Here’s How The Rich Invest In Real Estate Invest

About three years ago it was a beautiful sunny spring afternoon. I had an appointment at Starbucks with a potential investor, Stu. Why Starbucks? You probably guessed it: it offers a comfortable and semi-private environment where people can have a conversation and enjoy a Grande cup of expensive (but mediocre) coffee. That’s why Stu and I both chose bottled water.

At a cursory glance, Stu was an ordinary man who lost his mind, obscuring how much money he’d had for quite some time.

We exchanged the usual pleasantries and chatted about appreciating warmer weather so early in the spring. I asked about Stu’s family. He described his family: his wife, over 30, and his two children, both of whom were adults and living on their own. So then I insisted on asking Stu about his investment goals. He paused, then inquired about my background in his own quiet way.

As I shared my story, our conversation went like we were old friends. I’ve included a few more questions about Stu and his wife’s professional travels. He casually replied that they had both worked in banks in the past, but that they retired early to enjoy life. I was impressed and surprised at the same time because I don’t meet many retirees who prefer to diversify into new types of investments.


Increase your investments

Imagine being friends with hundreds of real estate investors and entrepreneurs. Now imagine grabbing a beer with each of them and casually talking about failures, successes, motivations, and lessons learned. That’s what we’re aiming for with The Pyjama People Podcast.


Why the rich choose syndications

I decided to ask Stu directly, “If you’re already enjoying your retirement, you don’t really need more money to build your wealth, do you?” Stu agreed in principle, explaining that his and his wife’s main goal was to continue building their wealth to help others recreate what they could keep and produce for their families.

Then I asked how they could build their wealth? He smiled and admitted that most of his family’s wealth had originally been built up by his parents—primarily his father, who had discovered real estate syndications long before home computers existed, when real estate syndications were referred to as “private placements.”

At this point, Stu said he didn’t quite understand how so many affluent people (like his family) have been able to take advantage of real estate syndications, while many other investors miss the boat. “Certainly,” Stu mused, “there are risks to this type of investment, just like any other, but the benefits far outweigh the risks.” So Stu and I discussed the aspects that people should consider before investing in real estate syndicates. They are easily identified and discussed below.

A real passive investment

Your job is to research and understand what syndication is, and then how to evaluate an offering; at that point your work is as good as done. So if an investor has a primary business or practice, or is a professional with a successful career, or just enjoys his life and doesn’t want to spend time dealing with tenants or toilets, investing in syndications is the way to go!

Preserving your capital

While it depends on each particular investor’s strategy, many look for ways to keep risks low and minimize losses. It is not uncommon for syndicates to achieve an average of 8-10% of the cash-on-cash return over a period of about five to ten years.

Although the stock market aims for an annual return of about 7%, it has many drawbacks. Most notably, the stock market doesn’t offer nearly as many tax breaks and is absolutely unpredictable.

Relying on calculated risk

When it comes to investing in real estate, careful underwriting is key. Experienced syndication operators ensure that the risks associated with a particular investment are accounted for in their underwriting.

Take advantage of tax benefits

There is no doubt that real estate is one of the most intelligent ways to reduce your tax burden. This can be accomplished in a number of ways: depreciation, cost segregation, 1031 exchanges, Opportunity Zones, and tax loss harvesting (just to name a few). And all the tax strategies mentioned above can be used when investing in various real estate syndicates.

Real estate generally offers major tax benefits. It all comes down to hiring an expert CPA who is not only knowledgeable about tax compliance but also knowledgeable about real estate and can provide tax strategies to help you plan ahead.

Generate residual income

You assess the offer, decide in which individual asset or real estate fund you want to invest, subscribe and transfer the funds. That is it; your work is done. Really? Yes really! From this point on, sit back and let the operator do its job while you collect your monthly or quarterly dividends directly into your bank account.

Risks to Consider

No investment is without risk. Here are some things to consider before diving into syndications.

No management decisions

When you passively invest in a syndication, you are essentially giving up your right to participate in the decision-making process for this investment. However, this comes with a bonus: you are investing as a limited partner and therefore your obligations are limited to your original investment.

It’s not your typical liquid investment

If you buy a stock or a mutual fund (or whatever on the exchange), you can technically sell it at any time. This kind of liquidity is not possible in real estate syndications. The way real estate syndications are structured, an investor basically invests and forgets about it until the deal has a capital event or the property is sold.

However, there is some flexibility when it comes to investing in closed-end funds. Closed-end funds usually have a so-called “lockdown period” – which can be a year or two – after which you are free to withdraw your investment.

Longer duration

If you are planning to invest in a value added project or even new construction, be prepared for the long term. It can take a while for a project to complete its full cycle. A common acceptance period is usually five to seven years. So as long as you invest money that you will not rely on within that time period, you are good to go.

Increase your wealth through passive investments

As one of my all-time favorite investors, Warren Buffett, once said:If you don’t find ways to make money while you sleep, you’ll work until the day you die.So the greater the number of these passive investments going on at the same time, the better off you will be. Not only do they generate passive income, but they also help you save on taxes.

Before I left Starbucks and went our separate ways, I asked Stu if this was enough material for him to get the word out — so more people could take advantage of the same strategy wealthy folks like him had for years. Stu looked at his notes, nodded, and thanked me.

After all these years, I still remember that conversation with Stu about the incredible investment strategy that: first, generates passive income for you while you sleep; two, you can save on taxes; and three also have a positive impact on communities in some cases. I hope you can take something from this and apply it to your own investment plans.

More about Pyjama People syndications

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.