Those who qualify to invest in apartment syndications as limited partners are required to have a certain amount of money (net worth and liquidity) and investing experience.
But who are these people?
A common misconception is that only a “special” sort of person can passively invest in real estate. A savvy Wall Street broker, a billionaire tech giant, a hedge fund manager, and other such wealthy professionals. While these people absolutely do passively invest in real estate, thinking they are the only ones who invest cannot be further from the truth. In fact, as you will see if you keep reading, the most common passive investor is (probably) who you least expect. In fact, if I had to bet, I’d say that someone you know already passively invests in real estate.
Following are the types of people who most commonly passively invest in apartment syndication.
Arguably the most common passive apartment investor works a full-time W2 job. These are individuals who’ve reached a point in their careers where they have a high enough salary or made enough investment into stocks, IRA, 401(k), or other investments to meet the SEC’s accredited investor status.
I have met passive investors who work W2 jobs in nearly every industry. Examples include:
People with high-paying W2 jobs decide to passively invest in apartment syndications because they work long hours and enjoy what they do, but they also want to beat the returns they are receiving on their other investments, like IRAs, 401(k)s, and the stock market.
These are self-employed individuals who’ve scaled a business to the point where the revenue generated or value of the company allows them to meet the SEC’s accredited investor requirements.
Examples of companies owned by small business owners who passively invest in apartment syndications include:
And the list goes on, because being self-employed, small business owners are heavily taxed. Therefore, they are attracted to passively investing in apartment syndications because they can get tax benefits. Also, they are busy running a small business that they are passionate about. They don’t have the time or the desire to go out and actively invest in real estate.
People who retire from a W2 job or who sell their small business also passively invest in apartment syndications. They have a lump sum of cash that they want to put to work while enjoying their retirement.
These are individuals or groups who — using their own money, other people’s money, or both — operate a business that exclusively passively invests. They either exclusively passively invest with one or multiple GPs or they invest in a wide range of passive investment opportunities (apartment syndications, REITs, stocks, start-up businesses, etc.).
Examples of full-time passive investors include individuals who accumulated a high net worth and quit their W2 jobs to passively invest full-time or institutional investment firms like private equity companies or family offices.
A professional, full-time passive investor will choose to invest in apartment syndications because they can achieve higher and less risky returns compared to other passive investment opportunities and/or diversify their portfolio.
It is common (and ideal) for the GPs to invest in their own deals. GPs will choose to invest in their own deals to create an alignment of interest with the LPs and to convey their confidence in the deal.
Individuals who invest in other types of real estate will passively invest in apartment syndications that generate enough income or have a large enough net worth from the active real estate business to meet the SEC accredited investor requirements.
Examples of real estate professionals who passively invest in apartment syndications include:
If this type of individual is an active real estate investor, they will choose to passively invest in apartment syndications to diversify their investments, since they are usually focused on one asset class. For the non-real estate investors and real estate investors alike, since they work in the real estate industry full-time, they can qualify for the “Real Estate Professional” tax status. This allows them to use passive losses to offset the income generated from their active business.
Most likely, this person would choose to invest in apartment syndications to diversify their investments because they are usually exclusively investing in single-family homes or smaller multifamily properties. Additionally, the IRS has a designation called “Real Estate Professional” where passive losses can be used to offset non-passive income.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.