BiggerPockets Money Podcast - 564: How to Make Truly Passive Income with “Syndication” Real Estate

Starting point is 00:00:00 There are so many powerful strategies that you can use to achieve financial independence, but to a lot of people, it sounds like too much work, which is why we're going to be talking about passive investing today and how you just might be able to sit back and achieve fire. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and today I am not joined by Scott Trench, but life goes on. As you know from Scott, Bigger Pockets has a goal of creating one million millionaires. You are in the right place if you want to get your financial house in order, no matter when or where you're starting. Today I'm bringing on Jim Pfeiffer, a former financial advisor turned passive investor.

Starting point is 00:00:41 He has now invested in over 100 syndications passively. He is new to the Bigger Pockets family and today his first episode airs on Passive Pockets, the Passive Real Estate Investing show. Jim Fyfer, welcome to the Bigger Pockets Money podcast. I'm so excited to talk to you today. I'm thrilled to be here, Mindy. Thanks for having me. Let's start with the basics. Let's just jump right in. Can you explain what passive investing through syndications is and how it works? Passive real estate through syndications. The syndication is basically just an LLC that is managed by general partners. And then the investors would be what they call limited partners. So the best way to look at it is if someone's buying a $20 million apartment building, right? Not very many people can just go out and buy it in cash.

Starting point is 00:01:28 even if you have a loan on it, you still need $5 million in equity, probably, right, if you're getting a 75% LTV. So what they would do is they put a syndication together, where an operator would operate, manage the asset, they do everything, they're the GP, and then you have limited partners, and they're the people that go and invest, and they can invest in smaller chunks. So they might invest $25,000, $50,000 or $100,000 into this apartment building. And basically, once you make that investment, you send the wire, you're a passive investment, You have nothing to do, but sit back and hopefully collect distributions,

Starting point is 00:02:03 collect reports, finances, either monthly or quarterly. And then when the asset sells or refinances, then you can get your capital back. It's very similar to owning a small apartment, except you don't do any of the work once the purchase is made. So what are some of the biggest benefits outside of having no responsibilities whatsoever for investing in syndications? Well, for me, you know, just a little bit of back story. I was an active investor. I had small multifamily properties. I had single family homes,

Starting point is 00:02:32 and I was a terrible asset manager. I had property managers who did all of that for me, and I constantly fought with them because they wanted to evict people or do rehabs, and I was just trying to cash flow, and they never cash flowed. So I was a really poor asset manager. I was lucky because at the time of the market, everything just went up.

Starting point is 00:02:49 But when I found syndications, I realized that I could vet the operator, analyze a deal, and I'm effectively hiring an asset, manager to do the asset managing, to hire the property manager, to do everything that I wasn't good at. And so I think one of the biggest benefits for me was I can hire people who know what they're doing. And my returns actually, the property's cash flowed better because what you're doing is you're hiring an expert. They only do multifamily. They only do it in these three markets. So they

Starting point is 00:03:19 know the market way better than I ever could. So I really wanted to be investing in real estate, but I didn't have the expertise. I didn't have one thing that made me good. as an active investor, which is why I chose to go the passive route. For someone who is new to the concept, why would syndications be a great strategy for those who are looking to achieve financial independence? For one, it's real estate, right? We all agree that real estate's a great investment because you get the tax advantages, first off, for me.

Starting point is 00:03:45 And taxes are the biggest eroder of wealth. And so if you can reduce your taxes, then you're on your way. So if we can agree that real estate is a good place to start for that, for the taxes, and the slow but growing wealth, you know, the snowball of wealth, you get cash flow, you get capital returned, which also saves on taxes. So there's a lot of different reasons why you want real estate. And syndications are just for someone who doesn't have the expertise or have the time to do the active investing. For me, it was both, right? I didn't want to spend all my time chasing after tenants or chasing after my property manager. And it also, I think, allows you to

Starting point is 00:04:25 invest in a lot different asset classes and different markets. So I live in Columbus, Ohio, and I had a few assets here when I was an active investor. I had a few in Memphis, Tennessee, because I'd become familiar with that market. But now as a passive investor, I have multiple asset classes. I have properties all over the country, and it's all because I can hire a local person who knows that market and have them do all the work for me. So what kind of returns can passive investors expect from syndications? For me, personally, the returns were similar or better than what I did in active investing. So if you're looking at investing in the typical syndication, you can expect between 6 to 10 percent cash on cash return. You know, it depends on the market. It depends on the cycle.

Starting point is 00:05:08 You know, there's a lot of things it depends on. And at the end, you know, the IRA, you can expect between, you know, 12 and 20 percent, again, depending on the asset class and things like that. So for me personally, I usually got better returns in passive investing because, again, I'm hiring an expert to be the asset manager, something that I wasn't very good in. So I always think if you have a strength, something niche, you know a market better than anyone else, or you can fix up a house better than anyone else, then perhaps active investing is a good thing to do. But if you're a professional, you have a big salary, you don't have a lot of time, or you're just tired of managing these assets, that's where I think real estate syndication is really beneficial. Let's talk about risk now. Is this riskier than real estate, traditional real estate investing or the stock market? It's hard to say that exactly because if you know your market, Columbus, Ohio, if I know

Starting point is 00:05:59 Columbus, Ohio, and it's probably less risky because I'm managing my own asset, I know my market. But if you don't have those strengths in a market, then I would say handing it over to a professional is less risky than, you know, managing your own asset in a market you're not familiar with. or if you're far away. Now, I know there's different strategies for different people, but for me, it is less risky. Now, there's a lot of risks because what you're doing is you're giving full control to someone else.

Starting point is 00:06:27 So the most important part is making sure that you trust and understand the operator because they are the fiduciary of your money. I think it depends. We've had some difficult times lately, and I am sure we'll talk about that, and we've had some operators who were not able to perform like we thought they would. So there is a lot of risk there. And if you compare it to the stock market, for me, you know, the stock market, you're basically getting what everybody else gets in returns, right? When the stock market goes up, everybody goes up.

Starting point is 00:06:55 And when it goes down, everybody goes down. And real estate is a little bit different. So I don't really see that there's a whole lot of difference between how the asset performs compared to active real estate when you're on the passive side other than you have so much less control. These are long-term investments. They're extremely ill-liquid. they're completely out of your control. And that is where I think the added risk comes in. Jim, you just said you need to trust and understand the operator. How do you build trust? Or rather, how does the operator build trust with me when you don't know them at all?

Starting point is 00:07:30 That's a great question. I think the best way to answer that is kind of tell you how I started in syndication investing, vetting operators, and how I do it now. The first time I invested in a syndication, I didn't have a clue what I was doing. I was just excited about it because I could out of active investing, I have somebody else managed my investments. So I went to a syndication seminar and there were all kinds of operators there. And at first I thought I wanted to be a syndicator. But as soon as I got there, I was like, okay, nope, I want to be what they call the LP, the limited partner. I want to give people my money and have them manage it for me. And so I assumed that because these people were at a seminar, that they must be vetted and they must be just the best

Starting point is 00:08:11 indicators around. So yeah, I made a mistake here, Mindy. I had an old 401k that I'd rolled into an IRA. And I just walked around and I met people and I basically handed them cash. Oh, you're an operator. I'll invest with you. I'll invest with you. I'll invest with you. Terrible way to vet operators. Just they're at a seminar and so you think you're going to invest with them. So some of those investments turned out. Some not so great. So then I went to what we call, you know, podcast university, I started listening to all kinds of podcasts. And what I would do is I'd listen to an operator who was on a podcast. I'd call them up and I'd a list of questions.

Starting point is 00:08:49 I'd have a 30-minute phone call with them. And so I could speak to the actual person who's making this investment. And I felt a lot more comfortable because I could listen to them. They would tell me, hey, here's some people I could talk to so I could get referrals. But there were always the people they wanted me to call. So you never knew if they were just a great marketer, meaning they sound great on a podcast and they're great at selling you something. Or were they a great operator?

Starting point is 00:09:10 And so that was very difficult. My results with those operators, it was much better than just going to a seminar and throwing money at people, of course. But it still wasn't where I wanted it to be. And that's when I reached out to a community of investors. You know, at left field investors now passive pockets, there's a community of people who are interested in the same thing I am. If you want to talk finance and you walk out your front door and you want to talk to your neighbors, what are they going to talk about? They're going to talk about their 401K, the interest rate on their mortgage, those kind of things. things. And if you're the guy that says, hey, what about real estate syndications? And everyone

Starting point is 00:09:45 looks at you like you're crazy. You turn around and they're all gone, right? So you have to find a community of people. And once I found a community of people, what I learned was I could use them to vet operators. So now I don't invest with a new operator unless they're introduced to me by somebody I know like and trust in my community who I know has already invested with them. Now, they don't have to have invested in them and had a deal go full cycle, meaning they purchase the property and run it for a few years and sell it, but at least a year where you can see, okay, does the operator do what they say they're going to do? Do they send reports when they say they are? Are the distributions similar or close to what they said they would be? Do they send

Starting point is 00:10:25 their K-1s on time? I mean, we're recording this in September. I still have some outstanding K-1s. I haven't done my taxes yet for this year. And it's getting down to the wire, right? So all of these things are what I get from the referrals. And you don't get that if you're you ask the operator for a referral, who are they going to send you? You know, their brother, their sister-in-law, the people that really like them, right? But if you get reviews from people in your community and they say, hey, this is someone that I had success with, you still have to ask all this questions. You still have to do all of the vetting. But you start from a place 100, 150 steps ahead of where you would otherwise. I like that tip. And I'm going to throw out the BiggerPockets

Starting point is 00:11:06 forums here. BiggerPockets.com slash forums. This is a great place. to get real estate information of all kinds, but also to ask about syndicators. You know, don't take one person's, oh, I had a terrible experience with Bob Jones. Okay, well, maybe he had a terrible experience with Bob Jones. But when you start seeing everybody saying they had a terrible experience with Bob Jones, and I just made that name up, I hope there's not a syndicator named Bob Jones. I should take that back. With XYZ syndication company, then, you know, as you see more people having the same experience,

Starting point is 00:11:39 that's the time to maybe look in a different direction. I think in the next few years it's going to be a great time to be investing in real estate syndications because experience means how did you get through 2020 through 2024, right? And that doesn't mean, you know, you had always had success. But how did you handle the difficulties? How did you get through these difficult times? How did you communicate with operators? How did you, you know, have results that you promised?

Starting point is 00:12:08 probably not, but how did you deal with the downturn? How did you deal with the difficult things? And that is what's really going to make it so much easier to vet operators moving forward, because experience is going to be something totally different moving forward than it was a few years ago. Stay tuned for more on passive investing and why this could be an investing vehicle to supercharge your fire journey right after this quick break. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going,

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Starting point is 00:15:09 If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. Welcome back. Let's jump in with Jim Pfeiffer. I'm in a couple of syndications right now. One of them, I get an email every month. Here's all the things we did. Here's all the things we experienced. Here's the good, the bad, and the ugly of this particular property. And I love having this information. I don't always have time to read it when it comes out. But I love having it there so that I can read it when I have the moment. But I have another syndication where I'm not getting as many communications. And it's a little disheartening because I don't.

Starting point is 00:16:01 don't know what's going on there. And I know it's doing okay. I keep getting the checks every month. But I want the communication. That's really important to me. I think that's that's something that is underappreciated in the syndication world from syndicators. Like, hey, if you're the, if you're the GP of the syndication, I want you to communicate with me. If I'm losing money, if I'm not getting a check this month, if I'm doing really well, whatever. I want to know what's going on because that will allow me to prepare. Like, let's say that we're having a really bad syndication. Right now, this is the elephant in the room is the interest rates. The number one issue for me as an investor is communication. And so I do that in the vetting process is one of the things I do is I come up with a bunch

Starting point is 00:16:47 of questions to ask an operator. Sometimes I don't really have these questions. I just want to ask them a bunch of things to see how they respond. Maybe it's a deal that I'm analyzing and I'm not planning I'm investing in it because I just want to kind of test them before I do. The thing I'm looking for are quality answers and I want an answer in a reasonable amount of time, right, 24 to 48 hours. And if they can't do that before I've sent them my money, how do you think they're going to respond to me after they have my check? Right? If they're ignoring me beforehand, they're going to ignore me after. So what you really have to do, and this is the hardest thing I think is to not get caught up in, you know, hey, I just talk to someone. They have a deal. I got to go get into this

Starting point is 00:17:25 deal. There's going to be other deals. There's going to be other operators. So make sure that you test them through communicating with them. And also, we're talking about referrals from your community. Don't just take that one referral and say, oh, well, you know, Steve said it was great, so I'm going for it. What you need to do is you need to get that recommendation and then put them through your own due diligence process, which includes asking them for sample reports. How often do you send these reports? Send me the financial. Send me something from a current deal that you sent out last week to your investors and read those and make sure that they give you enough information because the most difficult thing you nailed it right you think your deal is going well but you need to hear and see

Starting point is 00:18:03 that it is or better yet tell me when it's not because I would rather find that out sooner than just find out when you're sending me a capital call oh and for our listeners what is a capital call well there's a couple different ways you could get one but typically a capital call is when the property is not performing for one reason or another right now like you said it's and interest rates. And the operator comes to you and says, okay, look, you committed 50 grand at the beginning. Now we're asking everybody to send in, you know, 10% or 20% of their original investment because the property isn't performing. In the before times, you know, before 2022, that was a disqualifying question. If you asked that of somebody and they said, yes, we had a capital call

Starting point is 00:18:45 in the last few years, you would almost always just say, there is no way I'm investing with you because everything went straight up, so no one had capital calls. Now, a lot of operators have had capital calls because, as you mentioned, interest rates went up so quickly, right? When you have interest rates go from 2% to 4%, that's doubling. But when they go from 0.25 to 5%, that's like 20x, right? So that means the debt service exploded. And so when deals previously looked like all you had to do was do a few renovations, drive the value because these assets are valued based on net income, right?

Starting point is 00:19:25 But when your expenses go up so much because of the interest costs, a lot of these are underwater and it wipes out the equity. And so what they need is they need to either give it back to the bank and you lose everything, which nobody wants, or they ask for more capital. And so then the investor has a decision, right? Just because they do a capital call doesn't mean you have to participate. And again, we haven't talked about this, but you have to read the investment documents, Right. Some of them, they say that the capital call is mandatory and some it isn't. But either way, even if it's mandatory, you still have to re-evaluate the property as if it's a new investment and decide if you want to put more money at risk in that investment. Even if it's mandatory, if it's mismanaged, you might want to say, nope, I'm not putting more money in and then you would be diluted, right? Your ownership share would go down.

Starting point is 00:20:12 So you just said a couple of really interesting things. You said there's plenty of syndicators and I want to underline this and bold. hold it and circle it. There are so many people out there who are syndicators or calling themselves syndicators. If you are going through these questions and you're trying to do your due diligence and you hit a red flag, put those people in the no thank you pile and move on because there's no shortage of syndicators out there that are doing a good job, but there's way more that are not doing a good job. So you want to find a syndicator that you cannot find a red flag for. And then you said cap call mandatory. If I'm looking through these documents and it says capital call is mandatory, do I want to put that in the no thank you pile? Is that a red flag or is that a not necessarily

Starting point is 00:21:01 a red flag? I would say it's an orange flag, like close to red. There has to be an overwhelming reason why you would want to invest. And I would address that with the operator because sometimes they don't even understand their own documents. And that's a red flag, right? Because I've been thinking about this more and more now, I think if you would have asked me a couple of years ago, if it was mandatory, I would automatically say no. But now I think it's just, I would have a conversation with the operator and say, why do you have it as mandatory? What does that mean? And then understand it more. Because really, they can say it's mandatory or it's not. And you, they can't force you, right? They can't come and take money out of your bank account. So it's never really mandatory. You will

Starting point is 00:21:41 always have to make that decision on your own through looking at the deal and saying, hey, would I invest in this deal again now. And I would say if you're looking at it and debt is an issue and the operations are an issue, then you're not going to participate in that capital call regardless. Because if it's performing, if the asset is performing except for this debt issue, then, you know, no one really saw interest rates exploding like that. So you can kind of say, hey, you know what? I understand that. The asset is operating as it should be. And I want to make sure they have a plan. What are you going to do with this money and how long is it going to carry you out? If this money is just to get through 2024 or 2025, I might not participate because I want to make sure it gets through 26, 27.

Starting point is 00:22:26 It gets through to a reasonable time when they can start selling the assets or refinancing the assets because that's how you get out of this debt problem. So there's a lot of things you got to look at with a capital call. Okay. I love that advice to just talk to them and ask them. And, you know, that kind of goes for everything. If you have a question about the syndication, ask the syndication. ask the syndicator because if they can't answer it, maybe they're not as experienced as you are, which is fine if you're not experienced, but it's not fine if they're not experienced. So when they

Starting point is 00:22:55 can't answer the question that moves from orange to red. Yeah. And I would also add that you can, you can ask any question of them and they should be able to answer it. You should ask them, do you have any bankruptcies? Have you gotten in trouble with the law? I mean, there is nothing off limits because you've got to remember, these are very illiquid. You cannot get out of these, no matter what happens, it's very hard to sell an investment while you're in it. So this person is going to steward your money for the next three, five, or even ten years, right? So that's the difficulty of this. So you really need to be asking all these hard questions before you invest.

Starting point is 00:23:30 And if they don't answer or they get cagey, as you said, there are so many syndicators out there. Go find one that's comfortable. Or even if they're not the kind of personality that you enjoy or want to talk with, right? then don't invest with them because there's so many others out there. And this is a person you're going to have a relationship for a long time with. So you want to make sure that you're comfortable, you like the person because you're investing with it. It's not like investing in the stock market. If you buy Apple, you can't call up Tim Cook and say, hey, buddy, what's going on?

Starting point is 00:23:58 But the whole point of these investments, you can. You can call up the operator and say, what's going on with my investment? And if they're not going to answer or if they're not going to give the information, then you shouldn't have invested with them in the first place. We have to take one final break, but more with Jim. on why passive investing with high interest rates is still viable after this. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see

Starting point is 00:24:29 exactly where your money is going and more importantly where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code Pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals,

Starting point is 00:25:02 and net worth all in one place, so every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at monarch.com for half off your first year. That's 50% off at monarch.com code pockets. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsor jobs helps you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45% more applications than non-sponsored posts. The best part? No monthly subscriptions or long-term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you, 23 people just got hired through Indeed worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash bigger pockets. Just go to.

Starting point is 00:26:07 to Indeed.com slash bigger pockets right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash bigger pockets. Terms and conditions apply. Hiring, Indeed is all you need. When you want more, start your business with Northwest Registered Agent and get access to thousands of free guides, tools, and legal forms to help you launch and protect your business all in one place. Build your complete business identity with Northwest today. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They're the largest registered agent and LLC service in the U.S. with over 1,500 corporate guides who are real people who know your local laws and can help you and your business every step of the way.

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Starting point is 00:27:43 Marvel Television's Wonder Man. All eight episodes now streaming, only on Disney Plus. Welcome back to the show. So back to the interest rates scenario. I think you're right. I think that there was no way to know that interest rates were going to go up so fast, so high. And, I mean, I've seen, I'm fascinated by this new switch. in the multifamily market where you've got these properties that were sold for so much more

Starting point is 00:28:11 than they can sell for now. And I feel bad for everybody invested in that property. But there was one article specifically where the income from the rents that wasn't even covering the new mortgage payment. There was no way that they were going to be able to continue on with this property. How does an investor protect themselves from something like, this, where it's this weird, unforeseen scenario that is kind of affecting everybody. It's not, I wouldn't say that it's the syndicator's fault that they didn't realize

Starting point is 00:28:47 interest rates are going to go up that high. Would you? I think it's a few things, right? There were some operators who noticed this happening in 21, 22, and they said, you know what, I'm not going to invest in these deals. I'm going to give up some great returns because I'm so cautious. So those are the people you want to follow. But I would say diversify.

Starting point is 00:29:06 And by diversify, I mean in a number of different ways. Diversify by operator, right? You don't like the danger, not the danger, but what people do is they meet somebody and they do all the vetting and this operator's awesome. I've done this. And then they send you a deal so you invest in it. And they send you another one. You're like, I love these guys.

Starting point is 00:29:26 I just got to keep investing. And so a year later, you find out you've invested in six or seven deals with the same operator, right? And what we try to say is just slow down. We have a guy in our community who, he does not invest with an operator for the second time until a full year passes. I didn't follow that advice and I wish I had. That is some of the best advice you can have because that gives you time to see how they do.

Starting point is 00:29:48 And so if you diversify by operator, so now each operator has different philosophies, but diversification, I think, by asset class, it's not just multifamily, right? Your self-storage, there's mobile home parks, there's car washes. I mean, anything you, there's parking lots, campgrounds, anything you can think of can be syndicated. So get in a lot of different asset classes and then get in a lot of different markets. You know, all these really hot markets like Phoenix and Dallas, there's some trouble there. But if you had diversified and maybe got into some Midwest states and other things, those aren't having as many problems.

Starting point is 00:30:21 So there's a lot of ways to diversify so you don't have everything in one operator, one asset class or one market. And so when trouble hits, you're diversified. So I have some problems in, you know, some of my assets, some operators, some markets. but I have enough in other asset classes and other areas that, you know, it's just diversification, really. What are the common barriers to entry for new investors in syndications? I think there's two main barriers. One is just knowledge, like understanding what this is.

Starting point is 00:30:47 And that's why, you know, I'm so excited with a partnership with passive pockets because my mission is to go out there and say, hey, you can do this, this kind of investing, real estate syndications. It is a great way to build wealth. It's a great way to build financial freedom. So knowledge is, I think, the first one. The second one is money, right? You can't do this with no money. You can't wholesale or buy a property with no money down.

Starting point is 00:31:10 It's really not for someone starting out if they don't have capital. You need typically the minimums are $25,000, $50,000 or even $100,000 to get in one of these deals. Now, there are ways to do kind of group investments where you might get in for $5,000 or $10,000. But to get the diversification you want, you need a bucket of money. So it's really, we look at it as for people who are maybe graduating, from active investing that want to do a little bit less active and be more passive so they have some real estate knowledge or busy professionals who have a good salary and they can invest in a few of these deals a year but they don't have the time or energy to be active or really

Starting point is 00:31:48 dig in but they have enough time to maybe join a community or at least learn the basics so they can vet operators those are the kind of people so it's i think it's knowledge and capital of the two barriers are syndications traditionally reserved for accredited investors and beyond most people would say yes. I say absolutely not. It's harder for non-accredited people. Absolutely, because there are so many fewer investments. So you've got to work harder, which means in a community like passive pockets, there's a lot of non-accredited investors, and they're the ones that work the hardest and are the most engaged because they have to find those deals, because they're not allowed to advertise. There's a 506B and a 506C syndication, and we don't need to get into the weeds, but basically

Starting point is 00:32:28 506B cannot advertise. So they have to have a relationship with you before you can invest. So once you find one of those syndicators, if you're non-accredited, you'd have to may have a phone call, chat with them, which you'd want to do anyway, and establish your relationship before you can invest in a deal. 506C deals are for accredited only, and those are the deals where they can advertise. So it's easier for accredited, but you don't have to be accredited to be a passive investor. Okay. Accredited investors are those with either they make $250,000 a year for the last two years. and probably going to make it next year too, or a million dollars in net worth outside of your home equity. Is that correct? Close. It's 200,000 single, 300,000 married in the last two years and expect it next year or a million in assets outside of your home that you live in. Would you invest in a syndication if you were not an accredited investor?

Starting point is 00:33:24 I would because I believe strongly that real estate is such a good asset class and is the best way to build wealth. You know, you could make 150 grand, right? And let's say you're putting, I don't know, 25 grand a year into your 401K, right? That's one option. You could take that 25 grand, put it in the bank or, you know, because you're doing it monthly. So at the end of the year, take that 25 grand and invest in the syndication. Me personally, because of the tax ramifications, I would prefer to do the real estate than to put it in the 401k. And I know I've heard you and Scott talk about 401Ks before.

Starting point is 00:33:58 So this is kind of a, I don't know, I have a little bit of a mild disagreement. on that topic. Well, and that's fine. I just spoke with somebody recently who had been investing in the stock market and lost 80% of his net worth in three weeks. Oh my gosh. And I said, oh, what were you investing in? He said individual stocks. I said, which ones? He said Enron and Worldcom. And I'm like, okay, then. That explains it all. That breaks my heart. Yes. But also I could understand, like as soon as he said that, I was like, well, I understand why you're zero. percent in stocks right now. What a big burn to try to get over. And maybe somebody is in a similar position, and I hope not. I hope he's the only person on the planet that's in that situation. But maybe

Starting point is 00:34:42 someone's in a similar situation where they had huge losses in the stock market. They had a bad experience in the stock market. Or they're simply looking for something else. How would you consider syndications to fit into a broader investment portfolio? Should they be a significant part of your retirement plan or just one aspect of it? I think just one aspect of it. I think just one aspect, but maybe depending on your comfortability, a major aspect. One of the biggest mistakes I made when I got into syndications is I was super excited. So I went all in, right? And what I realized later was I invested everything, not everything, but I didn't have much liquidity, right? Because it's not like a, if I buy a house to rent, if something goes wrong or I want liquidity, I can sell it. I might

Starting point is 00:35:21 take a loss because I'm selling too early. It might not be optimal, but I can get some of my equity back. With syndications, you can't. It's just money that's going to be invested until the operator decides to sell. So I think one of the biggest things is, you know, be well-rounded. For a while, I was very much nothing in the stock market. I don't want any part of it because it's too rollercoastery and highly tax. But I think there's a place for the stock market for some of your liquid wealth because you can, you still get a return and you can exit when you want to. So I think there's a place for that. I don't think you need to be active if you want to be a passive syndication investor. I don't think you need active real estate. But if you're into that, you want to do a little

Starting point is 00:36:00 bit of that, I would sprinkle that into. I'm just a firm believer in real estate because of all the benefits that you get, and a lot of it has to do with reducing your taxes to, you know, almost nothing, right? If you do things correctly, you might not have to pay tax on any of your real estate. But you need to speak with somebody who specializes in real estate because the tax code is like this thick. They can't know everything and be an expert in everything. And there's a lot of real estate tax benefits that I think get lost by going to the cheap tax guy or the person who's like, oh yeah, I totally know about real estate. They're like, you should depreciate your property. And that's all they suggest. And there's so many more options available.

Starting point is 00:36:39 I would add one thing, Mindy, is if you're going to do real estate syndications, and that's going to be a big focus of yours, then find a tax person who is familiar with not only real estate, but with syndications as well. Because there's added things to syndication investing because of the number of K-1s that you get, that adds cost and it also adds time. You are almost guaranteed that you will not be filing your tax returns on April 15th if you are a real estate syndication investor. You are almost guaranteed to have to defer and do that later. Yeah, unless you're doing it in your self-directed solo 401k and then you don't. Exactly. But then you're giving up the tax benefits too. And it was it was a plan that we did and we're not doing it anymore, but that's, you know, a story for another day as well.

Starting point is 00:37:23 Okay, Jim, as we wrap up, what final tips or advice do you have for our listeners who are considering syndications as a part of their path to financial independence? I think the number one thing I would do is join a community. I really am a strong believer that you need, this is not a do-it-yourself thing. This is a team sport investing in syndications. You get so much from a community. You know, passive pockets is just starting up. It's going to be a fantastic community. But, you know, you need to find a community that fits your personality, the close.

Starting point is 00:37:53 culture of the community fits you. And if it's not passive pockets, there's a lot of different communities out there. I believe passive pockets is going to be phenomenal. So I'd start there. But you need to find a community because these investments, as I said, are ill-liquid. They're long-term. They're completely out of your control. And the best way to be successful is to find quality operators and have good strategies. And the best way to do that is to learn from others. You learn from the mistakes other people have made. You join a community like passive pockets. There's going to be people that have been doing this for years like I have that can teach you some things and then you don't make the same mistakes I did. You don't go to a conference and start throwing money around

Starting point is 00:38:29 because you just assume everyone's a great operator. You know, you can learn those things. And I've learned so much from experienced investors and then also the new people who don't even know what questions to ask. They ask something that I've never thought of. So I cannot stress enough that the number one thing you can do if you want to be successful as a syndication investor is join a community. I love that. I love that, Jim. Thank you so much for your time today. This was a lot of fun talking to you. And once again, the first episode of Passive Pockets, the Passive Real Estate Investing Show, aired today.

Starting point is 00:39:01 Please go check it out wherever you get your podcast or go to passivepockets.com. All right, Jim, thank you so much for your time and we'll talk to you soon. Thank you very much. Okay, that was a great episode with Jim Pfeiffer, the host of the new Bigger Pockets podcast called PassivePockets, the Passive Real Estate Investing Show. Go to passive pockets.com to learn more about passive pockets. Also, we have at least two past episodes dedicated to syndications, episode 219 with Jay Scott, where he dives deep.

Starting point is 00:39:35 I'm talking two hours deep into how to choose a syndication and literally everything you need to know about syndications. And then Jay comes back on episode 456 to talk about the harsh realities that syndicators are currently facing. Both of these episodes are excellent to listen to if you're thinking about investing in passive real estate syndications. All right, that wraps up this episode of the Bigger Pockets Money podcast. I am Mindy Jensen. He would be Scott Trench, but he decided to play hooky today. He'll be back next week. I am saying, bye-bye, Dragon's Eye. Bigger Pockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico content,

Starting point is 00:40:16 host production by Exodus Media and Chris Mickin. Thanks for listening.

BiggerPockets Money Podcast - 564: How to Make Truly Passive Income with “Syndication” Real Estate

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