, here’s what you need to know about group real estate investments and how they have the potential to grow your wealth!
What Is Group Investment in Real Estate?
Throughout cities and suburbs, you’ll see numerous skyscrapers, apartment complexes, office buildings, etc. Have you ever stopped to consider who owns those buildings? In some cases, an ultra-wealthy individual will buy one – often through their company. In other cases, a company might be using most of the space, so they’ll have bought it out themselves.
However, in many cases, it’s not one singular person or company that owns it. Instead, it’s a group of investors that pool their money together to buy or build one of these large commercial properties. Much like any other investment, there’s a prospectus, projected income, and more.
Group investment in real estate is not merely for giant skyscrapers. Apartment complexes, multi-family dwellings, plots of land – if it’s real estate, it’s possible for a group of individuals or companies to buy it! When people invest as a collective, they form what’s called a “real estate syndication.” There are some legal specifics about this, which will come later. First, though, let’s see why people would even want to be a part of these syndications in the first place!
Why Would Anyone Choose Group Investment in Real Estate?
At first, this concept may seem a little odd. Investing with a group invariably means you’ll have less control over the project. Instead of you having the choice of what to do with your property – when to do repairs, what to do about tenants, etc. – a group setting means you won’t have that control.
While it is true that choosing to invest as a collective can reduce your control (and to-do list), the positives significantly outweigh them. There are three primary reasons why someone would want to invest in a real estate syndication.
Diversification
One of the biggest reasons people choose group investments in real estate is that they offer a wide variety of projects.
This concept is perhaps best illustrated with an example. Let’s say you have $500K to invest.
Depending on where you live, that amount of money might buy anywhere from 1-2 single-family homes (depending on your leverage). What happens, though, if the job market turns and you cannot find renters for those? You could lose 100% of your cash flow and be stuck paying the mortgage out of your own pocket! Again, investing a majority of your capital into one or two deals increases your risk.
With a syndication, you could invest $50,000 in 10 different projects across different markets and asset classes. That way, you’ll maximize your risk and quickly diversify your real estate portfolio.
Access Some of the Best Real Estate Deals
The problem with real estate for individual investors is that some of the best real estate deals are with these significant buildings and projects. There’s only so much a single-family home will ever appreciate or generate for rental income. Investing in a retail center, a value add apartment complex, or some other commercial hotspot could potentially be incredibly lucrative, both in terms of capital appreciation and rental income.
By limiting what you can invest in personally, you’ll be unable to access some of the best deals in the market!
It’s Truly Passive Investing
While you may have more control over a single-family home you buy, that control comes at a cost. You need to manage that property. You can undoubtedly dole some of those responsibilities out to a property manager. However, many more significant decisions (e.g., the home needs a new roof) still need the owner’s review and approval. With one property, that’s ok. With multiple investments, that burden quickly becomes a lot.
With a real estate syndication, the people pitching the deal are called the general partners (or syndicators). They control the property, ensure the deal goes through, the rents come in, the tenants are happy, and so forth. Investors are limited partners, and, as the name implies, legal obligations to the project end once they cut the check. All they need to do after that is sit back and collect the profits!
Real Estate Syndication Example
Perhaps the best way to understand a real estate syndication is to go through an example. Let’s suppose there’s an apartment complex that has a valuation of $20 million. A sponsor wants to acquire the asset, and the bank needs 20% down, so that requires a $4 million investment. The sponsor only has $1 million, so they put together a syndication – typically an LLC – and look for partners to go in on this project. They’ll put together an offering memorandum for passive investors to review. For the sake of this example, let’s say the deal is projecting 10% returns for five years, at which point they will sell the building, and the price will likely appreciate to 1.5x the purchase price today.
Let’s say you, as a passive investor, put in $100,000. Now you’re a limited partner with the sponsor! They purchase the building, and you receive $10,000 per year for five years. When the building sells, let’s say it’s not 1.5x the price but rather 2x the price.
Let’s assume in those five years that the mortgage went down to $15 million. If the building sells for 2x the price, $40 million, that means there’s $35 million to distribute to investors. Since the total money pool was $4 million, your $100k investment represented 1/40th of that money. Therefore, you’ll get 1/40th of $35 million, which is $875,000!
Not bad for an initial investment of $100k!
Note that most buildings will not appreciate 2x in five years, but this example shows explicitly just how powerful group investment in real estate can be!
How To Join Real Estate Investment Group
Real estate investment groups are skilled investors (general partners) that work to identify and operate profitable investment possibilities on behalf of passive investors! The most significant decision an investor makes when it comes to investing in a real estate syndication is selecting a reputable, capable, and professional real estate investment group to partner with.
So how do you join a real estate investment group or syndication?
We have put together a guide on how to find and vet these real estate investment groups here – How to Find the Best Real Estate Syndication Companies
If you are looking for information on how to start your own real estate investment group we recommend you check out our full guide on how to syndicate a real state deal!
If you are interested in joining a real estate investment group that specializes in multifamily apartment complexes, learn more about investing with Disrupt Equity here and take a look at our track record here!
Consider Group Investment in Real Estate
There’s arguably no better way to invest in real estate than through a syndication! Whether you want to diversify your portfolio, have a stable income, take advantage of capital appreciation, or have a truly passive investment, syndications are arguably the way to go! There’s much more, of course, to learn on this topic, but hopefully, this high-level overview has shown the potential benefits group real estate investments can provide!