Real Estate Syndication Investing Self-Employed (IE self-directed 401k, IRA)
One of the greatest benefits of self-directed 401(k)s, IRAs, and other investment vehicles is found in the fact that they allow investors to take total control of their assets and the way that they get a return on their investments. Investors who are looking for larger returns than those provided by stocks and bonds but don’t want to spend all of their money on a single piece of real estate often look into real estate syndications. These investment opportunities allow self-employed investors, or those who use a self-directed retirement account to put a percentage of their available funds into a syndication and passively generate an income. Understanding how real estate syndications work and why they’re a good choice for self-employed or self-directed investors can ensure that you’re making an informed decision about your investment strategy.
What Are Real Estate Syndications?
Real estate syndications work similarly to crowdfunding platforms. In a syndication, a sponsor, who is also referred to as a syndicator, does extensive research on a potential investment property, creates a business plan about how to maximize the value of that property, and then either handles the long-term management of the property, or oversees the liquidation of it. Depending on the profit disbursement method that is chosen (renting the property vs. selling it), the investors in the syndication receive a portion of the profits that corresponds to the amount of money that they invested.
Investors, especially those who are using funds from an IRA or a 401(k) are drawn to this investment option because of the lower risk associated with the structure. Additionally, investors are required to do little to no work when handling a real estate syndication. Instead, these potentially high-margin investment opportunities allow investors to simply sit back and collect dividends while the syndicator handles all of the property-related tasks.
Things to Consider When Looking for a Syndication
Obviously, not all syndications are the same. It’s important that you know what kind to look for when deciding where a real estate syndicate fits in your portfolio.
First of all, you will need to ensure that you’re allowed to invest in the syndication that you’re looking at. In some cases, syndicates only allow accredited investors or those who have proven a predetermined level of financial success to invest in their syndicate. If you are not accredited or don’t meet the requirements of a given syndication, don’t lose hope. There are plenty of other options out there for you to consider.
Secondly, you should gather information about the way that the syndication structures payouts. For instance, is there a certain amount of money that you can put into the syndicate to obtain preferred investor status. Preferred investors not only get paid more than other investors, but they also get paid first. Also, does the syndicate include any heft maintenance fees in the fine print? If so, this could severely cut into your profits. It’s important to know how and when the money will be going into your self-directed retirement account, so gather as much information as possible about the pay structure of the syndication in question.
Speaking of structure, knowing how the syndication is structured is another crucial part of the process. A syndication’s greatest responsibility is to protect its investors and having the right structure in place is the best way to do so. Even if you’re not bothered by a single person heading up the entire syndication, you should get as much information as possible about what happens to the syndication in the event that the person dies, goes through a divorce, or the corporation as a whole crumbles. You should make sure that you know about the plans that are in place that protect you as an investor.
Real estate syndicates have been proven as a viable opportunity for investors who want to add real estate to their portfolio. Based on their nature, they are a great option for investors who want to use self-directed retirement accounts and self-employed income to make real estate investments. When you’re looking for a way to increase your own net worth so you can put your heirs in a better financial position, real estate syndications are a great option.