What are some of the tax benefits of investing in a syndication?
You would have to consult with your own CPA to obtain the most accurate information for your own unique tax situation. As a real estate syndication investor you gain the tax benefits of property ownership, including accelerated depreciation and cost segregation, which can help lower the taxable passive income you receive. You will receive a schedule K-1 tax form each year to include with your tax filings. Schedule K-1 reports your income and losses for the investment. If you happen to be a real estate professional you may be able to apply these paper losses to your ordinary income as well you will have to consult with your CPA for whatever related details or to your own financial situation.
What is an accredited investor?
There is no formal process for applying for the title of accredited investor, there’s no certificate to frame in fact you don’t have to apply at all. Determining whether you’re an accredited investor is more or less a self diagnosis, based on a few simple criteria.
Simply put an accredited investor is someone who meets one of two basic criteria:
1. You have earned an annual income of $200,000 or more or $300,000 of joint income for the past two years and you expect to earn the same or higher this coming year. Or
2. Your net worth is over $1 million not counting your primary residence.
How can I get my money back if there is an emergency and I need it?
There is a misconception among passive investors that their money will not be liquid, and will be tied up during the entire hold period of a syndication deal. Hold periods can last from 3 to 7 years typically but the passive investors are buying shares in the LLC that owns the property, and often Times those shares can be sold. It really depends upon the operating agreement of the LLC. Be sure to find out what the rules are for the LLC you are investing in. Our operating agreements in our LLC‘s always include the ability to sell your shares. We only require that you give the other investors in the LLC the opportunity to match any and all offers you receive for your shares.
Another place you can commonly find out how liquid your investment is in a syndication is in the PPM private placement memorandum you should have been given when you invested. It will be incumbent upon you to find the buyer or we can offer it to the other investors in the LLC.
How preferred returns work?
I will use an example to explain how preferred returns work, let’s say the syndication’s operating agreement says the preferred return is 8%, and it’s cumulative but non-compounding.
Now let’s say in the first year the property produces cash flow to distribute 4%. The passive investors will get all of the distribution because they are in a preferred position they receive all the cash flow until they have been distributed 8% annually.
Since there is only enough cash flow to distribute 4% in the first year and 4% carries over to the next year and beyond.
Now let’s say in year 2 the property throws off enough cash flow to distribute 8%, the investors will get all of that distribution. Now if in the third year the property throws off enough cash to pay 12% then the investors still get all of that distribution because they are owed 4% from the first years shortfall plus the 8% preferred return for that year.
If in year for the property throws off 12% again investors get 8% to meet the preferred return and the remaining 4% is split between the investors and the sponsors by a ratio specified in the operating agreement.
The sponsors are often referred to as the general partners and it is a common for them to receive 30% to 50% of the return above they preferred return, in this case 8%.
So if in this case the general partners get 50% of the cash flow above the preferred return of 8% and they would receive 2% and the passive investors would get 10%.