Real estate syndications have been a rapidly growing investment class in the last several years and are very popular with self-directed retirement plan investors.
The concept of pooling investors to purchase a large property isn’t new. But until recently access to these opportunities was limited to accredited investors.
The passage of the JOBS act in 2012 and resulting SEC rules implemented in 2015 allowed investment sponsors to raise capital for these types of much more easily. As a result, more and more such opportunities are available to the average investor.
For those with a self-directed IRA or Solo 401(k), syndicated real estate deals can be a great way to put your money to work for your retirement savings. Here are 7 reasons to invest in real estate syndications with your retirement plan.
1. Access to Larger Opportunities
Commercial real estate has always been one of the best performing asset classes.
However, large properties like apartment complexes and business centers can be quite expensive, and are generally out of reach for individual investors.
By pooling investors, a syndicator can acquire the large amounts of capital necessary for these projects, while only requiring a modest amount from each individual investor. Minimum investments are commonly in the $50,000 to $100,000 range, but there are funds available that will accept minimum investments as low as $10,000.
Investing in multi-tenant properties is a great way to achieve diversification for individual investors. If your IRA owns a $100,000 single-family home and there is a vacancy, you have no income from the property until it’s rented again.
If your IRA places that same $100,000 into fractional ownership of a 50-unit apartment complex and 5 units are vacant, there’s still rent coming in from 45 units. That means 90% of potential rents are still being collected.
3. Let Professionals do the Work
Most real estate syndicates take the form of a limited liability company or partnership. All the work is done by the investment sponsor, who acts as the general partner for the entity. That person or team identifies the opportunity and negotiates a purchase, obtains financing, and then operates the property.
Your IRA or 401(k) participates as a limited partner. The plan is purely a financial investor in the project and is leveraging the expertise of the professional team that is running the show. For busy professionals, this type of passive investment is great.
As an investor, you need to put the effort into finding the right opportunities, vetting the investment sponsor, and paying attention to the project once it’s up and running. However, all this is a lot less work than self-managing a rental property.
4. Truly Arm’s Length Investing
One of the primary IRS rules that applies to investing with a self-directed IRA or Solo 401(k) is keeping your investments at arm’s length, and avoiding too much personal interaction with the plan.
Acting as a limited partner in a syndicated real estate deal is one of the most hand’s off ways to approach real estate investing and is therefore very well suited to retirement plans.
5. The Benefits of Leverage
Most syndicated real estate transactions use a mix of investor capital and debt-financing. As a result, the project produces leveraged returns that can outperform any all-cash deal.
It’s not uncommon to see an apartment project using 30% investor capital and 70% debt. The returns on these properties can easily run in the 12-14% range, and sometimes higher.
Because the general partner is obtaining the financing, there’s no need for a personal guarantee on behalf of your limited partner investment. This meets the IRS criteria that any loan obtained by a retirement plan must be non-recourse.
For IRA investors, the use of debt-financing in the deal will create generate Unrelated Debt-Financed Income (UDFI) and a resulting UBIT tax liability. The impact of this taxation in terms of actual dollars and percentage of income will be nominal.
A 14% top line return might be reduced to 13.5% or 13.25% net of taxation, which is still an excellent return on investment. However, the presence of this taxable income will require that you work with your CPA to perform the necessary tax filings.
6. Limited Liability Risk
As a limited partner in a LLC or LLP syndicate, your IRA or Solo 401(k) has no direct exposure to liability risk or debt obligations. The general partner may be guaranteeing the loan. As a limited partner, you certainly will not. In the event of a default, the lender will have no means to come after limited partners.The entity structure will also shield your plan from exposure to liability that may stem from the actions of the managing partner, hired vendors, or other operational aspects of the project.
As a limited partner, your plan (and you acting on behalf of the plan) won’t have any controlling responsibility for the entity, and won’t be making management decisions. You and your plan are removed from any chain of responsibility and the resulting liability exposure that can create.
7. Overall A Great Investment Choice
Making passive investments in larger real estate syndicates provides a wide array of benefits for an IRA investor. These opportunities can produce high returns with minimal effort and no liability exposure.
As with all investments, you must perform thorough diligence before putting your retirement funds into a syndicate. From there, it can be as simple as depositing quarterly checks and watching your tax-sheltered retirement savings grow.