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  • Writer's pictureCole Farrell

Alternative Sources of Capital to Invest

Updated: Mar 28




Disclaimer: I am not an accountant or a financial advisor, the information below is for educational purposes only and is not to be treated as advice in any form or fashion.



The most common way to invest in a real estate syndication is with liquid cash, however, not everyone has enough liquid capital to meet the minimum investment. Even if someone lacks liquid capital, there are several other ways to invest that are unknown or misunderstood.


Cash

Cash is the most common and simplest way to invest. The saying "Cash is King" still reigns true. There are no setbacks or difficulties when using cash. The process is straightforward. Once the proper paperwork is signed, the cash is wired to the ownership entity, and that's it.


There is often a scenario where a few people are interested in investing, however, individually they don't have enough cash to meet the minimum investment. In this scenario, the parties could form a legal entity (LLC) and become partners, pooling their money to invest in the syndication through the shared entity. Any profits or losses would pass through the entity to the owners. Not all GPs allow corporations to invest, so if this is something being explored, make sure to check with your GP team before forming an entity.


Self-Directed IRA (SDIRA)

Tapping into an IRA is a super powerful way to get started in real estate investing. To invest in real estate with an IRA, someone must first transfer to a self-directed IRA. This involves finding a custodian to monitor the account and keep the account up to date in all legal and tax ways. When using an SDIRA for real estate investing, the custodian must be one that allows alternative investments (not stocks, bonds, or mutual funds). SDIRAs are the same as a normal IRA with tax advantages, contribution limits, and withdrawal rules.

Pros Cons

-Higher Potential Return -More work

-Full Control -Complex taxes

-Diversification -Special Guidelines

-Flexibility


401(K)


Each time someone changes employers, they must decide what to do with their 401(k) plan. They can roll it over to the new employer, leave it be, turn it into an IRA, cash out, etc. In the transition and stress of changing employers, it's not surprising that people often forget about an old 401(k) plan. Even if it's forgotten, it's still somewhere. There are rules, exceptions, and regulations that affect a 401(k) such as amount invested, involuntary cashout, and vesting schedules, but a 401(k) is a source of capital that can be turned into investing funds. Starting with a lost 401(k) and turning it into an investable SDIRA (keeping it invested and tax-free) does take time and effort, however, the returns are going to be higher than if it remained stagnant. Someone can also cash out an old 401(k) plan and use those funds, but beware unless the owner of the account is of age, the money will be subject to early withdrawal penalties and income taxes.


For more specifics on using 401(k) funds or IRA/SDIRA funds to invest, we recommend speaking with an accountant for any and all impacts it may have on someone's financial situation.


Borrowed Funds


When it comes to alternative ways to invest in real estate, specifically syndications, the idea of using borrowing funds to invest always surfaces. Using borrowed money to invest in a syndication can enhance someone's returns, but the trade-off is increased risk. There are two downsides. One, if the investment doesn't work out and someone incurs a loss, they'll be twisting a knife in the wound by being left behind with debt to pay off. Second, if the investment returns are less than expected, or there is no cash flow at all, they can be left with partial or complete debt service out-of-pocket.

If someone uses debt, they need to be sure that if the investment had zero cash flow, they could still service the debt without altering their lifestyle. If they are comfortable with the risk and are going into it with full understanding, it's their choice. However, if they are already hitting their limit with finances, it's playing with fire. As a sponsor/GP, we really prefer that investors do not invest with borrowed money, and if asked, we discourage them from doing so.



When investing in a syndication, there are several different methods and by evaluating all options, someone can determine which method will maximize their returns. For some cash is the best option, either by themselves or with partners. For others, it's tapping into a retirement fund to achieve better returns. For others, it's just not the right time yet. Either way, there are numerous options to work towards financial freedom through apartment investing.





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