All The Reasons You Should NOT Invest In Real Estate Syndications

If you’re a frequent visitor to our website, you’re likely familiar with our usual approach – emphasizing the benefits of real estate syndications as an incredible investment opportunity that we strongly advocate for. We truly believe in this investment strategy and have personally experienced the life-changing benefits it can bring, so we stand by our words and endorse it wholeheartedly.

However,

While we strongly believe in the benefits of real estate syndications, we also recognize that this type of investment may not be suitable for everyone due to its substantial nature. As a result, we would like to present the counter-argument and provide you with our top four reasons why investing in real estate syndications may not be the best choice for you.

Reason #1 – You Can’t Take Your Money Out At Will

Investing in real estate syndications involves committing your funds for the entire duration of the project hold time, which can be several years. This illiquidity means that your money becomes unavailable for withdrawal or transfer during the investment’s duration, and you cannot easily retrieve it until the end of the hold time. In contrast, stocks and mutual funds provide a more liquid investment option, where you can sell your shares and retrieve your money relatively quickly.

The liquidity of stocks and mutual funds allows investors to make decisions quickly and adapt to changes in the market. For instance, if there is a sudden drop in stock prices, investors can choose to sell their shares and recover their funds immediately. However, in real estate syndications, this is not possible due to the nature of the investment. This can be a significant drawback for investors who value liquidity and prefer to have access to their funds at all times.

Similarly, in a checking or savings account, you have complete control over your funds, and you can withdraw or transfer them at any time without any restrictions. The liquidity of these accounts provides investors with the flexibility to use their funds for daily expenses or other investments whenever they choose. In contrast, real estate syndications require a long-term commitment of funds, which can be a challenge for investors who prefer to have access to their money for short-term needs.

Upon entering a real estate syndication investment, investors are required to sign a comprehensive legal document known as the PPM (private placement memorandum). This document outlines the investment’s details, including the projected hold time and the illiquidity of the investment. Therefore, investors must be certain that they will not require immediate access to their funds during the hold time.

The PPM serves as a binding contract between the investor and the sponsor, and investors are expected to honor their commitment until the investment’s completion. If an investor has any doubts or concerns about committing to a long-term investment and having their funds locked up for several years, they may want to reconsider investing in real estate syndications.

Investing in real estate syndications requires careful consideration and an understanding of the investment’s terms and conditions. It is crucial to weigh the potential benefits against the drawbacks, such as the illiquidity of the investment, before making a decision. Investors who prioritize liquidity and prefer more flexibility with their funds may find that real estate syndications do not align with their investment goals.

Reason #2 – You Have To Invest A LOT Of Money

The minimum investment amount for real estate syndications is $50,000, which is a substantial sum of money that may represent a significant portion of an individual’s savings or income. It could potentially cover the cost of a new car, a year’s worth of private school tuition, or serve as a down payment on a home.

Given the high minimum investment requirement, it is essential to carefully evaluate the potential risks and benefits of investing in a real estate syndication. Investors should assess their financial situation, investment goals, and risk tolerance to determine if a real estate syndication aligns with their needs.

While investing in real estate syndications can yield significant returns, it is crucial to consider the opportunity cost of investing $50,000 in a long-term illiquid investment. For some individuals, it may be more beneficial to allocate those funds towards other investments or expenses.

Don’t put that $50,000 into a real estate

syndication until you’re absolutely sure that it’s

the right place for your money.

It is crucial to maintain an emergency fund to cover unexpected expenses or events that may arise during the duration of a real estate syndication investment. Therefore, investors should avoid investing their entire savings into a single investment, such as a real estate syndication.

If you’re hesitant about investing $50,000 in a real estate syndication, it’s important to trust your instincts and consider alternative investment options that align with your financial goals and risk tolerance.

While the high minimum investment requirement of real estate syndications can present a challenge, it’s important to carefully evaluate the potential returns and risks of such investments, and determine whether they are a good fit for your financial situation and investment goals.

Reason #3 – You Have To Learn A New Process

Investing in rental properties is a common topic, and many people are familiar with the basic process. Typically, a broker is enlisted to help find a property, and after analyzing the financials, the property is purchased, rented out, and monthly rent payments are collected – much like the process depicted in the game Monopoly.

While investing in a multifamily syndication still involves the crucial aspect of collecting monthly rent from tenants, the process is markedly different for passive investors.

Unlike buying a rental property on your own, you may not have any physical connection to the property or personal relationships with the broker, lender, or property management team. In fact, you’ll be entering into the investment at a later stage, typically after the property is already under contract and well on its way to closing.

Investing in a real estate syndication is a unique process that may require some adjustment. To become comfortable with this investment approach, it is important to take the time to conduct thorough research and gain a good understanding of the process.

Reason #4 – You Have To Give Up Control

Investing in a rental property gives you complete control over almost every aspect of the investment. You have the power to decide on when and where to buy, which property management company to work with, which tenants to accept, how to accept payment, which improvements to make, and more.

As an investor in a rental property, you have a wide range of options and the flexibility to make decisions based on your preferences. There are numerous little adjustments you can make to fine-tune your investment, and you can customize your strategy to suit your particular needs.

As a passive investor in a real estate syndication, you’ll have minimal to no control over the investment. You won’t be able to make any day-to-day decisions, screen tenants, or influence any aspect of the property management. For someone who’s used to being in charge, this lack of control can be frustrating.

Since you’re not the one making the decisions, you’ll have to place your trust in the sponsor team to run the investment effectively. If you’re not comfortable trusting others with your investment, then real estate syndications may not be the right choice for you.

Conclusion

While real estate syndications and passive investing may be touted as a fantastic investment opportunity by syndicators and sponsor teams, it’s important to recognize that no investment is perfect. Investing passively in a real estate syndication requires a significant amount of capital and a long-term commitment. There is a learning curve involved in the process, and you’ll have to relinquish control over the investment decisions.

Ultimately, it’s up to you to make the best decision for yourself and your family. Despite all the persuasive arguments for real estate syndications, it’s important to assess your own situation honestly and determine if this investment strategy aligns with your goals and risk tolerance. And, most importantly, trust your instincts throughout the process.