Diversification: real estate has historically delivered equity-like returns with lower volatility and modest correlation to stocks, serving as a useful addition to building a diversified portfolio.

Passive Income: As an LP, you’re not plunging toilets, you’re receiving scheduled distributions (subject to performance). The GP handles all day-to-day operations, leasing, maintenance, tenant communication, personally guaranteeing the debt, and the timing around refinance and sale. While each opportunity is unique, in our base case return expectations we typically target a 6%-8%+ annualized cash distribution. 

Debt Paydown: Tenants’ rent pays down the principal balance of the debt over time, steadily building equity and wealth over time. Depending on the leverage level and stage of the investment, this can add an additional 5%-10%+ of return each year that become accessible to investors at refinance or sale. Think of this like a forced savings account.  

Forced Appreciation: In commercial real estate, value is a function of net operating income (NOI), which is revenues less expenses, and the cap rate (market expectation of the property’s risk and return). A skilled Sponsor can improve operations by increasing revenue, decreasing expenses, or both and force appreciation by increasing NOI. For example, if a sponsor buys a $5 million property at a 7% cap rate, the NOI is $350,000. If the Sponsor can add just $75,000 in NOI through improving the leases or increasing occupancy, the property would be worth just over $6 million at the same cap rate creating $1 million dollars of forced appreciation. This is how real wealth is made through owning and operating real estate.  

Tax Benefits: The use of depreciation, which is a non-cash expense, and a cost segregation study can accelerate a tax shield that can offset income generated by the property and, depending on your unique tax status, offset income generated by other investments or possibly even your W-2 income. Check out our past newsletter on bonus depreciation. In future newsletters we will dive into how real estate generates tax benefits whether you qualify for Real Estate Professional Status (REPS) or not, but if you want to touch base about your specific situation and how real estate can offset your taxes, please reach out! 

Institutional Quality Assets: Real Estate Syndications open doors to institutional-quality assets at a price point that may be difficult to acquire as an individual, let alone manage. Minimum investments vary by sponsor, but they’re a fraction of whole-asset ownership because your capital is pooled with other investors. That lets you diversify across markets, property types, and business plans instead of swinging at one big pitch. These larger properties can be of higher quality, easier to attract quality tenants and therefore be less risky than smaller properties. A larger property may also increase the buyer pool for the property when it comes time to sell. These investments are also passive for limited partners. In contrast to direct real estate ownership where the investor would have to manage the acquisition, day-to-day operations, and eventual sale of a property, a syndication allows the investor to benefit from the expertise and motivation of the Sponsor.

Alignment: Done correctly, the Sponsor’s structure should create alignment between the Sponsor and the investors. This is one of the most critical issues for a syndication and we will discuss how to vet a sponsor in a future newsletter. Essentially, the amount of capital the sponsor invests, the fees and the payout structure should create a win-win scenario that ensures the Sponsor has the investors’ best interests in mind.