Syndication questions and Taxes

[Greg C.]

As I explore different types of real estate investing my latest area is researching and understanding Syndication (as an investor not a sponsor). For the sake of argument lets say one qualifies as an Accredited Investor.

Are there specific tax benefits to this type of investing? I've seen a lot of posts regarding Syndication but nothing specific to taxes. I've read a little about K1 but am unsure if that is a report of earned income or if things like Depreciation,  Expenses and New Operating Losses pass through to the investor.

Are there issues or concerns about using a HELOC as the source of capital in a syndication deal?

When analyzing a Syndication investment what are you looking at to size up the deal. IRR? COC?

CCIng some of the folks I have seen chime in or heard chime in on the subject in general.

@Ben Leybovich

@Brian Burke

@Brian Adams

[Andrew Schena]

Hey @Greg C....all great questions. I'm certainly not as seasoned as the other guys you mentioned, but I'll throw in my two cents. 

As a syndication investor you need to make sure that a passive investment strategy is right for you and your real estate investment goals, as syndication investment as an equity contributor, for the most part, is simply another form of passive investing. You can certainly achieve many of your investment objectives w/syndication investing, such as diversification, risk mitigation, tax planning, etc. 

To speak directly to your K1 question, the K1 is a report of your income gain or loss in direct correlation of your equity share percentage of the corporation invested in. All net operating expenses, gains and losses are assessed to the corporation yiu invested into first, and then is broken down to each equity investor based on their net equity percentage of ownership of that investment. 

Investing with a HELOC is doable, but may not be advisable. Again, it all depends on your personal risk appetite. Sure you can create a net gain on the cash flow, but consider the alternative if the investment goes south. Are you willing and able to pay that HELOC if you in fact do lose money, or don't make as much as the projections say? Again, that's for you to answer.

When sizing up an investment it's been my experience to discuss IRR over COC. It's a better representation of performance over an investments duration. But the COC is not something to ignore, as it is also a valuable measurement of investment return, but IRR to me is the primary driver.

There is a lot to evaluate in a syndication, and investment performance is certainly a key metric, but don't ignore the operators experience in that particular asset class, their performance history, and referrals. And again, make certain that your primary investment goals are met with the right operator in the right asset. Hope that helps a little.