If you’re a high-income professional or high-net-worth investor and have been considering investing in a real estate syndication, I want to explain some of the basics in this article.
In this post, I’ll break down exactly what real estate syndications are, why they’re legal (yes, people ask this all the time), and how they let you scale your real estate portfolio without dealing with the headaches of managing properties yourself. If you’ve been looking for a way to grow your investments while keeping your time freedom, this is for you.
What Is a Real Estate Syndication? And Is It Legal?
Before we get into the bulk of this blog, I want to first discuss what a syndication is. At its core, a real estate syndication is a group of people pooling their resources—time, money, and expertise—to purchase a large real estate asset. This could be an apartment building, a self-storage facility, or even a mobile home park.
Why do this? Simple: these are properties that most individuals couldn’t buy on their own. But by teaming up, investors can share in the cash flow, tax benefits, and appreciation of these larger assets.
And yes, it’s 100% legal! In fact, one of the most famous real estate syndications was the Empire State Building. Back in 1961, a syndication allowed 3,000 small investors to buy into the building with as little as $10,000 each. That’s the power of syndication—it lets investors get into large real estate deals that they wouldn’t be able to buy on their own.
The Two Types of Investors in a Syndication
When you invest in a syndication, you fall into one of two categories:
- General Partners (GPs)
Also called sponsors or operators, these are the people running the deal. They find the property, analyze the numbers, secure financing, raise capital, and manage the property. They do all the heavy lifting. They’re responsible for everything running smoothly.
- Limited Partners (LPs)
Since you’re reading this blog, you likely fall into this bucket. These are passive investors. They provide capital, but they don’t have to manage tenants, handle repairs, or deal with property managers.
Instead, they just collect their share of the profits—cash flow, appreciation, and tax benefits.
5 Benefits of Syndications for Passive Investors
1. Lower Risk, More Stability
Unlike single-family homes (or even stocks), multifamily properties are incredibly resilient.
People always need an affordable place to live, even moreso in times like this when owning a home is so expensive.
Even during the 2008 recession, multifamily delinquencies peaked at just 0.4%, while single-family mortgage delinquencies hit 4%.
2. Higher Returns
The stock market has historically returned 7-8% per year (before taxes and fees). Meanwhile, multifamily syndications routinely deliver 10% or more in average annual returns.
3. True Passive Income
With owning other real estate assets like single-family rentals, you’re still responsible for property management, even if you outsource it. With syndications, you invest your money, and the general partners handle everything else.
4. Incredible Tax Benefits
Multifamily investors get access to powerful tax breaks like depreciation and cost segregation. This means your cash flow can be completely tax-free for years. And when it’s time to sell, you can use a 1031 exchange to defer taxes even further.
5. An Inflation Hedge
When inflation hits, apartment rents go up. In 2022-2023, while inflation soared to 9%, rents climbed 25%. That means while most people were losing purchasing power, apartment owners were making more money. If inflation rises again, multifamily investors will be protected.
5 Risks in Syndications (and How to Mitigate Them)
Of course, no investment is risk-free. But with the right strategy, you can manage those risks effectively:
- Sensitive to Market Cycles.
Like any investment, real estate is affected by market cycles. Some assets are more sensitive than others, that’s why I prefer multifamily, which has historically performed better than other real estate types.
I’d also recommend staying away from syndications on the West Coast and New England, where strong up and down cycles are likely to impact your investment. That’s why we tend to invest in more stable areas like the South.
- They Are Highly Dependent On The Operator.
A bad operator can sink a good deal. That’s why you should invest only with experienced sponsors who have a track record of successful full-cycle deals.
Having the right team in place to run a property is also crucial to the performance of multifamily. If you are dealing with an inexperienced or incompetent operator, they are liable to make mistakes. Mistakes that can cost you a lot of money.
- Lack of Liquidity
Arguably the biggest disadvantage of investing in syndications is that your money is tied up for 5 years or more. You can’t just call up your broker and sell your position.
On the other hand, many syndications can refinance before the end of the term and return part or all of your investment. And in the meantime, you’re likely getting cash flow, so you’re getting part of your money back!
- Control
Not only is your money tied up for years, but you also don’t control the investment itself – your operator does. They make all of the day-to-day decisions but they also decide when to refinance or sell.
If you’re a control freak, this may be an issue for you. On the other hand, that’s also the benefit of being a passive investor: you don’t have to do anything, just leave it up to your trusted operator!
- Harder To Understand Than Stocks
It may seem that understanding an alternative investment like a real estate syndication is hard to; and yes – there is a learning curve.
But, who really understands the stock market? While most investors should try to understand the stock market, most don’t take the time and turn their hard-earned savings over to a financial advisor.
The difference here is that you should spend time finding an operator you can trust and then invest with that operator over and over again.
How to Get Started with Multifamily Syndications
In conclusion, real estate syndications, especially multifamily ones, offer a unique opportunity to invest in large-scale, income-producing properties without the headaches of being a landlord.
With below-average risk, above-average returns, passive income, extraordinary tax benefits, and protection against inflation, multifamily syndications truly are one of the best investments available.
If you want to learn more about syndications and vet an operator while you’re at it, visit nighthawkequity.com.
Thanks for reading, hope this helped you!
To your success,
Michael Blank
