Essential Questions Related to Passive Real Estate Investment

Essential Questions Related to Passive Real Estate Investment

Have you ever invested in real estate? Or are you an investor looking for better investment opportunities? Most people invest in this sector because of its various benefits, including the promise of a steady income and tax benefits.

However, people require considerable capital to invest in large-sized properties, like multifamily apartments and duplexes. And even if they have the money, they should possess the experience, knowledge, and connections needed to manage those. and similar private equity firms allow fellows to invest in multifamily Class B and Class C properties as passive investors with just a tiny amount of capital instead of the usual amount involved in such transactions. Further, they save people the trouble of managing the properties or playing the active role of a landlord. 

And the advantages don’t just end there. By incorporating real estate tax planning strategies, passive investors can potentially reduce their tax liabilities and maximize their profits from multifamily properties. You enjoy plenty of tax benefits, receive a steady cash flow monthly or quarterly, and enjoy exclusive investment opportunities in multifamily properties as a limited partner through a real estate syndication process. 

But before you go ahead and contact an equity firm, here are some essential things you should know related to the entire process. Alongside this, researching successful real estate directors like Lincoln Frost is a great way to get a better understanding of how you can take your real estate journey further, to create a thriving business.

What is real estate syndication?

It refers to an investment method in which fellows and an equity firm jointly contribute money to purchase a multifamily apartment. It is called passive because they don’t have to be involved in the everyday workings of a building.

What is the investment amount?

In most real estate deals of this type, between 25% to 30% of funds for buying a property are raised by the syndicator (equity firm) and passive investor (you). The third party, the bank, contributes between 70% to 75% of the total amount. Most equity firms will have a minimum investment amount of 50,000 USD. 

Which parties are involved in a deal?

A passive investment deal usually involves several parties. These include lenders, attorneys, real estate bankers, property managers, passive investors, and syndicators. Each party plays a clear role in the deal. 

What is the role of the syndicator?

The syndicator or an equity firm plays a vital role in the deal. Besides finding viable multifamily Class B and Class C properties, they look for interested investors, raise funds, force appreciation, and manage the assets.

Types of funds for investment

People can use a few types of funds for investing in multifamily property as a passive investor. Some options are cash, self-directed IRA, retirement plan, 401k, or through multiple accounts. 

Are there requirements for investing?

Most equity firms allow only accredited investors to invest in multifamily property deals (an accredited investor meets the income guidelines and requirements set by the Securities and Exchange Commission (SEBI)). 

As an accredited investor, you should have an income of at least 200,000 USD or 300,000 as joint income. Or, your net worth should be more than 1 million USD, excluding your primary home. 

How is the cash flow determined?

As mentioned earlier, one of the advantages of being a passive investor is the steady cash flow you receive each month or quarter. But how is the amount calculated?

Tenants pay a certain amount as rent. After deducting the operating expenses (money involved in maintaining the building), you get the net operating income (NOI). Subtracting the debt services from the NOI gives you the total cash flow amount, which is shared between you and the syndicator. 

Can you exit a deal anytime?

You can enter a deal only on a short-term or long-term basis. The first liquidity, which gives you a chance to sell your investment, occurs within the third year from the date of your initial investment. 

It would be great if you considered investing in Class B and C multifamily properties as passive investors by contacting experienced equity firms. It is an attractive real estate investment option since you enjoy a steady income and various tax advantages by investing with a minor amount of capital than is otherwise required.

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