2 Options For Funding Your Real Estate Syndication Investment

by | Aug 11, 2021 | Uncategorized | 0 comments

As you learn about real estate syndications and decide to invest, a key issue you should consider is: how and where is the best place to get the money to fund this investment decision? It’s incumbent upon you to set up your personal finances strategically so the income distributions benefit you as you envision and you are secure in the amount you are investing.

Following are two options for funding your real estate syndication investment.

CASH

The quickest and easiest way to invest is with cash. This means entering the deal as an individual or jointly with your spouse with capital from your savings or other liquid assets. You’re entirely in control of selecting the sponsor, deal, signing and completing documents on time, and wiring the money into the deal.

You’ll receive distributions from the syndication deal directly into your personal account and reap the tax benefits of owning real estate. There is no need for bookkeeping either because you’ll receive a K-1 each Spring with all the information you need for your taxes. When you invest personal money, all the benefits, tax breaks, distributions, and other benefits of being a real estate syndication investor are directly yours.

SELF-DIRECTED IRA

The second way you might choose to invest is through a retirement account like a self-directed IRA.  These plans have the same tax-advantaged benefits and are governed by the same IRS rules as conventional IRAs, but they allow you to invest in alternative assets such as private equity, gold, cryptocurrency, and real estate.  Presently, the types of plans that can invest in real estate are:

  • Individuals – Traditional IRA, ROTH IRA
  • Small Business Owners – Solo 401(k), SEP IRA, Simple IRA
  • Savings Plans = Health Savings Accounts (HSA), Education Savings Accounts (ESA)
  • Former Employer Plans – 401(k), 403(b), 457, TSP, Pension Plan

BENEFITS

  • You won’t be using your personal funds to invest and can use a tax efficient income and wealth generation strategy.
  • You still choose what to invest in and rely upon your own knowledge and expertise.
  • You get away from the volatility of the stock market and Wall Street in general. Create diversity and invest in tangible assets that are not tied to the stock markets and will appreciate over time.
  • You’ll get tax free or tax deferred income, including capital gains, that grows within the tax-advantaged IRA.

LIMITATIONS

  • Some of the tax advantages of investing in real estate syndications (depreciation, interest expense) are not available when investing with an IRA.
  • There is also the possibility of UDFI and UBIT that limit the tax advantage of investing with an IRA.
    • Unrelated Debt-Financed income (UDFI): This tax may be owed if financing is used to buy the asset.
    • Unrelated business income tax (UBIT): This may come into play for income earned by an IRA-owned business or if your IRA invests in a real estate syndication.

Always consult a tax professional familiar with real estate syndications and self-directed iRAs.

Which Funding Option Should You Choose?

Ultimately the question of which one is best for you depends upon when you’ll need the cash flow, how you’d like the tax benefits to be applied, and what level of asset protection you’re seeking.

If you’re interested in the distributions and tax benefits being applied to you personally and want cashflow to boost your lifestyle now, then an individual or joint investment may be the way to go.

Are you planning on the investment distributions replacing some income? Funding your investment from your personal assets, either jointly or individually, may be best.

If you’re more interested in building long-term growth and having the distributions bulk up your retirement account, then you may want to explore a QRP, a self-directed IRA, or 401k.

NOTE: This information is of a general, educational nature and may not be construed as legal or tax advice pertaining to a specific offering, exemption, or situation. Any such advice must be sought from your own attorney, or properly licensed tax professional, pursuant to an attorney-client, or other professional relationship.

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