financial freedom with real estate syndications

Should invest actively or passively in real estate? What’s the difference? What are the pros and cons of each?

Deni & Brian break down how you should decide whether to invest as a passive or active investor in real estate.

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live off rents podcast transcript

 

Brian: Hey, guys. Happy Tuesday. Brian Davis and Dennis Shipley here from Spark Rental. So glad to be with you on this Tuesday afternoon. And if we seem like we’re a little more amped up than usual, it’s because we are more amped up than usual. We are hosting a live webinar tonight and the second one tomorrow and we are really pumped about it. We are going to be teaching you all about real estate syndications, how they work, specifically how middle class investors can access them, because they’ve historically just been like country club deals for the wealthy only. So we’re going to talk about some of the the legal loopholes that you can use to invest like the wealthy and some of these passive real estate syndications where you can earn 15 to 50% or higher returns without actually having to Yeah, yeah. Without having to do the hassles of renovating properties, finding deals, getting financing, dealing with tenants, calling you at 3 a.m. about toilets and all that stuff. So we’re going to put a link in the comments to where you can register for that webinar. And today we’ll be talking about a related topic: active real estate investing, you know, the traditional buy a rental properties, etc., versus passive real estate investing in things like crowdfunding and things like real estate syndications because there are pros and cons to both. So with that being said, Deni let’s jump in here and talk about what exactly active real estate investing is versus what passive real estate investing is, because not everyone is 100% clear on the distinction between.

Deni: On the difference. Well, active real estate investing is pretty much what I’ve done most of my life.

Brian: Me too.

Deni: Yeah, basically you’re going to use your time, your capital, and it’s going to be your risk. So you’re all in this by yourself usually. And it’s it’s some work. I mean, it’s not all bad, but not all.

Brian: Yeah, no, no, it’s just pros and cons to both like what I mentioned.

Deni: Right. So that’s active.

Brian: Or buy property under your own name, basically, or maybe under a legal and then you own.

Deni: And then you manage it and you deal with all the day to day or higher property manager and then make sure that they’re handling

Brian: And then manage the manager.

Deni: Right. I was going to say that, yeah, make sure they’re handling the day to day…

Brian: Take off the words out of your mouth.

Deni: So with that being said, passive real estate investing is a lot different. It’s kind of the benefit still of active real estate investing. But you don’t have the hands on anymore. You don’t have to answer the phone at midnight or when you happen to see your renter in the supermarket and they run after you and they’re like, Yoohoo!

Brian: I’ve had renters come to my house at night.

Deni: I’ve had that happen. Oh!

Brian: It was on one of my first dates with Katie, now my wife, but at the time. She came over. I made her dinner, we put on a movie and we’re sitting on, I don’t know, it’s like 9:30 at night on, like, a Wednesday or something. We’re sitting on the couch watching a movie, and then boom, boom, boom, boom, boom! Like there’s a knock at the door, and it’s my renter who doesn’t speak English. And he brought an interpreter and you know it. He didn’t come with a chainsaw or anything. It’s a massacre. But it still was not the what I wanted to be doing at 9:30 at night on a Wednesday when I was on a date. I mean. Like.

Deni: I’ve had people approach me in stores and give me a maintenance request and I was like, Oh, I’ll just write it over here on the cereal box. Anyway, So you don’t have all those, you know, dealings and…

Brian: You get a check.

Deni: Right. You don’t have collection of rent, all that stuff. You write a check and basically you want to do some due diligence in the beginning, write a check and then. Wait for your returns basically.

Brian: Come back and collect the distributions and eventually collect the big paycheck at the end when the property sells.

Deni: Right, which is nice. So there are different ways to do this. You have rights, which is real estate investment trust, there’s crowdfunding real estate funds and then syndication investing, which is to me one of the cooler. All of them, but they’re all really, really neat.

Brian: Oh, great. Yeah. I mean, you know, Deni, you and I both have money tied up in real estate crowdfunding investments. We have money in real estate syndications. I have a little bit of money in publicly traded reads, so. And actually, as another passive form of investing, I’ve got some money in a a private note to an active real estate investor. Actually you know them the Thompsons out in Ohio.

Deni: Oh right right.

Brian: So tonight we’re going to be focusing on real estate syndications. But like you mentioned, there are many different ways to invest passively in real estate. So what are some of the pros and cons of each? I guess let’s start with active investing because most people are more familiar with that. What are the pros and cons of going out and actively buying real estate yourself in your own name?

Deni: Well, the pros are you have the control, it’s yours. You do what you want to do. And if you have a long term equity build and that also is yours. The cons are like we spoke before, It’s time consuming. It can be extremely aggravating. You have a pretty large cash outlay in the beginning and for repairs and whatnot.

Brian: And I mean down payment. So now we’re just talking yesterday how the median home price in the US is well over $400,000 at this point. So even if you get a mortgage for that, a 20% down payment is still $80,000 on a $400,000 property, which is not trivial. Most of us don’t have that just sitting around collecting dust. And like you just mentioned just now, sometimes you have capital outlays unexpectedly, right? Where, oh, we need a new roof. $20,000. I mean I guess that example is not super unexpected. You can you can tell how much remaining in the roof. But you see the point, though, that you’re going to have unexpected repair costs. And sometimes they’re quite significant, thousands of dollars.

Deni: And there’s time in the purchase, you know, going through the mortgage, getting all that paperwork together. So those are definitely the cons, the pros of passive. I have syndication in the brain right now.

Brian: Oh, I thought we’ll talked about rental passive property together on this webinar.

Deni: I know… (The pros of passive) Is no hands on. You don’t have to deal one on one with the renters. Your returns are pretty stable and…

Brian: And high returns, too!

Deni: Yes. Yes! And you don’t have the stress and the aggravation, which is nice. You know, it’s almost like I don’t like to say a win win, but it is kind of. Yeah. And then the cons really the only con that I could see is… There’s a risk with anything. So there is going to be a risk and you don’t have as much control. But I mean, I don’t know if that’s a con.

Brian: Well I mean some people really value control. There are a few other cons with real estate syndications. I mean, one of them is that most of them have a high minimum investment. So you’re looking at typically a minimum of $50,000 investment in a deal. Now, Deni and I, we have a co-investing club where we all get together in a pool funds together to invest in these. So each individual investor only has to come up with $5,000 or $10,000, which I say only it still a significant amount of money, but it’s a lot less than $50,000 to $100,000. Like a normal syndication or like coming up with a down payment for a property to buy actively.

Deni: You can actually spread money over a few deals for the price of a down payment. So.

Brian: Right. Yeah! So if you do invest with a tribe like our co-investing club, but it doesn’t have to be it could be your own friends, you know, if you’re only putting 5000 in each deal, you could buy into 1015 real estate syndications for the same amount of money that it would cost you to put a down payment on a rental property or to buy into a traditional real estate syndication by yourself?

Deni: Yes. Has anybody here ever done anything like this? Please put in the comments. Let us know what kind of creative real estate investing you’ve done.

Brian: Yeah. Yeah. We love to hear this stuff. And, you know, let’s see other cons of real estate syndications. It can be hard to find syndication deals that allow non-accredited investors. So if you guys aren’t familiar with that term, an accredited investor is a wealthy investor that worth over $1,000,000. So historically the syndications really have been for the wealthy. Nowadays it is easier to find deals that allow middle class investors. And that’s actually what we’re talking about tonight on the webinar, how to access these as a middle class investor. But that’s been hard historically for middle class investors to access these. So that’s been a challenge.

Deni: Which is not fair. But that’s a whole other story for another.

Brian: Indeed! And then. One other downside to real estate syndications is they can be complex and intimidating for people who aren’t familiar with them. For example, the way that returns are broken down, there’s usually a waterfall structure where up to X percent, let’s say 7%, maybe it’s a preferred return for the limited partners like you and me, the passive partners. But then above that there’s like a 70-30 split and then above a certain equity multiple. It’s a 50-50 split. That can be intimidating for novice investors, people who just aren’t familiar with how real estate syndications work. And, you know, if you aren’t familiar with these, it can be intimidating. How to vet sponsors, how to vet deals, because a lot of the lingo is kind of jargony and it’s industry jargon and it’s not very newcomer friendly.

Deni: All stuff we are going to be talking about in much more detail tonight and giving a lot of good information so that there is no longer those barriers to passive investing for the middle income people.

Brian: Right. So we’re going to go through tonight and talk about all the obstacles for middle class investors investing in real estate syndications. And then we’re going to go through and knock down on every single one of those obstacles to make it more accessible for you.

Brian: Oh, and you want one final thought, one final advantage to active real estate investing. We didn’t talk about tax benefits yet right now. Almost all the tax benefits of direct property investing do carry over with real estate syndications. So as a passive investor in real estate syndications, you get almost all of those exact same tax benefits. The one difference is that when you have passive losses on real estate syndications, you can only use those to offset other sources of passive income and you can carry them forward. Yeah, yeah. You can carry them forward to future years when you own properties directly, when you’re a landlord, and you report losses on your rental income as a landlord. There is actually an exception for you as a landlord. You can use up to $25,000 per year in losses to offset. Active income, not just passive income. So that’s one loophole is unique to landlords who actually directly own properties and that does not carry over to passive real estate investors in syndications. But every other tax advantage from depreciation, all the deductions, all that stuff that does carry over from direct property investing to passive investing in real estate syndications.

Deni: So you had another benefit.

Brian: Yeah. Although, yeah, with that one exception of the offsetting.

Brian: All right. Deni, any final thoughts on passive real estate investing versus active real estate investing?

Deni: No, I just think that tonight is going to be great. I think there’s going to be so much information and you just have to come and see, even at my age, learning this stuff, because I didn’t know a whole lot about this type of passive investing. I did. But I always too thought, Brian, that’s not for me. But it is nice. It’s nice to see a way for everybody to be able to do it now. And it’s kind of exciting. I think, You know, you get to meet other people who you invest with and talk and it’s just really cool.

Brian: Oh, it’s great. And you know, where else can you consistently earn 15 to 50% returns? I mean…

Deni: Nothing like getting that check.

Brian: Yeah!

Brian: All right. On that note, we will see you guys tonight, 8:00 Eastern, 5:00 PM Pacific for the live webinar this evening. We’re going to do another one, another live one tomorrow at 2 p.m. Eastern, 11 a.m. Pacific. And then that’s it. That’s all she wrote. So join us tonight. Or if you can’t do tonight, then tomorrow afternoon and we will see you guys there. Bring your questions. It’ll be totally interactive.

Deni: See you there. Bye bye.

 

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