Time or Money: Why HNW Investors Choose Syndication for Real Estate Investing
Table of Contents
1. Why HNWIs Should Consider Real Estate Investing
2. Tax Breaks and Deductions
3. Appreciation
4. Portfolio Diversification
5. Real Estate Leverage
6. Inflation Hedge
7. The Best Real Estate Investment: Why HNW Investors Choose Real Estate Syndication
8. Why HNWIs Trust BAM Capital for Multifamily Syndication
High-net-worth individuals (HNWIs) are generally those who have at least a liquid $1 million, meaning they have cash as well as assets that can be converted to cash easily. For its Form ADV, however, the US Securities and Exchange Commission (SEC) uses slightly different requirements. For individuals to be considered high net worth, they need to have a net worth of $1.5 million or $750,000 in investable assets. There is no multi-industry level of wealth that you have to reach in order to be considered an HNWI. [1]
HNWIs get exclusive services from most financial institutions. This includes access to specialized investment accounts. In fact, some financial advisors work exclusively with HNWIs, helping them grow their wealth and reach their financial goals.
A credit card company may offer HNWIs an invitation-only card with unique perks like unlimited spending, luxury hotel upgrades, and 24-hour concierge service. Financial advisors categorize their clients as either high-net-worth or not. This influences the type of financial advice they give based on the person’s financial capabilities, assets, and specific needs.
Individuals may check if they are considered high-net-worth by looking into their liquid assets, including their checking accounts, savings accounts, money market accounts, stocks, bonds, and mutual fund shares. [1]
Assets that are harder to liquidate are usually not factored in by most financial institutions. Real estate investments, land, vehicles, etc. are typically excluded when considering whether or not a person is an HNWI.
Here we will focus on investors who are considered HNWIs and why they should consider investing in real estate, specifically real estate syndication. Normally, HNWIs go for a range of investment vehicles such as equity funds, stocks, bonds, venture capital, hedge funds, real estate investment trusts (REITs), private funds, mutual funds, and exchange-traded funds (ETFs).
But savvy investors usually include real estate assets in their investment portfolio for the sake of diversification. Real estate investing can offer more than just diversification. Real estate investments, including commercial and residential properties, can offer a wide range of benefits for investors. Let’s take a closer look.
Why HNWIs Should Consider Real Estate Investing
There are numerous benefits in investing in real estate. Investors can enjoy great returns, tax advantages, passive income, and a predictable cash flow if they choose the right assets. With the right approach, HNWIs can even leverage real estate in order to build wealth over the long term.
Unlike the usual investment options, real estate gives investors a tangible asset, meaning it’s a property that they can see and touch. With the right investment property and a proper strategy, it is possible for investors to have great control over their investment and returns. For those who are thinking about investing in real estate, it is important to know about its different benefits.
Real estate investing is known for its strong and predictable cash flow. Cash flow is the net income generated by a real estate investment after operating expenses and mortgage payments have been made. [2]
A real estate property can generate cash flow, usually in the form of rental income from tenants. A single family property can earn from the rental payments made by its tenant. A multifamily property such as an apartment complex or a condominium can generate a strong cash flow due to the fact that there are multiple units and tenants paying rent.
In many cases, equity is built up and cash flow strengthens over time as the owner pays down their mortgage. Real estate investing can provide a steady income stream. This includes commercial real estate and rental properties. It is ideal for HNWIs who are looking for a source of passive income and working towards their retirement.
Tax Breaks and Deductions
Real estate investing offers various tax benefits, including deductions for mortgage interest, property taxes, depreciation, and other expenses. These numerous tax breaks and deductions can help reduce an investor’s taxable income, allowing them to save money at tax time.
In general, investors are able to deduct the reasonable costs of owning, operating, and managing a property. And because the cost of buying and improving a real estate investment property can be depreciated over its useful life, investors can benefit from decades of deductions that lower their taxed income. For residential properties, this is 27.5 years, while for commercial properties, it is 39 years. [2]
Appreciation
Real estate investors mostly make money from rental income and profits that are generated by property-dependent business activities. However, they can also earn from appreciation. [2]
Real estate properties have the potential to appreciate in value over time, leading to capital gains for investors. Well-chosen properties in growing markets can offer substantial returns, contributing to long-term wealth accumulation.
With a good investment property, investors can turn a profit when it’s time to sell. And because rents tend to rise over time, it can also lead to greater cash flow.
Portfolio Diversification
We mentioned earlier that real estate investing is great for diversification. This is because real estate has low correlation with other major asset classes. In some cases, it even has negative correlation. [2]
Unlike the stock market, which is volatile, real estate investing is relatively stable. And because of the low correlation with stocks, your real estate investments can keep generating returns even when the stocks are tanking.
It simply means that real estate investing is a good way to lower your portfolio volatility. It also gives investors a higher return per unit of risk.
Real estate offers diversification benefits, as it often behaves differently from traditional financial assets like stocks and bonds. Including real estate in a portfolio can help reduce overall risk by spreading investments across multiple asset classes.
Real Estate Leverage
Leverage refers to the use of different financial instruments or borrowed capital, such as debt, to increase the potential return of a particular investment. For example, if a 20% down payment on a mortgage gets you 100% of the house you want to buy, this is leverage. Real estate is a tangible asset, and therefore can serve as collateral, which is why financing is readily available. [2]
Real estate can be purchased with borrowed money, which means investors can use leverage to control a larger asset base with a relatively smaller initial investment. This can amplify returns if the property appreciates in value.
Inflation Hedge
Real estate is often considered an inflation hedge because property values and rental incomes tend to rise with inflation. This can help protect the purchasing power of an investor’s wealth over time.
Real estate’s inflation hedging capability comes from the positive relationship between GDP growth and the demand for real estate. This means as economies expand, real estate rents are driven higher by the demand. In turn, this translates to higher capital values. [2]
Real estate maintains its buying power of capital by passing some of the inflationary pressure on to tenants. [2]
Through research and the advice of financial planners, HNWIs are able to decide on the right real estate investment strategy that suits their needs and goals. HNWIs need to consider their risk tolerance as well as the local real estate market dynamics in order to choose a good real estate investment property. Keep in mind that even with all of these benefits, real estate investing still comes with risks.
The Best Real Estate Investment: Why HNW Investors Choose Real Estate Syndication
Real estate investing, particularly multifamily investing, is attractive to HNWIs because of its strong and reliable cash flow. Even if one or two units become vacant, the remaining units will still produce rental income while you look for new tenants to replace the ones who left.
However, multifamily real estate investing comes with two significant challenges: one is that it has a large barrier to entry due to the fact that these buildings are much more expensive than single family properties. The other one is property management. Large multifamily properties need experienced landlords or property managers in order to keep them running.
The good news is that multifamily properties usually generate enough income to cover the cost of hiring a professional property management company. A high-net-worth individual simply does not have the time to play the role of landlord and handle tenant emergencies themselves.
But even HNWIs may think twice about dropping a large amount of capital for a multifamily building. The risk is too big if you are tackling this investment on your own.
Fortunately for HNWIs, there is a much more convenient option and it comes in the form of a real estate syndication deal. Real estate syndications involve multiple investors who pool their funds together to purchase a single real estate property. They will provide most of the capital needed to purchase the investment property and they will also share in its risks and returns. A real estate syndication example would be if multiple investors pooled their resources together to buy an apartment building.
Real estate syndication deals are arranged by a syndicator—also known as the General Partner—who locates the investment property, puts the deal together, handles the financing, and looks for investors who will participate in the syndication. [3]
This type of deal can be done with any type of real estate. Therefore there are commercial real estate syndications as well as residential real estate syndications. However, multifamily syndication deals are the most popular among HNWIs because of the benefits listed above. Multifamily properties generate strong cash flow and do not stop producing income even if one or two tenants leave.
Syndication deals are often exclusive to accredited investors and HNWIs, and so they get to enjoy an alternative investment that is outside of the typical Wall Street options. [3]
Real estate syndication can be compared to a real estate investment trust because both investment vehicles allow investors to participate in real estate without actually managing the property themselves. The main difference is that you can choose the syndication deals you want to participate in, based on the properties you believe in. On the other hand, investors have no control over which real estate properties are selected by REITs.
Multifamily syndication solves the two most common problems encountered by real estate investors. Through syndication, you no longer have to pay full price just to own an apartment complex. You also do not have to worry about property management since the syndicator will also be in charge of that.
Investing in multifamily syndication requires less upfront capital from each participating entity because the costs are assessed and fairly distributed among the group. Even the risks are shared by the participating parties. This allows investors to partake in deals that they normally couldn’t participate in on their own. [4]
This means multifamily syndication is essentially a source of passive income. The Internal Revenue Service describes passive income as any money generated from rental or business activity in which the first receiver makes “income from a business in which the taxpayer does not materially participate”. [3]
As you may already know, true passive investments are incredibly rare. But a multifamily syndication deal gives investors a major economic advantage while saving time and energy.
In a syndication deal, passive investors act as Limited Partners (LPs) who may or may not have the experience or time to handle these multifamily projects themselves.
The syndicator will handle everything that is related to the project. In return for their capital investment, investors gain a share of the monthly cash flow, and depending on the deal structure, a share of the appreciation upon resale. Every syndication deal is different. It is therefore important to work with a syndicator you trust.
Why HNWIs Trust BAM Capital for Multifamily Syndication
Some investors who go into multifamily syndication try to build their own team or create their own real estate company. But doing so takes a significant amount of time, energy, and resources. Companies do not just become industry leaders overnight. So instead, the majority of investors, especially HNWIs, opt to work with syndicators that are already well-established and have proven track records to arrange syndication deals for them.
Lean into what you know: whether that is running your business or investing in companies. Instead of starting your own real estate company, outsource the work to BAM Capital and enjoy the benefits of working with an industry leader.
BAM Capital is an Indianapolis-based syndicator that is already vertically integrated. This means they can handle every step of the syndication process and guide investors through each one.
With multifamily syndication, HNWIs can just sit back, relax, and collect their checks. BAM Capital has a strong Midwest focus, prioritizing high quality multifamily properties that are Class A, A-, and B++. This syndicator focuses on properties that have in-place cash flow and proven upside potential. They then use their award-winning strategy to mitigate investor risk and create forced appreciation. [5]
In fact, BAM Capital now has over $700 million AUM and 5,000+ units. BAM Capital will guide you every step of the way: from acquiring and purchasing the multifamily property to renovating and managing it. [5]
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For HNWIs who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.
