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There’s a famous Chinese proverb that says, “Wealth never survives three generations.” America has its own version, which says, “Shirtsleeves to shirtsleeves in three generations.” But while 70% of wealthy families will end up losing their wealth by the second generation and 90% will lose it by the third, there are ways to avoid that from happening.
The concept of generational wealth is simple: It’s money earned by one generation that is passed on to the next. The generation earning the money is one that is working hard and is earning a high salary. The problem comes in when they stop working. The money stops flowing when you stop working, and there are limits to how much one can earn. The solution is investing the money, which lets you increase your wealth and use the money you earn to generate more money.
Apartment Syndication
Many families have built their wealth by investing in multifamily properties, and it’s still possible today. The demand for multifamily properties is strong and growing. Many investors are even overbidding on properties just to get into the game.
Syndication is a smart way to invest in multifamily properties. With syndication, a syndicator, or lead investor, brings together a group of investors to buy a property. The syndicator forms a limited liability corporation (LLC) and sells shares in the corporation to passive investors. Everyone involved is entitled to numerous tax benefits, and generally investors are able to invest in properties that are much larger than they could afford or manage themselves.
The participating investors are called passive investors because they don’t take any active role in the deal. Most passive investors don’t have the time or experience to find the right property in the right market, bring together other investors or negotiate the deal. That’s the responsibility of the syndicator.
Passive investing is an ideal approach for those investors looking to earn ongoing income and ultimate appreciation when the property is sold. It’s also a long-term wealth-building strategy that will play into creating generational wealth.
Building Wealth Takes Time
A word of caution to potential investors: You won’t get rich overnight. Even those who have made a lot of money in a short period of time didn’t have the monetary discipline needed to reinvest and manage their money, so they ended up losing it. As Warren Buffet is credited with saying, “It’s pretty easy to get well-to-do slowly. But’s it’s not easy to get rich quick.”
You won’t be able to build generational wealth by putting $50,000 in a few multifamily investments. It takes discipline, and you have to be willing to reinvest your money and let it grow over time. For example, if you invest $100,000 in a multifamily property with an IRR of 15%, you will double your money. (IRR is the percentage of interest you earn on each dollar invested in a property over the entire hold period.)
Generally, when you invest in a syndication, the equity split (meaning, the cash flow that the property generates, and the proceeds from the sale of the property) between general partners and limited partners is 70-30 or 80-20, where the investors receive the bulk of the funds.
During the hold period of three to five years, you’ll receive distributions from the syndicator, including your share of rents and income. Reinvest that money in another property. When the property sells, you’ll also receive your share of the sale, which will be $200,000, including your original $100,000 investment.
Invest that money again in another multifamily property, and at the end of the hold period you will have doubled your money again, now up to $400,000. As you can see, you’ll be building your generational wealth over time.
Sign The Loan To Build More Equity In Real Estate
There is a way to speed up the money-making process, if you’re willing to sign on the loan for 5% to 10% as the general partner (GP). You’ll still be a limited partner in the deal, but by assuming additional risk by signing on along with the GP, your returns will be higher, faster.
There is a risk that you’re taking here because you are guaranteeing the loan, so make sure you know and trust the syndicator you sign the loan with and that you consult a lawyer. If you wish to sign the loan, the only requirement is that you have a net worth equal to the loan amount and liquidity equal to nine to 12 months of loan payments. You can start small, but you’ll receive additional income regardless of how liquid you are.
An Additional Option
If you have strong financials, an additional option is to network with young syndicators and let them use information on your financials to get their letter of intent (LOI) to be accepted by the seller. Syndicators who are just starting out may not have the funds or the credibility to be taken seriously by the broker, and providing proof of funds can be what they need to get their foot in the door. Your fee can range between $3,000 to $5,000 if the syndicator closed the deal. You don’t take any significant risk here, because you are not under an obligation to buy the property.
Summary
Building wealth that can sustain multiple generations is the goal of many families. Being a passive investor in a multifamily syndication is a proven way to build that wealth, but be aware that it will take time. You’ll need to participate in multiple deals and have the discipline to reinvest the income you earn. You can speed up the process by signing on with the general partner and increase your equity holding. Finally, you can use your strong financials to help a young syndicator get their letter of intent accepted.
Be creative and find other ways to build wealth in real estate, and as long as you have the discipline and patience, you can build generational wealth that will last.