If you want to be in real estate investing, you want to hold the title to the property. This means you are responsible for EVERYTHING. Trash, tenants, repairs, etc. is all on you. Some people would rather be passive and have the money in, without having to take care of the investment physically. REMINDER: I am not a securities attorney or a CPA, which means you need to run these things by your personal investment strategy and your rules and regulations.
Dr. Matt Motil discusses the differences between the private lending and syndicate funding for real estate investing. You don’t want to miss out on the exciting world of different ways to invest. If you want to learn more or are interested in maybe joining a fund, send an email to firstname.lastname@example.org.
Fun with Vocabulary
There are slight differences in each of the things I talk about today.
- Syndication: you know exactly where your funds are going when you invest. There is a particular place, a set price, and a known interest rate. Each investor will own a percentage of the property that has been split into shares.
- Debt fund: When the syndicator raises money, but only does interest rate. The investors don’t have equity in the property. It is basically a lending entity, similar to a bank.
- Equity fund: if the investors are sharing in the ownership, that is an equity fund.
- REIT (Real estate investment trust): these can be non-registered securities (like ours, where we can raise private equity without needing a license and we can only raise money through accredited investors) or if you want the fund traded publically like a stock, it is a registered REIT. These are registered and have different rules than the non-registered. You would need to talk to a securities attorney to get the real deal between them.
- Crowdfunding: you can put out a deal and have people crowdfund it or as an investor, you can put whatever you want into the crowdfund. The difference is that crowdfunding has to be done entirely online. There are no meetups and the internet is your paper trail.
- Accredited investor: a person who has made 200k a year for the last two years and will be making 200k this year (or 300k if they’re a married couple), or their net worth is 1 million dollars, or you can invest with your retirement fund if it has 1 million dollars in it (and you have not made 200k in the last 2 years).
Private lender vs syndicate fund
Note: a debt fund and a private lender is very similar. Neither have equity, but as a private lender you get a note in a mortgage. In the debt fund the fund gets the note.
As a private lender you are the bank. When you get a check that is going to be ordinary income and you will get a 1099-S for taxes. Or if you do it with a ROTH IRA you can let the money grow tax free. That is a different episode though (episode 66). In private lending, you know that you can get your money back quickly. Funds tend to be a long-term investment and you will have to deal with locking you investment money up for long periods of time. If the private lender has a relationship with me, the lender does not need to be accredited.
Funds can be great, even though they are so much work because they help you take down big deals. An equity fund gives you a piece of the ownership, you can get cash flow and also appreciation for the assets. The fund holds the assets and then has the ability to sell off the assets and the profits will be split between the ownership. The fund can even help keep tax exposure down for those that worry about taxes. The fund is for you if you want to be as passive as possible and you worry about tax implications.
WHAT’S IN IT FOR YOU
You can do the fund, and if you do one that allows both accredited and non-accredited investors (whom you have had a previous relationship with) you can do that. I chose to do the 506 C fund because I can advertise my fund and I can always use the investors I have met through the fund to start a new fund (506 B) that will allow me to use non-accredited investors.
If you want to be a syndicator, don’t let fear hold you back. The second you start down the path, you will kick yourself for waiting so long. This is not a cheap option, but it can be done and it can help you move on to bigger and better things.
Be a private lender or use private lenders if you don’t need accredited investors. Or you are an investor who wants your money back in a quicker amount of time than a fund would let you have it.
It all depends on how quickly you want the money back, how passive you want to be as an investor, and your status of accredited or not. The choice is yours!
Now, if you are an investor and fall within the accredited category, don’t be afraid to reach out to me. I have some great deals going down in my fund and would love to help you make some passive income. You can reach out to me at www.investwithdrmatt.com and fill out the questionnaire.
If you are not accredited, we could always do private lending deals, no worries!
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