Investing in real estate is one of the best ways to create passive income and generate wealth. However, it requires an initial investment of not just money – but yourself as well. Successful investors build good habits and personal skills that can both build their business and help them to become successful in the field. Our team of experts wants to share key mistakes to avoid and paths to success in real estate syndication.
Keys to Success
#1. Always Perform Due Diligence
It’s important to fully understand how investing works in order to assess the risks involved and avoid getting tricked out of your hard-earned money. A key component of being a real estate investor is performing due diligence or examining the components of the business deal to assess its profitability. If needed, hire a professional to help you with the due diligence process so the only costs of investing that you feel are financial ones.
#2. Be Informed, Stay Educated
For industry insiders, it is important to always be up-to-date with current trends, news, laws, and regulations, concerning the real estate business. Those who succeed in the business stay educated, constantly adapting to changes, managing and minimizing risks, and adjusting to market trends and needs. Falling behind in knowledge and information may impact your business negatively. Strive to always be growing, developing and making yourself better.
#3. Be a Go-Giver Not a Go-Getter
Finding a cause and giving our time and resources to support that cause enriches our lives. As much as giving allows us an opportunity to help others, it also causes us to grow as individuals and to understand our roles and our purpose. This key to real estate syndication success in turn manifests in other areas of our life, including our business endeavors and source of income. So then, whatever you generously give to others will find its way back to you in equal measure or perhaps more.
#4: Utilize Underwriting in Your Investment Deals
Underwriting a deal and understanding its financial nuances is key to successful multifamily investing, and is crucial to real estate syndication success. Getting information may be challenging, but you will be far better equipped to avoid pitfalls, avert risky investments and focus on opportunities to grow wealth quickly. We recommend looking out for these figures for successful underwriting: entry capitalization rate, exit capitalization rate, trailing 12-Months (TTM or T12), 2% year-over-year growth, and rent comparison data.
Key Mistakes
#1: Not Vetting Your Syndicator
Commercial real estate investment through syndication allows a group of investors to pool their resources to fund a larger project. The syndicator in this project is the sponsor, who manages the group funds and facilitates the development of the project. Choosing the right commercial real estate syndicator is the key to your investment success. The best syndicators bring market knowledge, legal savvy, tax understanding, structure, comprehensive real estate portfolios, and acceptable terms and conditions.
#2: Focusing on the Short Term
Commercial real estate syndication is a much longer-term strategy than many other investments. In many cases, you will not see results in one day or even one month, so don’t get too caught up in the short term.
Instead, focus on the bigger picture, and talk to your syndicator about a realistic timeframe. Look at actual investment summaries for these types of projects. It’s common for a project to include 5 to 7 years’ worth of projections for investor returns.
#3: Assuming You Need Real Estate Knowledge
Good news: You don’t need any real estate knowledge to join a real estate syndication. A talented and trustworthy syndicator understands that investors rely upon their intellectual capital for smart investments. They put a massive effort into making good choices and keeping their investor group updated on each project’s success.
Along those lines, you can be proactive as the investor to always read the contract thoroughly and understand the investment terms and conditions. If you see terms you don’t understand, ask what they mean. Get clarity upfront, and the deal will go more smoothly for everyone.
#4: Not Meeting the Requirements
You’ll need to be a certain type of investor to join in on most syndication projects. But don’t let this scare you off. Talk to the syndicator about what it takes to join. The minimum investment is usually $50,000, and depending on the deal type, there may be specifications around whether it can allow either accredited investors or sophisticated investors, as defined by the U.S. Securities and Exchange Commission (SEC), or only accredited investors.
Also, be mindful of significant tax advantages you should use to your benefit. You can ask a financial advisor for the details or download our Guide to Passively Investing in Commercial Real Estate for a more general explanation.
#5: Misunderstanding Value-Adding
If you’re not familiar with the idea of value-adding, here’s a quick summary. Value-adding involves identifying undervalued or under-marketed properties, investing in them, adding value (such as remodeling), then selling or renting them to bring investor returns.
Prepare yourself for the idea that undervalued properties may need a significant period of value-adding and property management before they bring returns. All good passive investors account for ample time before expecting cash flow in the form of returns.
Life Bridge Capital is Here for You
Curious about commercial real estate investment? Life Bridge Capital is a leading commercial real estate syndicator that holds the keys to real estate syndication success and can fully meet all of the criteria described above. Our team of professionals can help you get started and answer your questions. Contact us today to learn more.
