Benefits of Investment Groups
When you invest with a private real estate syndication, you are pooling your capital with that of other qualified investors for the purpose of investing in larger and more lucrative real estate projects. This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of a piece of income producing property that is too much to handle individually from a financial or risk aversion stand point.
Real estate syndicates own income-generating residential or commercial real estate and are secured by these tangible and quantifiable assets as collateral. This characteristic is untrue of many other investment vehicles and provides added security for your investment. Additionally, investing in private real estate syndicated deals gives the individual investor the ability to achieve extraordinary profits, generally, with no liability for debt.
Although the legal structure of a syndication can take many forms, it is generally accepted that a Limited Partnership (LP) or Limited Liability Company (LLC) is one of the best forms of group ownership of real estate investments. It offers all of the financial rewards and tax benefits of individual ownership without the burden of management responsibilities, liability for principal debt (in many cases), or large individual cash investments.
Real Estate Syndication in a nutshell
A Limited Partnership or Limited Liability company is formed by a group of investors to purchase and control a specific property. Each investor contributes what he or she wishes toward the purchase, usually in easy-to-divide units, such as 10% percent.
If the structure of the syndication is that of a limited partnership, then one of the members of the group, normally the developer or the investor who put the deal together, becomes the General Partner for the group and the investment.
The General Partner is granted all decision-making powers for the investment. This includes management, though he may hire a professional management company rather than handle it himself.
Everything that happens to the investment is at the sole discretion of the General Partner. He decides when major expenditures are needed, but will usually attempt to get a group opinion first. He determines the optimum time to sell or trade, and establishes the selling price. A good General Partner must always keep the goals of the group in mind and always act in the best interest of the other investors.
A General Partner also assumes total liability for the investment. Were a property to get into major financial difficulties, the cost (or loss) is his responsibility. The remaining partners in the group are Limited Partners. Their financial obligation is limited only to their initial investment. If the whole investment goes bad, the most they stand to lose is their initial investment.
Now you might be thinking, “Why would anyone in their right mind want to be the General Partner?”
The reality is that, if each investment is acquired with a strict set of investment standards, thorough due diligence is completed, and the property is managed properly, then the likelihood of a property going bad, is GREATLY reduced.
Although there are cases of this happening in today’s current economic environment, most of these toxic assets were caused by greed and not fundamental investment principles.
Additionally, the General Partner is usually paid for his services, and also has an interest in the income and future appreciation of the property, therefore, it is in his best interest to make the venture as profitable as possible.
Written by Khary Reynolds
Filed Under: Apartment Investing
