Real estate syndications can provide a low-risk investment with steady returns, dividends, and appreciation, drawing interest from a wide range of investors. However, with investment minimums of $50,000 or more, it can be challenging to identify the capital required to participate.
Below are the most common sources of capital for commercial real estate ventures.
Cash on Hand: Whether you choose to park funds in a CD (certificate of deposit), high yield savings account, money market, or money market mutual fund, these accounts grant you liquidity and easy access to cash reserves.
Tax-Advantaged Accounts (IRA and 401k): Retirement accounts often represent your largest investment balances. You consistently contribute a percentage of income to the company 401k or retirement plan throughout your working life. The tax-free nature accelerates account growth, often leading to significant balances to use in retirement.
Changing jobs often results in rolling over balances into an IRA, offering the same tax benefits as an employer-sponsored account. In most cases, you cannot withdraw money without penalty until you reach 59 ½. And even then, you may face taxation on withdrawals, limiting your ability to access these funds.
The workaround is a self-directed IRA, which allows you to roll over qualified IRA or 401k balances while retaining the tax benefits. A self-directed IRA permits alternative investments like commercial real estate syndications without forfeiting the tax advantages of your current retirement scheme.
To avoid the UBIT (Unrelated Business Income Tax) on the gains leveraged by the debt portion of the syndication investment you can set-up and invest using a solo401K.
Borrow from 401K or Employer Retirement Account: Regular contributions to a current 401k or employer-sponsored account make it more difficult to access funds, even if you want to use it for investment purposes.
Borrowing from your 401k for a commercial real estate investment could be an acceptable option. The IRS allows you to borrow up to $50,000 from qualified accounts without losing the tax benefits.
Home Equity Loan or Line of Credit: Rising home prices also mean more equity in your home. Home equity loans or lines of credit can give you affordable access to money for quality investments.
Lenders typically permit loans up to 80% of the home’s value. They calculate your available equity using the home’s current value and multiplying it by the maximum equity offered. For example, if the value of your home is $500,000, the lender could allow you to leverage up to $400,000 (80%). Assuming your current mortgage has a balance of $250,000, the lender would likely approve a $150,000 loan or line of credit.
To qualify, you must complete the underwriting process, which includes a property valuation and an assessment of your creditworthiness. The process can take two weeks to two months, depending on the lender.
1031 Exchange allows you to defer taxes when selling an investment property. While it does not provide funds for the initial investment, it could help you convert the investment into bigger deals. As long as you remain in “like-kind” assets, you can defer taxes through a 1031 exchange.
If you are interested in commercial real estate investments, you can learn more about the syndication process here.