As you learn about real estate syndications and decide to invest, one of the main questions that comes to mind is about how and where to get the money to fund this investment decision. Passive income sounds fantastic, but you’ve got to set up your personal finances strategically, so the distributions benefit you in the way you imagine. The typical minimum investment amount is fifty-thousand dollars. Since that’s probably a little more than you can scrounge up from in between your sofa cushions, there’s a teeny bit of planning and strategy required.
Meanwhile, you might be surprised to find that there are at least three options for funding your real estate syndication investment. The option you choose will depend on your family situation, your investing goals, what you plan on doing with the distributions, and more. There’s not a one-size-fits-all answer, and you’ll want to sort through the details here so you can make the corresponding moves before our next deal opens up.
So, which of the three ways is right to fund your real estate syndication investment? I’m so glad you asked!
You’re A Courageous Individual Investor
The quickest and easiest way to invest is solo with cash. This means entering the deal as an individual (no partner) with capital from your savings or other liquid assets. As a sole signee, you’re entirely in control of selecting the deal, signing and completing documents on time, and simply wiring the money from your savings into the deal.
As an individual, you’ll receive distributions from the syndication deal directly into your personal account and reap the tax benefits of owning real estate. There is no need for bookkeeping either because you’ll receive a K1 each spring with all the information you need for your taxes. When you invest personal money, all the benefits, tax breaks, distributions, and other joys of being a real estate syndication investor are directly yours!
Some things you want to think about as an individual investor are alternative forms of asset protection like insurance or trust. You should ensure there’s a will in place with a designated
beneficiary. The operator team doesn’t collect beneficiary information, so if something unexpected occurs, you want to have that clearly stated in your own legal documents.
You’re Part of a Powerhouse Team
Suppose you wanted to invest jointly with a partner or a spouse. Yep! You two can pool your resources together to amass the fifty-thousand and invest in a real estate syndication deal together. It happens all the time!
Many people live in community property states, which ensures all marital assets are jointly owned. So, spouses are required to invest together, reap the distributions, and enjoy the tax benefits jointly.
This gets slightly more complicated since now two signees are required, and both of you have to agree on an investment deal together, but it’s still a pretty straightforward process. However, both partners must consider asset protection strategies and put legal beneficiary designations in place. Whether this is state-determined or if it can be designated in a trust or will, it should be set up by the spouses or partners ahead of time, just in case.
You’re Ecstatic to Invest as an Entity
The third way you might choose to invest is through an entity. You can invest through a retirement account like a self-directed IRA or a QRP, through a trust, or via LLC. Depending on your state’s rules and the advice of your CPA, any one of these could be an option to invest in a real estate syndication with retirement funds or as a way to harness the protections of a business intentionally set up for investing.
This typically requires one signee, so it’s simple, but it requires filing some paperwork, which makes it slightly more complicated. You always want to check with a tax professional familiar with your financial situation and the applicable tax laws to see which choice might be most beneficial to you.
Distributions and any benefits from the investment apply to the entity, meaning the deposits will go back into your retirement or business accounts. If investing this way, it’s important to keep funds separate - you don’t want unexpected taxes or fees from the accidental withdrawal/use of retirement or business funds.
When investing through an entity, your level of asset protection and heirship is based on the Operating Agreement of the LLC, Trust, or IRA you’re using. Check with your account provider
about any rules or fees about real estate investments and understand the benefits of depreciation or loss as applicable to the account. There is a chance if you’re investing in real estate syndications through a self-directed IRA, for example, that you could become liable for UFDI or UBIT taxes.
So, Which Funding Option Should You Choose?
Ultimately the question of which one is best for you depends upon when you’ll need the cash flow, how you’d like the tax benefits to be applied, and what level of asset protection you’re seeking.
If you’re interested in the distributions and tax benefits being applied to you personally and want cashflow to boost your lifestyle now, then an individual or joint investment may be the way to go.
Are you planning on the investment distributions replacing some income or funding little Joey’s future soccer club dues? Funding your investment from your personal assets, either jointly or individually, may be best.
If you’re more interested in building long-term growth and having the distributions bulk up your retirement account, then you may want to explore a QRP, a self-directed IRA, or even an LLC situation.
Are you intent on tripling your retirement assets within the next 15 years so you can live out your dream lifestyle during those elder years? Then one of these entity-type options might serve you best.
Many factors might affect your choice, like if you’re married with kids, which state you live in, how old your kids are, if you have any large purchases on the horizon, when you’re hoping to retire, what you plan to do with the distributions, and what heirship designations you require.
How To Find and Fund Your Next (or First) Syndication Deal
To invest in a real estate syndication, typically you must be an accredited investor. However, a handful of our syndication deals have been available to sophisticated investors over the past year. In other words, you don’t have to be a big shot to get into this stuff!
Whether you’re a sophisticated or an accredited investor, our deals tend to fill up fast, so take some time to think about whether you’d be best to invest individually, jointly, or through an entity first. Once that legwork is done, and you have your capital “in hand,” we can help you find a real estate syndication deal projected to best move you toward your financial and lifestyle goals.
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