Four Factors That Contribute to High Investment Returns in Syndications

by | Mar 8, 2023 | Investing Advice | 0 comments

Investing in syndications can be a lucrative way to generate passive income and build long-term wealth. Syndication deals offer four factors that contribute to high investment returns: cash flow, forced appreciation, tax advantages, and scalability. Passive investors can benefit from regular cash flow distributions, value-add strategies that increase the property’s value, tax benefits through accelerated depreciation, and the economies of scale that come with owning multifamily commercial properties. By understanding these factors, investors can make informed decisions and reap the rewards of investing in syndications.

 

Cash Flow

Passive investors in syndications receive regular cash flow distributions, which is the income generated by the asset after deducting operating expenses, vacancy costs, and mortgage. This income is typically dispersed on a quarterly basis, providing investors with a steady income stream.

Forced Appreciation

Syndication deals often involve value-add strategies to improve the condition of commercial properties and increase rent, leading to an increase in the property’s value. Unlike residential real estate, which is assessed based on comparable sales, commercial real estate is evaluated based on Net Operating Income (NOI). Improving operations and decreasing expenses can lead to an increase in NOI, which, in turn, leads to a rise in property value.

Tax Advantages

Investors in syndications also enjoy tax benefits through accelerated depreciation, which is achieved by performing a cost segregation study to dissect the construction cost or purchase price of the property. This allows for greater total depreciation in the first 5-7 years after purchase. The depreciation amount allows investors to show a paper loss, but they can still receive distributions (tax-free) until the property is sold.

Scalability

Multifamily commercial properties allow for scalability, higher profits, and lower risk. This is because these properties have economies of scale, which allow for the hiring of professional property management companies to handle operations. This includes HR, accounting, marketing, leasing, and professional maintenance services. Multifamily properties also minimize risk by not relying solely on a handful of tenants, and any vacancies have less financial impact.

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