Escape the Rat Race! – Invest Your Way Out of Your Job with Real Estate Syndications

Do you ever ponder how you could replace your salary from you day job, or become less reliant on it, so you could focus more on the things that matter to you?  One of the biggest mistakes people make is being dependent on only one source of income – their job.  

Similar to how insurance protects you from losing everything in the event of an unlikely loss, having multiple sources of income protects you from the risk of corporate lay-offs, restructures, or any number of other scenarios that are out of your control.  Unfortunately, many people found out the hard way in 2020 how a black swan event like COVID-19 could hit their finances.  Unemployment in the U.S. spiked at 14.8% percent in April of 2020. 

Aside from providing downside protection from unexpected events, having multiple sources of income allows you to escape a job you don’t enjoy to pursue your passion.  The fact is that many people aren’t happy with their jobs, but feel trapped.  A Gallup poll conducted in 2019 revealed that of the world’s one billion full-time workers, only 15% were engaged in their work.  Are you part of the other 85%?  

A lot of people relate, but feel helpless to do anything about it.  After all, who wants to work a second job when they’re already hammering back long commutes and late hours at the office to get ahead.  That’s exhausting enough.  Many simply stash money into their 401K (maybe) and continue the slog, spending on material items to compensate for their lack of fulfillment, hoping the stock market will continue to rise so they can retire someday.  Sure, taking the conventional path of investing in stocks and bonds will get you to the finish line.  You may just be running a marathon, when instead you could bang out a 5K and get to the fun stuff. 

There’s no short-cuts to working hard and aggressively saving.  That’s a start.  But many don’t realize there are ways to earn while asleep, slowly replacing the reliance on their employer.  The right passive income investments can give you the flexibility to take on work that’s meaningful to you.  Instead of working for money, it works for you.  Thereby, freeing your time to work when, and on what, you choose.  

The good news is there are a lot of ways to earn passive income, or get paid with little to no effort.  The problem is many of the options require high output initially before they become passive.  This requires a lot of time.  Time that most don’t have or are unwilling to invest.  However, you don’t have to become a landlord, start a side-hustle that eats up your weekends, or take on the night shift at a second job.  This is where real estate syndications, in my opinion the best passive investment, provide a solution- a way to invest in real estate, get paid regularly, and have little to no involvement in the day-to-day.  No tenants.  No toilets.  All the upside without drawbacks.

Through speaking with my network, friends, and family, I’ve realized that many people don’t know what a real estate syndication is or how it can change their lives for the better.  Let’s break it down into layman’s terms.  

What is it?

Crowdfunding, or real estate syndication, is simply described as a group of investors pooling together their funds to buy an asset that is larger than they otherwise could afford to buy alone.  Syndications have been around for decades, but access was much more limited prior to the passage of the JOBS Act in 2012.  Now anyone can own a piece of an apartment building or other type of commercial real estate. 

How Does It Work?

A real estate operator or “sponsor” will find profitable properties to invest in, like an apartment building for example.  They will work with a lender to secure the debt needed to acquire the property.  They also must find capital for the equity to fund the downpayment, any improvements they intend to make to the property, and any operating costs or fees that will be incurred.  This can be roughly 20-35% of the purchase price.  This is where the individual investor contributes as a “limited partner” in the syndication.  This differs from a REIT (real estate investment trust) in that the limited partner actually owns a piece of the physical real estate, as opposed to stock in a company that invests in real estate.  Once the property is acquired, the sponsor will manage the asset and the day-to-day operations. 

What’s the Entity Structure?

Most all real estate syndications are structured as a limited liability company (LLC) or Limited Liability Partnership (LLP).  This means the extent of the limited partner’s liability is the amount invested in the deal.  

The terms of the LLC or LLP are laid out clearly in an “operating agreement.”  This document spells out how distributions will be paid to the limited partners and sponsor, how profit splits will be handled when the asset is sold, fees paid to the sponsor to manage the asset, and voting rights. 

Investors will review and sign the offering documents, including a “subscription agreement” and “private placement memorandum” (PPM) to become a part of the company as a limited partner.

How Do You Make Money?

Profits from operation come in the form of rental income.  After expenses are accounted for, distributions to limited partners can be paid.  This is typically done either monthly or quarterly and comes in the form of a “preferred return.”  Preferred returns are typically around 7-8% annualized.  

Additionally, limited partners have the potential for a larger payout when the property is sold.  Most sponsors target properties with potential to “force appreciation” through increasing rents and net operating income through updates and operational efficiencies, while also buying in areas where jobs and people are moving.  Typically they will aim to sell within 4-7 years, but the operating documents usually allow the sponsor’s discretion to maximize returns for investors.  The operating agreement will outline a voting process if there isn’t a clear answer to sell or not to sell.  Based on market conditions, it may be beneficial to sell sooner than planned or hold for longer than anticipated.

An “internal rate of return” (IRR) is a financial metric that takes into account the time-value of money, distributions paid out, capital gains earned from the sale, and a number of other factors to calculate the investment’s comprehensive rate-of-return.  After the sale, the limited partner will get a large payout of their original principal, plus any capital gains.  A typical investment in a real estate syndication has resulted in IRRs between 15-20% or higher. 

Who Can Invest?

These days, anyone can invest, with a few caveats.  I’m not going to get too deep in the weeds on federal legislation regulating securities offerings in the context of this article.  That’s a whole other post.  What is important for the individual investor is whether the investment opportunity falls under Rule 506(b) or Rule 506(c) of the JOBS Act and how an “accredited investor” is defined.  

An “accredited investor” is one who either individually, or combined with their spouse, has a net worth over $1M, excluding their primary residence.  Additionally, accredited status can be attained by earning $200,000 for the last two years consecutively, or $300,000 combined for spouses.  

Under Rule 506(b), accredited investors can self-verify their status.  Additionally, up to 35 “un-accredited investors” are allowed to participate.  The sponsor may not advertise these offerings to individuals who they don’t have an existing “relationship.”  A relationship is easily attainable, in this context.  If you’ve connected with the sponsor over the phone and have had a discussion about investing in general, you’ve now met that hurdle.  A 506(c) offering is available only to accredited investors.  Sponsors using this regulatory structure are allowed to advertise their offerings to anyone and aren’t required to have the pre-existing relationship like they do with a 506(b) offering.  

The Math Doesn’t Lie

When comparing the 7-8% preferred returns real estate syndications offer, its not hard to see how attractive yields are compared to traditional investments like stocks and bonds.  Currently the 10-year treasury note is paying a measly 1.7%, offering a close to negative real rate-rate of return, after accounting for inflation.  The average dividend yield of the S&P500 over the last decade, the index representing the overall stock market best, is about 2%.  

Let’s take a look at an individual who’s looking to replace a $75,000 salary with passive income.  How much would a person have to save and invest in each of these investment options to hit that target?

Bonds @ 1.7% –  $4,411,764

Stocks @ 2.0% – $3,750,000

RE Syndication @ 8% – $937,500

It’s a bit more achievable to save $937,500 than over $4M in bonds!   

It’s important to note, this example doesn’t take into account appreciation, on purpose.  It only accounts for income the asset pays via bond yield, dividend, or preferred return, respectively.  However, as mentioned prior, the IRR of real estate syndications is often in the 15-20% range, which also compares favorably to historical stock and bond returns, allowing for much higher upside.  

Someone looking to supplement the income from their job with stocks and bonds is likely going to draw down their principal.  As shown, unless you have a high net worth, the income those assets produce is unlikely to replace a meaningful amount of anyone’s salary.  Drawing down principal may be acceptable for someone over 60, but if you are middle-aged, you are rolling the dice on running out of money before you die and exposing yourself to “sequence of returns” risk.  Do a quick Google search or “sequence of returns risk and the 4% rule” and you’ll see what I mean. 

Wrap-up

By providing steady, high income, real estate syndications allow you to own a piece of commercial property with all the benefits real estate offers – a hard asset that’s much less volatile than the ups and downs of the stock market.  An assets that pays high-income.  An asset that has massive tax benefits.  An asset that builds equity while renters pay down the mortgage.  An asset that appreciates over time and protects against inflation.  Finally, an asset that takes advantage of the power of leverage.  

You don’t have to follow the crowd.  You don’t need to work forever and let your best years pass you by in a job you don’t enjoy. If you’re looking to replace or supplement the income from your job before the traditional retirement age of 65, forging a different path in life, take a hard look at real estate syndications as a way to reach your goals.  

Paul Shannon is a full-time active real estate investor, as well as a limited partner in a number of syndications.  Prior to leaving the corporate world, Paul worked for a medical device company, selling capital equipment to surgeons in the operating room.  After completing a few rehabs employing the “BRRRR method”, he saw scalability and more control over how he spent his time, and left to pursue real estate in 2019.  Since then, Paul has completed over a dozen rehabs on both single-family and multifamily properties.  He currently owns over 50 units in Indianapolis and Evansville, IN and is a limited partner in larger apartments and industrial properties across the US. You can connect with him at www.redhawkinvesting.com

Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.

Stay Connected!

Sign up to be notified of our latest articles and meeting announcements.