If you’re interested in investing in real estate but aren’t sure how to get started, you’re not alone. Often, would-be investors know that real estate is a reliable, relatively low-risk way to build wealth but aren’t sure how to initiate the process. 

A typical path new investors take is starting small and building capital, then investing in more significant, more passive investment deals down the road. 

Here at 23^rd Street Investors, we know many investors who started real estate by investing in short-term or vacation rental properties. By starting with a vacation rental or Airbnb in a desirable area, you can enjoy the property with your friends and family while building your capital and gaining valuable real estate experience.

If freedom is one of your top priorities, you’ll, at some point, likely move from active investment projects to more passive investments. For example, vacation rentals often lead to small multifamily properties and ultimately to completely passive commercial real estate syndications.

This is a great strategy, but there are a few things to do before getting started in real estate investing. Keep reading for a quick guide on how to take your first steps toward real estate investing success. 

Identify Your Strengths

The first step is to identify your strengths. While this might sound cliche, understanding your strengths and weaknesses is crucial to your success. Everyone has areas where they don’t perform well, areas where they’re average, and areas where they truly excel. 

As we all know, when we’re able to focus our efforts on our strongest areas, we perform better and are ultimately more fulfilled. The same holds true for real estate investing.

As an investor, it’s essential to identify your strengths. For instance, if you’re exceptional at seeing potential in properties and creating a renovation plan that brings a diamond in the rough asset to life but aren’t great at executing the plan, you need to focus your efforts where you’re the strongest. In this example, you should stick with finding rundown properties and creating an overall strategy for what needs to happen to bring them to their full potential. Since you’ve identified you’re not the best at executing a plan; you need to have someone on your team who does excel in that area. 

Identifying your own strengths is essential, but it’s just as critical to identify the strengths of others as well. As you build a team, everyone will bring their own unique talents and expertise to the table. When everyone is operating from their own personal zone of genius, everyone is more productive and creative, creating a deal that’s ultimately more successful. 

Design A Plan

Now that everyone’s strengths and passions have been identified, it’s time to design a plan to bring your real estate investment dreams to reality. 

Let’s face it, most of us want to design a life around our personal goals and desires. Real estate investing is a great way to get there.

When designing a viable plan, you must first do your due diligence. A real estate investment plan is not to be taken lightly. You, as the investor, must research what options are available to you, research markets, determine what type of investment best fits your lifestyle and personal investment goals. 

Here’s a pro tip, get a pulse on what other real estate investors are doing. By following other investors, you’ll quickly understand what’s working and what’s not. Also, be sure to stay up to speed on the current real estate market. 

While your plan may involve some trial and error down the road, do your part to establish a viable plan early on before you even need one. 

Take Action

Once you’ve put in the work to create a vision for your life and real estate investment journey, it’s time to get your hands dirty and start taking action. 

While this step seems obvious, it can also be the most difficult one to take. It’s not uncommon to get so wrapped up in the research and the due diligence of real estate investing that you suddenly find yourself stuck. You’re doing all the right things but not actually taking any action steps. 

A smart way to combat this counterproductive behavior is to set yourself up on a timeline. Starting with research, map out each phase that needs to be completed. Once you have all the stages mapped out, include specific action steps that need to take place. Then, most importantly, add dates to your action steps. When deciding how much time to allow for each task, a good rule of thumb is to create a time frame that’s realistic and doable but also challenges you. You don’t want to make your action plan so comfortable that it doesn’t get accomplished within a reasonable amount of time. 

Action, after all, is intended to get you from point A to point B, point A being where you are now, and point B is the lifestyle you’re dreaming of. The quicker you take action, the sooner you start progressing toward your real estate investing goals. 

Propel Yourself Forward

Investing in real estate can feel overwhelming, even intimidating, especially if you’re new to the process. However, it’s important to remember that progress doesn’t have to equal perfection. 

To make forward progress, you have to trust yourself. You have to trust your strengths and your instincts. As time goes on, you’ll start feeling more comfortable in your new role as a real estate investor, but until then, it’s up to you to continue to propel yourself forward.  

Remember, your first few real estate investments will likely be a work in progress. You’ll quickly figure out what works and what doesn’t. Then, as your expertise grows, you’ll know how to adjust your deals and your overall vision accordingly. 

By creating a vision, starting small, and taking action, you can develop a cycle of investments that you can enjoy, while living a meaningful, intentional life as you build your wealth.

Most people focus only on and only know about active income. Active income buys fancy cars, expensive homes, and designer clothing, all while simultaneously being taxed at the highest rate out of any income.

Yep, read that last part again. Active income is the most heavily taxed type of income.

Why keep hustling at earning active income, only to have such a large portion taxed? The focus should also be to generate and build passive income until it equals or surpasses your active income, which is what we’re talking about in this article.

School Doesn’t Prepare Us

Unfortunately, the US school system grooms us to become cogs in the active income-generating and tax siphoning cycle. We’re taught to work and trade time for income.

Even degreed doctors and attorneys who land high-paying salaries are doomed to trade their time for money for the next 35+ years. That’s the only thing they’ve been taught – to work, earn their $16,000 paycheck each month, pay about 40% of it in taxes, and be left with $9,600 a month in earned income.

While that’s still a high income, pay attention to the tax value. How much do you pay in taxes?

In comparison, a person who earns $16,000 a month in passive income (cash flow from rental properties or other real estate), only $2,300 would be paid in taxes. Which means they can take home $12,800 each month. Which would you rather?

You Still Need Active Income

To be clear, you need to earn and save active income so that you can invest to create passive income. Maybe your goal is to work only 4 hours a week, or perhaps that sounds boring. Either way, the goal is to accumulate enough savings to invest and then continue to invest until the passive income earned matches or exceeds your active income.

Financial Freedom

Most people are only taught about and to focus on generating active income. We’re taught that it’s “normal” to work 40 hours a week for 40 years, all while saving bits at a time, and then retire at 67.

This may not sound ideal to you, which is probably why you’re here right now. Most likely, you’re on the hunt for a tried-and-true method of achieving time and financial freedom. In other words, you’re interested in building multiple streams of income to cover your living expenses, whether or not you work daily.

One way of achieving the “mailbox money” of your dreams is to have multiple properties generating passive income streams. This allows you to design your time and your life instead of fearing layoffs or being concerned about getting to work on time.

Why Real Estate Passive Income?

Think about how you dream of spending your extra time. If you’ve wished for more time freedom to spend time with your kids or to see the world, passive income is the ticket!

You may already know that it is possible to generate passive income from the stock market. You may also know that it’s a roller coaster ride, and you would rather avoid that drama.

Real estate investing creates reliable income streams because you’re investing in stable assets. If you make $200,000 per year in income, the goal should also be to generate $200,000 in passive income from your investments.

Passive Income Ingredients

Now that you’re aware of passive income and its vital role in becoming financially free, how do you get started generating passive income?

1. Focus on building your passive income until it matches your active
2. Invest in things that increase in value and are physically
3. Only invest in assets that can’t be

Number 3 above is one of the key reasons you should invest in real estate. Multifamily properties have withstood the test of time – people always need a place to live, no matter the climate, the economy, or social status.

How to Create Passive Income in Real Estate Investing

Everyone is an investor. You’re either investing your time and energy to earn an active income, or you’re investing your money to build passive income.

As an example, a doctor treats patients and receives $150 from the insurance company. The doctor invested his time in exchange for that payment.

The trick is learning to invest your money so that it begins to earn more money without you investing your time. Because of the way we’re generally taught – to work for an income – people tend to sit on large savings accounts. This “rainy day” cash is reserved for a period of injury or unemployment, a sudden life emergency.

The downfall is that this massive pile of savings is not earning any additional money. An Investment in multifamily real estate syndications could begin earning cash flow and appreciation, growing that money without the time investment.

7 Steps to Building Passive Income Through Real Estate Investing

#1 – Start With Your Why

The first step toward building passive income is YOU and your ability to develop a clear why.

The Bigger Pockets group says there are three things you must change to become wealthy. They say that all three steps are required – if one leg is broken, the tripod topples over.

The Wealth Tripod:

• You must believe that you can become
• You must learn how wealth is
• You must live out the steps needed to make it

Not every investment pans out as you wished or planned, but having a strong why will help you learn from each experience, push past your comfort zone, and keep you on track toward your investing goals.

#2 – Take Action

As with most other things in life, the action piece is the real key to making progress toward a goal, often, we get excited about something, dive into books and YouTube videos to learn about it, but then never actually get off our duff to do the thing.

Commit yourself to set aside time each day to take action.

#3 – Decide What Type of Real Estate Investor You Want to Be

Once you’ve developed your “why” and committed time blocks on your calendar, it’s time to decide which route you’ll take.

To be an active real estate investor, you need time and expertise at your disposal. To have a successful real estate business, you’ll need the skills and people in your circle to support the day-to-day operations of a successful business.

Some questions you may want to ask yourself are:

• Do you have spare time, outside of family and your job, to dedicate to active investing?
• Do you have time to manage rental properties yourself?
• Are you physically able to keep up with rental properties and the repairs needed?
• Do you have supportive (soon-to-be) team members who can help manage the property, or will you hire a property management company?
• Do you have the capacity to make strategic decisions (renovations, evictions, purchases, and sales) about your property?

If not, that’s okay. It might be best for your lifestyle and current capacity to pursue passive investing in real estate syndications over individual rental properties.

#4 – Decide What Type of Real Estate Assets to Invest In

Whether you choose the active or passive route to real estate investing, there are two main categories to decipher between Residential and Commercial.

 Residential properties consist of four units or less and include single-family homes, duplexes, triplexes, and quads.

Commercial properties include office buildings, retail (strip centers), storage units, and multifamily (five or more units) properties.

Many investors start in the residential real estate market but quickly realize that, to scale, commercial rental property investments would be more beneficial. All investments come with risk and require you do do your research before jumping on board. We view real estate syndications as posing less risk than others and have chosen this as the option for our family.

#5 – Learn and Utilize the Wealth Generators

When investing in physical properties, there are four main Wealth Generators to watch:

a)    Cashflow

One of the most attractive reasons for investing in physical property is the potential for cash flow. Cash flow is leftover money after the property expenses and mortgage is paid each month. We love putting our feet up and knowing that money is “flowing” into our lives.

b)    Appreciation

When a property increases in value over time, that is appreciation. As with any investment, there are ups and downs, but historically the value of real estate has continued to increase in the US.

One way to “force” appreciation is by investing in value-add property, where improvements increase the value of the asset through physical updates and renovations.

c)    Leverage

When you take out a mortgage to buy real estate, each month, your tenants pay rent. Their rent money pays down your loan balance. This helps you automatically build wealth over time.

Pretend you bought a rental property valued at $300,000 with a mortgage of $200,000. During your ownership, the property broke even and never appreciated – which is very unlikely.

Once the mortgage is paid off, you own a property worth $300,000 free and clear you never had to pay or save for. How is that? Your tenants bought it for you by paying rent (which you used to pay off the mortgage). Sweet!

d)    Tax Advantages

One of the most overlooked advantages of building wealth through real estate is the tax benefit. Owners of real estate get to deduct interest, insurance, maintenance, and depreciation.

Also, when an investor sells a property and uses a 1031 exchange to reinvest the proceeds, they can defer all capital gain taxes. Passive investors reap these rewards and more.

#6 – Find the Right Investment Opportunity

Once you decided to take the passive real estate route over active investments in rental properties, you must find an opportunity that supports your passive income desires.

Once you apply for and join the Street Smart Investor Club, we’ll share upcoming investment opportunities with you in an effort to support you toward your investing goals.

Rest assured that we pre-vet deals ourselves and require that they meet our high standards for deals we want to invest in ourselves. Some things we look for are:

• A robust operating team with a solid track record and a history of integrity and excellence.
• B or C class multifamily assets in markets with strong job growth, population projections, and job
• Value-add business plan with conservative underwriting and multiple exit

We encourage you to review deals and craft your own set of criteria as well.

#7 – Reserve and Fund

Investment opportunities fill up first-come, first-serve, which is why it’s crucial to educate yourself first, before there’s a live deal in front of you.

Once you’re well educated and adequately researched, you can take advantage of a soft reserve while taking the time to review the investment materials.

If you decide to move forward, you review and sign the Private Placement Memorandum, a legal document that goes into detail about

• The investment opportunity
• Risks involved
• Your role as an investor in the

The final step is to wire your funds or send a check. This completes your active role in the process. You’ll receive an update when the deal closes and then monthly after that. On most deals, you can also expect monthly passive income distributions.

Summary

If you’re ready to stop trading time for money, you’ve got to go all-in on the passive income game. Invest in yourself, grow your active income and begin saving toward buying assets that increase in value.

The only thing that can hold you back now is fear. Create an intentional mindset shift in yourself through learning about passive investments in real estate syndications.

You can do it and we’re here to help. If you’re ready to begin replacing your active income with passive income so you can build time freedom AND financial freedom, apply to the Street Smart Investor Club today!

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​Any time a potential investor is reviewing real estate syndication investment opportunities, they’ll likely come across the term “equity multiple”. Even if they’ve purchased a primary home or a residential rental property before, it’s unlikely they’ve heard of equity multiples.

When it comes to passively investing in real estate syndications however, it’s an important phrase to know and understand.

What “Equity Multiple” Means for Investors Interested in Real Estate Syndications

 As a new or seasoned real estate investor, it’s important to know what you’re getting yourself into. Part of that awareness comes from understanding the metrics presented in the investment summary prior to agreeing to the deal.

As passive investors review potential real estate syndication deals, the term “equity multiple” might seem confusing or even daunting if no one’s ever explained what exactly that means.

Alternately, our investors have shared with us that, after they grasp the concept of equity multiples, they are able to more confidently compare projected returns and make wiser investment decisions.

Defining “Equity Multiple”

 The initial amount invested into a deal is an investor’s capital. That capital equals the amount of equity an investor has in the passive investment. Thus, the term Equity Multiple simply means the amount your capital (or equity) will be multiplied by the end of the deal.

If a real estate syndication deal has an equity multiple of 2x and a projected hold time of 5 years, that means investors can expect to double their capital (original investment) in that 5 year period.

The equity multiple is the total of the cash flow distributions plus the returns after the sale of the asset.

A Little Math to Help Demonstrate

 How about we explore an example deal with a 2x equity multiple?

The investment (capital, also referred to as equity) is $100,000 and this deal has a projected annual rate of return of 8% with a 5 year hold period. This means the investor may receive about $8,000 per year for 5 years.

In other words, over a 5 year period, the investor will have received a total of $40,000 in cash flow distributions. Then, when the asset is sold, investors receive their initial $100,000 back, plus another, say, $60,000 in profit from the sale.

When the $40,000 in cash flow distributions and the $60,000 from the sale are added up, that’s $100,000 in total returns. The investor began with $100,000 and, not only got that back, but also earned an additional $100,000 cash.

In this example, the investor has doubled their money, which is what it means to have an equity multiple of 2x.

How Passive Investors Might Look at Equity Multiples

 In real estate syndication deals, it’s actually quite reasonable to expect to double your investment over the course of 5 years, but that doesn’t mean

these deals are easily found. Here at 23^rd Street Investors, we aim to present our investors with a 2x equity multiplier over a 5 year hold period.

Remember, the equity multiple, just like any other projected return or rate, is projected. That means it’s estimated using formulas, algorithms, and expectations of the market, and it’s not guaranteed. The actual returns may be below the projections shown on the investment summary, or they may far exceed what was thought possible.

All in all, investors should be reviewing the details of any presented deal with a discerning eye and ask any and all questions that come to mind until they feel comfortable with the information presented and confident that they are ready to move forward.

Now that you fully understand equity multiples, you can approach the next deal with confidence around that term.

While single-family residential property is often the first investment choice for real estate entrepreneurs, it isn’t the only one. You don’t have to represent a real estate investment trust (REIT) to find ways to invest in multifamily homes.

The allure of multifamily properties such as apartment buildings and complexes is that they typically offer higher returns and more stability than single-family rentals (SFR) because since they generate income from multiple units, the rents paid can generally cover the mortgage, even when one unit is vacant.

It’s essential to understand the ins and outs of real estate investing whether you’re a beginner or you’re looking to make the switch toward more commercial real estate opportunities. You already know that investing in real estate is a great way to build your portfolio, but make sure you also understand what it takes to effectively and efficiently manage your investment property.

When you invest in multifamily properties, you’re also signing up for a few key property management responsibilities. When you own a rental property you must ensure that it’s in good working condition and visually appealing. You also need to make sure that you’re making enough in rental income and keeping your occupants satisfied.

Here are our top five tips on how to effectively manage a multifamily investment property.

#1 – Plan accordingly

If you’ve never managed a multifamily property there are a few key points to consider. This type of investment property requires long-term care and commitment to keep it at full occupancy. You could have a slight edge in picking up the necessary skill set if you have previous experience managing single-family rental homes or commercial properties. However, if you’re brand new to real estate investing, managing properties, screening tenants, and hiring landlords, we recommend starting small. It’s easy to overextend yourself and accidental overwhelm can poorly impact your cash flow and returns.

Even if you’ve maintained a vacation rental, Airbnb, or hired a cleaning team for a commercial rental, this still doesn’t necessarily equip you for real estate investing involving multifamily properties. Multifamily real estate investments require precise planning and strategy.

By starting small and planning ahead you can ensure your tenants keep renewing their leases again and again. Work to keep your property at capacity and make sure you don’t get overextended, so you allow yourself the time needed to master the fundamentals of multifamily property investing and management. Starting with a single multifamily property and taking the time to choose good investment opportunities will allow you to steadily grow your portfolio.

#2 – Make it attractive

While you’re busy managing your multifamily property, you should still focus on making passive income from your real estate investment. The easiest way to do this is to make sure your property stays at full rental capacity.

What’s the best way to encourage tenants to stay long-term? Our advice is to put yourself in the position of the renter. Since multifamily properties and apartment buildings are long-term investments, your best options are often working on your tenant perks, amenities, and quality of life improvements. Considering your property and the surrounding area, determine what type of amenities would be most attractive to potential and current tenants. 

Before spending money on amenities and perks, be sure to calculate your total return to verify that you’re investing in upgrades that help you generate capital gains and real wealth. Starting small with your first multifamily property will likely not make you wealthy overnight. However, working to add benefits and perks to encourage renters to stay long-term will help you to become a successful individual investor over time.

#3 – Screen potential renters

Think of your residents as everyday investors for your property. Tenants are valuable in that they help you pay the monthly mortgage, provide you with gains, and sometimes help increase your tangible assets’ capital value. Ideally, they can also help you generate more taxable income.

The beauty of owning residential rental property in the U.S. is that there are always potential residents looking for homes. Keeping in mind that the families living in your units are your investors, it’s of utmost importance to find the right tenants for your property.

When screening residents, take their entire financial history into account. Consider multiple asset classes, different types of taxable income, and other payment sources. This will help you to ensure that a renter can afford to pay their lease each month. A quick background check is also recommended to help you determine whether or not they’ll require a credit sponsor or co-signer.

#4 – Keep the property in working order

Owning and maintaining a multifamily rental property involves more than just collecting rent payments and responding to resident maintenance requests. While those aspects are certainly part of the job, you also have to work diligently to maintain your property and keep it in proper working order.

After covering the monthly mortgage payments or fees, you’ll have difficulty increasing your net worth if you’re ignoring maintenance issues. To increase the value of the property you must find ways to regularly invest in seasonal maintenance and unit improvements. This could include property inspections, gutter cleaning, tree pruning, and landscaping services. Focus on proper maintenance and things that will ultimately make the property more appealing for resale in the future.

#5 – Nail your marketing

To generate consistent rent collection and therefore monthly income, effective marketing of your property is key. Whether it’s a rental property, vacation rental, or Airbnb the listing must be marketed to potential renters in order to stay at capacity. When you compare industry experts to new rental property owners, the distinctions are obvious.

Many vacation rental and real estate professionals understand how to effectively use marketing, advertising, and content production to attract guests to their homes and this helps guarantee that they’re making a profit every month. Be creative about how to reach potential residents with automated marketing so you can be free to focus on managing your current residents’ needs efficiently and explore additional portfolio diversification strategies.

A Few More Clues on How To Manage Multifamily Property

For new investors, the real estate industry can seem intimidating and competitive. When investing in rental properties, no matter if they house a single or multiple families, effective, efficient property management is essential to your success. You’ve got to pay attention to your current residents, the property’s condition, handle property maintenance, and keep your eyes on the horizon toward new tenants just in case someone decides they want to move – that’s a lot to shoulder!

One of the best ways to achieve success in anything in life is to surround yourself with people at least one step ahead of you. In other words, make friends with other real estate investors who have experience with multifamily property management. Whether they are property managers themselves or have connections to and experience with multifamily property management companies, they could be a very valuable resource and a great buddy to have coffee with! Find ways you can add value to their lives in exchange for their great advice.

At 23rd Street Investors, we’re here to help with experienced guidance in all areas of real estate investing and multifamily property management. Whether you’re interested in investing in multifamily property directly, via syndication (group investment), or through a REIT strategy, we’re here to lend our years of successfully managing multifamily properties to your ears! Often, the advice you receive can be the determining factor whether you hit your financial goals, build wealth efficiently, and grow your portfolio as a successful multifamily property owner.

When selling or buying a home, you often interview multiple real estate agents before you decide on the right one. A real estate agent who focuses on rural areas may not be the best fit for someone who is looking for a nice neighborhood and a house with a pool.

You need to do your due diligence as a buyer or seller to vet the real estate agent. Some ways to make sure the real estate agent is the right fit for you is by looking at their website, selling data, and other key information. Your real estate agent will be your right-hand person for at least a couple of months, and it is important they are the right fit for you.

When you decide to start the investment process and pursue a real estate syndication, you want to do your due diligence and research as well. You will want to research locations, the age of the investment property, the type of commercial property and trends related to that industry, and many other details.

Beyond property and market details, you’ll need to review the real estate operator carefully. A real estate operator is a person or company who rents, leases, and manages residential and commercial properties. They are involved in the development of properties, connected to broker and seller agents, and heavily involved in the appraisal and property management processes throughout your investment hold period.

Here you’ll learn how you can perform extensive due diligence when vetting a real estate operator and discover some red flags you should be aware of before diving into the first real estate syndication investment opportunity that comes across your desk.

Taking the time to gather and implement solid advice upfront will help you feel more confident throughout the investment process and will more likely lead you to the projected returns and the investor experience you were hoping for!

How To Vet a Real Estate Operator

Investors are always very excited to hear about the returns. When looking at different investment opportunities, you want to know what the cash flow will be like and how much money you will make.

But before you get too excited about the projected returns, you must realize that the deal operator is in charge of executing the business plan. It’s the proper execution of the plan, properly timed decisions, and the operator’s choice in other property management partners that create those returns.

So, before choosing a particular investment, you need to make sure your views and goals align with the operator and that you like the property market they are in. Then you can start talking about returns.

Due Diligence Process: Choosing the Operator

There are five questions investors should ask an operator when looking at different real estate syndications. These questions will help you ensure you get all the information you need to have a successful transaction and a great real estate partnership.

Questions To Ask The Operator

1. What is your investment philosophy?

You want your investment philosophy and your operator’s philosophy to be aligned. Aligned philosophies mean you have the same expectations regarding a real estate deal, investments, properties, financial matters, etc. All parties involved should have the same goals, and you want the operator’s philosophy to align with what you need in your portfolio.

An investor looking for double-digit returns who doesn’t need cash flow and wants to do hotel deals in California probably won’t align with 23^rd Street Investors’ philosophy. But an investor looking for stabilized cash flow, reasonable chance of appreciation, growth markets, and who likes the idea of value ad markets where we can force the appreciation would want to invest with us here at 23^rd Street Investors!

2. What does the company invest in?

This is when you ask about property information. If you are looking to invest in multi-family, but that operator does self-storage, you will not be a good fit. You also want to look at what the operator actually invests in. Do they invest in direct assets (single asset entity), funds, or REITs?

There are many different investment opportunities, and you want to ensure you understand what that real estate business group invests in and how they invest. Check to see if the operator offers multiple vehicles for investment. You may be able to meet various investing goals under one roof.

3. Is the OPERATOR competent?

Do they know what they are doing? Do they have a track record of successful real estate syndications? Have they done deals before, and if so, have they been through the full cycle and exit? Have they ever exited a deal early, and if so, how were investors treated throughout the process?

When completing your due diligence investigation, you need to look at the real estate syndications the operator has been a part of and see how many have gone full cycle. You want to be with operators who have experience and have learned from multiple deals—looking at the return profile as well.

4. Does the company work with sophisticated and/or accredited investors?

If you are in the middle of the due diligence process and are looking at the company website, see if they work with 506(c) deals. 506(c) deals mean they only work with accredited investors.

To become an accredited investor, you must make $200,000 annually for the last two years or $300,000 jointly with your partner or have one million dollars in assets outside your primary residence.

If the operator does 506(b) deals, they can take up to 35 sophisticated investors per deal. There are a couple of different groups raising for the deal, and they can take up to 35 sophisticated investors in each group.

Once you have found a deal, you’ve vetted the operator by conversing with them, looking at their markets, and getting a good idea of how the deal will work. You want to move on to number five.

5. Listen. How does the company respond to you?

Is the company happy to hear from you, and how do they respond to questions? When doing your due diligence, you must listen to your gut and feelings. How do you feel when you speak with them via phone or email. What type of vibe do you get from their social media? You will have a business relationship with them for a minimum of 5-7 years, and this relationship is an important part of real estate syndications.

You can probably find many of the answers to these questions on the operator’s website. If you can’t find answers to your questions there, call. It is important to be thorough. Investments are risks, and you want the best team to handle your investments.

Due Diligence Process: Operator Red Flags

When you are vetting a real estate operator, you should be aware of any possible red flags. These red flags may not completely rule out an operator. But if you notice a red flag during your due diligence investigation, you will need to dig a little further into your research. If a real estate investment opportunity seems too good to be true, it probably is!

Red Flags For Operators

1. No Business Background

There are a lot of new syndicators out there, which is excellent. But, what if they don’t come from a business background. Ask or figure out who does have this background on their team? It doesn’t have to be the person starting the company.

People start businesses all the time and build a dedicated team around them. Make sure someone on that team has the knowledge needed to successfully navigate through a market downturn, rate hike, occupancy slump, and more.

2. Part-Time Operator

You are transferring your time and energy. You want your investment to be taken care of by someone doing this full-time, and you want them to put excess care, time, and energy into the investment.

In exchange for your faith and financial capital, you want a full-time, dedicated operator who will make the proper management of this asset and the people involved a priority.

3. One Managing Partner

If there is only one managing partner within the company handling the deal, what happens if something happens to this one partner. What happens to the deal? How does the deal continue? Who takes on the financials and the exit plan? Looking for an operator with multiple managing partners is a good idea. Teams always bring great things to the table.

4. No Succession Plan

You want to understand who the partners are within the company. A business with multiple partners allows for a good succession plan. They need to have a plan in place to make sure their team is ready to continue with the deals and investments they have in place.

5. No Preferred Return

Preferred return is when the operator is so confident the property will make an excellent return that they are willing to give away the first X percent of the deal to the limited partners.

If there are no preferred returns, this doesn’t mean it is not a good deal, but do your due diligence and dig a little deeper into the real estate syndication waterfall model and see what is going on and why a preferred return is not being offered.

For a “heavy lift” project (a project with major renovations) the renovations could take years and the money earned will be put back into the project, which is a major reason why preferred returns might not be offered.  But these type of projects usually have much higher returns at the back end.

6. Distributions are Return of Capital

You’ll want to determine if the distributions are a return of capital or return on capital. Either one can be okay when it comes to a real estate syndication. 

You need to research and understand exactly how returns are calculated and whether you’re to expect your initial investment money back or not. You’re investing your own capital and need to know how returns will be handled.

For example, if you invest in ATM machines (a very common investment) the returns look phenomenal! – 18 to 22%! But when you look closer you realize that at the end of the term, usually 5 years, you don’t get any money. The asset you are invested in has a limited life and is worthless at the end of the term. So the money you receive on an annual basis is BOTH a return on capital and a return of capital.

7. Skin in the Game

Do the operators have skin in the game? Is it their general practice to invest alongside the limited partners?

There are some reasons a general partner would also want to invest in the property. The major one is to represent and prove their belief in the properties, and secondly, so they can reap the tax benefits too! This may be a red flag if they do not have plans to invest alongside you.

However, this does not mean that every general partner needs to invest in the project. Some of the general partners may have limited funds to invest and can’t invest in every deal they are involved with. Make sure that the major GPs are investing.

8. Encountered no Challenges

If you’re talking to an operator and every deal they have ever conducted has been a success, that means they have no experience navigating a bump in the road. This type of practice seems pretty unrealistic and may mean they’ve only been in business a short time or during a hot market.

We know all investments have risks, and if deciding between two operators, it may be best to go with the one who has had to deal with some bumps in the road because it shows they know how to conduct themselves in different situations, make tough decisions, and still produce successful opportunities for their investors.

9. Dodges Questions

Poor communication is a huge issue. If you are asking multiple questions or the same question in different ways and the operator continues to dodge the question and not answer it or does not seem interested in answering any of your questions; this is a huge red flag. You want to make sure your operator knows the answers or can quickly gain access to the answers.

There you have it!

Nine red flags you can look for when doing your due diligence as you research and vet operators.

Try not have unrealistic expectations about what you may find. Remember, operators are not perfect. Remember to refer to what we often call the “gut test.” It’s always in your best interest to follow your gut feeling. If your gut is telling you this operator does not align with your best investment or personal interests, it’s time to walk away.

The Perfect Operator For Your Investments

In any endeavor, you want to make sure you have the best team built around you. Real estate syndications involve risks, and it is always in your best interest to make sure each person on your team is the best fit.

Whether it’s an experienced sponsor, an operator, or other members, you want to do your due diligence to vet anyone who will be a part of the real estate transaction. Use the valuable advice throughout this article to help you perform thorough due diligence and avoid the major headaches one might experience if they wound up working with the wrong operator.

Taxes aren’t the most exciting aspect of real estate investing, but they’re important to understand nonetheless. As a real estate investor, it’s much more fun to focus on great returns and upgrading your lifestyle, but you must be sure to not overlook taxes completely.

As a passive investor in a real estate syndication, your sponsor team will guide you through tax season and help you ensure you’re getting the tax benefits you deserve. The beauty of investing in real estate is that your investments lower your tax obligation rather than increase it, unlike some other investment vehicles, such as mutual funds and stocks.

Any time you’re investing your hard-earned money, you should do your due diligence to gain a working knowledge about how you may be taxed as a result of your investment and explore the best strategies to decrease your tax bill.

Keep reading for an overview of the best tax strategies and to learn how to maximize the tax advantages available to you as a real estate syndication investor.

Deciding On Your Entity Election

 Oftentimes, real estate investors ask how setting up their investing entity will change the amount of deductions they’re allowed to take on their taxes. Allowable deductions don’t change whether you’re investing with your personal name and social security number, whether you have a single-member LLC, or if you have a multi-member LLC or corporation. The tax deductions are the same and include all business-related expenses.

As a real estate investor, it’s wise to avoid electing C-corporations to set up your real estate investing business. With a C-corporation, all your earnings can be taxed more than once. To simplify things as you’re just starting out, we recommend forming a single-member LLC. Most real estate syndications are formed as multi-member LLCs and are taxed as partnerships.

Keep in mind that in order to receive the benefit of asset protection, you need to keep your personal and business assets separate. You should have separate business and personal accounts and be sure not to intermingle the funds. Maintaining separate accounts allows you to protect the integrity of your business entity.

During the startup phase of your business, it should be noted that any costs you incur, even before electing your entity, are tax-deductible. These startup expenses include, but aren’t limited to, legal fees, research, travel to look for and tour properties, and other professional fees.

Taxes And Real Estate Syndications

Real estate syndications are typically set up as limited liability companies (LLC) and taxed as a partnership. The syndicator, or sponsor, is typically in the role of the general partner and the investors are the limited partners.

The real estate syndication itself is not taxed. It’s a pass-through entity, meaning that the items of income and expenses, as well as the gains and losses that occur at the syndication level are passed on to the limited partners. There will be separately stated items on the K-1 that each syndication member will be liable for and taxed on accordingly.

The items reported on the K-1 and your cash distributions are different. The cash distributions you receive as returns on your investment are not subject to tax, to the extent of your tax basis in the syndication. Simply put, your tax basis is your initial capital investment into the real estate syndication deal, so maybe $50,000, plus any current year contributions and pass-through income, minus any losses and expenses. Expect the tax basis to go up and down every year. As long as you maintain a positive tax basis, any cash distributions are tax-free.

The syndicators have flexibility in how they choose to allocate the various items. The real estate syndication operating agreement can be written to reflect the various allocations, depending on the personal needs of the partners.

Taxes And Rental Real Estate

 As a limited partner in a syndication, you’ll be earning passive income, and passive losses are different from earned income, or W-2 income. Passive income is treated the same as interest, dividends. Generally speaking, passive losses can be used to offset passive income.

There is a special allowance for rental losses. If your adjusted gross income as a married couple is $150,000 or less, you can take up to $25,000 of these passive losses and offset your earned income. However, if your adjusted gross income is higher, you cannot take any rental, passive losses against earned income, unless you’re a real estate professional. Real estate professionals have a special designation that allows them to take more passive losses against their earned income.

It’s common for real estate investors to qualify for this designation. There are three parameters that must be met to qualify for this designation. The first is that 51% of all the investor’s working time and services must be in real estate-related activity. Also in one calendar year, the investor has to do more than 750 hours in a rental real estate trade or business. Third, the real estate professional has to materially participate in their business’s real estate activities. A real estate trade or business can include rental property management, syndication deal sourcing, brokering properties, etc.

Be sure to discuss your personal situation with a CPA. Changes can happen quickly and what you qualify for one year, may be different the next year. Small changes can impact you greatly at tax time, so always seek professional advice from your CPA or tax advisor.

The Power Of Depreciation And Cost Segregation

When we buy an apartment building, we take advantage of depreciation. Wear and tear on a property over time is expected and you’re allowed to write off the depreciated value of an asset over its useful life. The set useful life of residential rental assets is 27.5 years and commercial properties is 39 years.

Depreciation affects you, as the investor, because when the property makes money (rent in excess of expenses) you would normally report that profit on your tax return and pay taxes on it. But you get to offset that profit with the depreciation from the asset. What this means is that in most, if not all, years, you won’t pay any taxes on the profit you get from the investment.  In addition, if there is excess depreciation (depreciation exceeds the income) you might be able to use it to offset your other income! Check with your tax advisor.

Cost segregation amps up the tax advantages even further. In typical real estate syndications, the property is held for around five years. With straight-line depreciation, properties held for many years receive the most benefit. By utilizing cost segregation, you’re able to take into account the various aspects of the property that will depreciate at a quicker rate. For instance, the signage of an apartment complex is expected to deteriorate quicker than the roof. Cost segregation can speed up depreciation benefits, so investors can have further tax advantages even within five years’ time.

Tax Benefits Of Investing In Real Estate

By investing in real estate, either actively or passively, you can qualify for significant tax advantages. You can use the deductions earned from real estate investments to offset your other income and ultimately greatly decrease your tax bill each year.

In order to build wealth, it’s not enough to earn income, you also have to know what strategies can best help you maximize the tax benefits available to you. Investing in real estate syndications gives regular people the chance to build wealth quickly and sustainably, while also mitigating risk.

As always, be sure to consult your CPA or tax advisor to assess your personal situation and determine what strategies best fit your needs and financial goals.

What do you want your next investment to do for your financial situation? Do you want to save money, or do you want a big return on your investment? If the answer is “I need both,” then it might be time for commercial real estate investing.

Real estate rental property, commercial real estate, and real estate syndications can provide a great way to make some cash and also maintain financial stability. But if you don’t live in an area where the real estate market is on the upswing or don’t want to buy rental property nearby, you might feel a little stuck.

Savvy investors find hot commercial real estate investments outside their local market by exploring off-market properties. If you take the initiative to look for commercial real estate outside of the listed properties in your local area, you are more likely to see decreased competition, easier deal negotiation, and you will probably be able to snag the property you had in mind with better terms than if you’d pursued a typical listing. For these reasons, it seems like a no-brainer – You need to find off-market commercial real estate!

But how?

You are coming to the realization that finding off-market homes could increase your competitive edge, and that with this advantage, you could easily use real estate outside your local market to retool and refine your investment strategy. However, before you start playing the real estate market or setting aside capital for real estate investing, it’s essential to understand how investment properties work and find deals on the correct property type.

Whether you’re searching for a rental home, commercial real estate like an office building, or anything else, here’s how to discover the best off-market deals.

Get to know your fellow investors

While most folks will immediately turn to online websites for real estate properties that are listed for sale, you want to buy off-market properties. So, it’s important to approach things differently.

First, you want to get to know and make friends with other real estate investors. While at first, this might seem counterintuitive because you might think they are your competition, there’s actually a TON of value in having relationships with people who share your interests.

Commercial real estate investors, especially those who are more experienced than you, often already have contacts and connections to investment opportunities that aren’t listed elsewhere. Many investors already know and work with real estate brokers, have already dabbled in direct mail marketing, and can already guide you toward or warn you against certain locations or strategies.
Whether you are looking for a great deal, or you want to discuss market analysis, or exit strategies, rubbing elbows with fellow real estate investors and real estate professionals will help you gain the connections and knowledge you need.

By forming a relationship, you can gain insight into their strategy, willingness to sell, and real estate approach. When you are selling and buying within a respected investor network, you are working within a form of “house hacking”. This often can pay high dividends in your favor.

If you want the most out of your existing or future real estate investments, surrounding yourself with fellow flippers and investors helps you realize the highest value from your investment property or a renovation. This niche group of people knows what it takes to profitably flip or BRRRR distressed properties. With this supportive community of potential buyers and sellers surrounding you, it will be much easier to, generate passive income, find off-market commercial property, and achieve your financial goals.
If you’ve already built a network of real estate professionals, lean into it!

And, if not, it’s time to start. This is the #1 way you can expand your reach and find your groove in off-market property.

Use a Real Estate Agent For Off Market Property Leads

We often think of real estate agents focusing mainly on their buyers. But experienced realtors maintain seller lists as well. If a market is favorable, a real estate agent may reach out to contacts who’ve previously expressed interest in or asked questions about selling. Sometimes, if the market value has risen significantly, homeowners become potential sellers easily.

Real estate agents will often make phone calls, send postcards, and use other means of communication to property managers, landlords, tenants to share the purchase price on properties sold in the local area. This alone could be a big persuasion to a property owner, especially if they’ve thought about selling before.

If you’re new to the investing game and want to purchase your first property, a real estate agent could help you establish a long-term real estate investment strategy.

Connect With Area Contractors

A good idea for individual investors is to connect with contractors in your desired market. Contractors often can help you find unlisted real estate because they know what renovations they’ve quoted and which owners have been considering a change. You might even consider partnering with a contractor to help you buy a distressed property and hit your investment goals.

Contractors can help in different capacities and with many types of real estate investing. Working with a “pro” contractor can really help you develop your real estate investment strategy because as they are renovating properties and working with real estate developers, they might share property details with you. You never know when the relationship might be mutually beneficial.

Use Direct Mail For Investing In Off-Market Properties

A lot of real estate investors use direct mail to find off-market real estate. Direct mail marketing does not require a lot of money and you can help generate off-market leads for years to come.

Whether you are a new real estate investor or you’ve got some experience under your belt, you should consider direct mail marketing because it’s a quick way to get your name out there.

Your first step in starting a direct mail campaign is to figure out your audience. This way you can craft a very well thought out targeted campaign. After you have created your mailing list, send out the mail to residential real estate, apartment building owners, and other types of properties that you’d like to have in your portfolio.

Try Your Hand At An Auction

You can find great deals at an auction as the properties up for auction may be distressed properties at a low price point. Likely, there are regularly occurring real estate auctions in or near any zip code, and this makes it really easy to connect to excellent off-market commercial real estate deals in any area!

Browse auction websites to find off-market deals from all over the country, in every market, of every real estate type, residential and commercial. These properties often wind up at auction because property owners are unable to pay taxes, the mortgage, or both, and have fallen delinquent.

Auction properties generally need some type of rehab, so be ready for that. Always perform proper due diligence on the properties, investigate the parties involved and pull public records so that you can know as much as possible about the off-market listings presented at auction.

Depending on the auction’s location, you can buy an off-market property just by paying the back taxes or any past-due utility taxes the property has.

Find Off-Market Properties Through Wholesalers

Wholesalers can help you grow your taxable income, add to your net worth, or develop rental income because they often have a lot of information on, strategy around, and insider knowledge about off-market opportunities.

Wholesalers can find the deals, flip the right to purchase, and then turn it over to the buyer for a commission fee. If you are looking at rental income or commercial property, there are a couple of cons. These can range from bottom-line effects to property depreciation.

Wholesalers normally work with properties that need some work. You want to make sure you check how much work the property needs by surveying public records, looking at on-market properties nearby (for contrast), and talk to fellow investors. You do not want to have to invest more cash into a property than you have or than what it’s worth.
When you know how much work a property needs, and you still think it’s a great deal and that you can profit, you can find the correct lender and interest rate to cover those costs.

How To Find Off-Market Commercial Properties For A Great Deal

Off-market deals are so often talked about in the real estate investment arena, and if you weren’t sure how to find off-market properties, now you know!

When you know where to look for the best off-market deals, it’s a lot simpler to diversify your real estate portfolio, invest in properties that pay regular dividends, and collect rental income from your commercial holdings.

As you explore off-market real estate, you’re sure to see decreased competition, meet new fellow investors, gain insight and experience that leads to personal growth, and quickly brush up your negotiating skills. All of these will positively impact your cash flow, diversification strategy, and investment portfolio!