Are you a real estate investor who wants to take your business to the next level? Are you interested in raising capital for your deals, expanding your network, and earning more profits?
If so, you’re in the right place.
In this post, I will walk you through how to do real estate syndication and share some valuable tips I picked up during my first syndication in 2019.
I’ll share the fundamentals of real estate syndication, discuss the pros and cons, dive into the legal and financial aspects, and guide you through seeking and teaming up with investors. After reading this post, you’ll have the basics to start looking at options.
- Real estate syndication is a way to pool capital from multiple investors to acquire a larger real estate asset.
- Steps in real estate syndication include identifying an investment opportunity, conducting due diligence, raising capital, and managing the property.
What Are Real Estate Syndications?
A real estate syndication deal is a way for multiple investors to pool their capital and expertise to purchase and manage a larger real estate asset than any one of them could acquire or operate alone.
The properties are typically in commercial real estate, such as multi-family rental property, retail, or self-storage.
The syndicator, the sponsor, or the general partner (GP) is the person or entity who originates, structures and manages the property syndication.
An investor in real estate syndicates, also known as the passive investor or limited partner (LP), provides the capital, share profits, and have limited liability.
The syndication can take various legal forms, such as a partnership or a limited liability company (LLC).
7 Steps to Start Your Real Estate Syndicate
Syndication helps you grow your real estate business but it involves complex legal and financial considerations. Be sure to consult professionals to guide you through the process. That being said, here are the seven steps:
Step 1: Define Your Vision
What is your vision for your syndication? Do you see an amazing investment opportunity that could be a great real estate project? Are you a real estate developer who believes there is a great use for a parcel of land?
Create a vision for your real estate investment and syndication, define your investment goals, research the market, assess resources, set criteria, and establish your financial targets. Regularly review and adapt your plan as needed.
Note… this is not a one-time thing.
For example, when I did my first syndication, I set goals to expand the number of hotels under my management, focusing my expansion plans on the Southwestern United States. As demographics have shifted, I am now revising my strategic growth plan to include opportunities outside the US.
Step 2: Formulate a Business Plan
To develop a business plan, research your industry and target market to understand the competitive landscape. Do you believe there are opportunities for more housing? Is there a lack of retail space? Identify what these opportunities are within your real estate niche.
Then, outline your investment structure, including how much capital you need and how it will be allocated. To guide your strategic decision-making, define your desired outcome, such as revenue targets, market share goals, and expansion plans.
Step 3: Assemble a Team
Your team is a HUGE part of your success. To do this, start by identifying the necessary folks you need. From my experience doing real estate syndications, at the very least, you will need an attorney to help you with the syndication paperwork, a CPA, a bookkeeper, and a property manager.
Develop a network of other real estate investors or attend events to connect with people in these fields. For example, I met the real estate attorney who did my syndication paperwork at a meeting on opportunity zones. And the property management company for our hotel came through a recommendation within my network of other hotel operators.
Reach out and evaluate their expertise, track record, and compatibility with your goals. Bring together the selected professionals to collaborate and guide you through the syndication process.
Step 4: Identify Investment Opportunities
Determine the type of properties or projects you are interested in, such as multi-family, hotels, self-storage, retail, or mobile home parks. Consider location, market demand, purchase price, potential returns, ongoing cash flow, and risk tolerance in your chosen niche.
Next, utilize various sources to gather data and insights about the market. This may include studying industry reports, analyzing local market trends, examining demographic information, using financial reports, and reviewing economic indicators.
Online platforms, real estate listings, and networking within the industry can also provide valuable information.
In this market, finding good investment deals that meet our criteria can be challenging. After the pandemic disruptions, I expected a surge of great hotel opportunities to open up, though that has not yet happened. While this requires creative thinking around markets or property types to source new acquisitions, it does not mean quality deals are nonexistent — just much harder to find no matter what niche you are in.
Step 5: Perform Due Diligence
Once you have identified potential properties or projects, assess viability. This starts with a financial analysis. Review the property value, historical financial statements, rental income records, and expense reports.
- Analyze key financial metrics such as net operating income (NOI), cash flow projections, occupancy rates, and market comparables.
- Identify the potential risks and rewards associated with the investment in rental property, considering lease terms, tenant creditworthiness, and market conditions.
- Next, conduct a property inspection. Higher professional building inspectors or engineers to assess the physical condition of the property. They will examine the structure, mechanical systems, electrical wiring, plumbing, and overall maintenance.
This inspection helps identify any existing or potential issues, such as structural deficiencies or costly repairs, that could impact the property’s market value or future profitability.
- Finally, perform legal assessments to ensure compliance and mitigate legal risks. Engage attorneys experienced in commercial real estate transactions to review lease agreements, title documents, zoning regulations, and any pending litigation or environmental concerns.
They will identify any legal issues or potential liabilities associated with the property and guide on options for resolving them.
To learn more about due diligence in commercial real estate, explore this article from Bigger Pockets.
Step 6: Raise Money
Leverage your professional network and connections to network the syndication opportunity to passive investors. Here are the key steps to raise funds by working with investors who want an alternative investment vehicle.
Investment Presentation deck
Create a compelling investment proposal highlighting the syndication opportunity’s benefits and potential returns. Communicate your investment objectives, project details, financial projections, and the value proposition for investors.
I took a strategic approach when my first real estate deal required a capital raise. I exclusively shared the opportunity privately, collaborating solely with accredited investors.
By adopting this approach, I saved on syndication paperwork fees and gained the advantage of selectively choosing who invested in my syndication.
In contrast, if you broadly advertise or list your opportunity on a real estate crowdfunding platform, you relinquish some control over the investors involved. Your legal paperwork costs will also be much higher, so consider the implications before deciding.
Cultivate relationships with potential investors through personalized communication and regular updates.
To build trust and credibility, provide transparency, address their concerns, and showcase your expertise and track record.
Consider using real estate syndication software to help you manage individual investors and communication.
Private placement memorandum
During the phase where you raise capital, a key document is the Private Placement Memorandum (PPM) or Offering Memorandum (OM). This legal document informs potential investors about a private investment opportunity.
It contains detailed information about the investment strategy, including the terms, risks involved, financial projections, and preferred return information.
The issuer or its legal counsel typically prepares the PPM and helps private investors decide whether to invest in the offering.
Private placement structures
There are a few options for your syndication structure. These options became available in 2013 when the SEC issued new final regulations allowing public advertising and solicitation of Regulation D offers to accredited investors.
- It consists of three different rules (Rule 504, Rule 506(b), and Rule 506(c)) that allow companies to raise capital from accredited investors without undergoing the time-consuming and costly process of registering their securities with the SEC.
These exemptions have specific criteria and limitations that must be followed to ensure compliance with securities laws.
- Rule 506(b) allows issuers to offer securities to an unlimited number of accredited investors and up to 35 non-accredited investors with a pre-existing relationship with the issuer.
- Rule 506(c), on the other hand, permits issuers to use general solicitation or advertising to attract investors. Still, all investors must be accredited, and the issuer must take reasonable steps to verify their accredited status.
This rule does not allow non-accredited investors to participate in the offering.
Step 7: Execute and Manage
To begin this step, execute the acquisition or development plan outlined in the investment proposal. This involves conducting negotiations, completing the necessary paperwork, and properly handling the transaction’s legal and financial aspects.
Effective management includes overseeing day-to-day operations, coordinating with property managers if applicable, monitoring the financial performance, and implementing strategies to enhance returns.
Regularly analyze financial statements, monitor occupancy rates, manage expenses, and address any operational issues that may arise. Your goal is to increase cash flows and revenue to increase property appreciation over time.
Communicate with investors throughout the investment period. Provide regular updates on the project’s progress, financial performance, and significant developments. I recommend doing this through secure online portals.
Actively manage investor relations by promptly addressing any inquiries or concerns they may have. Be responsive, provide accurate information, and proactively address potential issues.
Provide investors with distributions meeting the preferred return criteria as outlined in the PPM or OM.
Regularly assess the market conditions and adjust strategies to maximize the investment’s potential.
Key Considerations for Successfully Doing Real Estate Syndication
Here are some additional insights from my first syndication:
I joined other real estate syndicator webinars to learn how they structured their investor presentations, and I studied deals on popular crowdfunding sites.
Having a great lawyer was key in efficiently navigating the complexities of the paperwork process.
Surprisingly, raising capital was less challenging than anticipated; however, I learned the importance of carefully selecting investors.
In my experience, the most promising investors are those with prior real estate investing experience and a firm grasp of the industry’s fundamentals.
The next Level: Starting a real estate fund
Syndications involve structuring deals around specific properties or opportunities. This involves organizing paperwork, preparing presentations, and facilitating investor communication on a particular property.
However, taking it a step further is a real estate fund that allows for capital raising for a specific project type without specifying the exact project.
For instance, you could state that the fund aims to invest in multi-family housing in the Midwest or that you’ll work with real estate developers on a new construction project. The funds are raised and allocated when you find suitable properties meeting the defined criteria.
This approach helps avoid the chaotic last-minute rush that often occurs when securing investor deposits while simultaneously closing on loans and purchases.
You can raise capital for a real estate fund through individual investor conversations or place the fund on a real estate crowdfunding site.
Alternatives to doing a real estate syndication
Investors have a viable alternative: forming joint ventures with compatible partners to combine resources, expertise, and knowledge.
This approach offers streamlined paperwork and does not require you to involve outside investors.
I structured my first hotel purchase as a joint venture or JV agreement, which can be helpful in different situations.
I didn’t require additional capital in my scenario since I used the proceeds from a multi-family sale via a 1031 Exchange. Rather, I needed the expertise of an experienced hotel operator to get bank financing.
However, potential challenges may arise with a joint venture, including having enough funding for projects and a risk of partner conflicts.
Why Should you Learn about Syndication?
As a real estate investor, there will come a time when you want to expand your portfolio and acquire more properties. But how can you raise funds to make it happen?
The answer lies in pooling resources through syndication. By joining forces with other investors, you can go beyond your limits and purchase commercial real estate properties, like apartment complexes, shopping centers, office buildings, or hotels.
It’s a way to grow together and diversify your real estate investments across different properties and markets. This way, you can minimize the impact of any single property’s performance.
Wrapping up and my experience with how to do a real estate syndication
As a new real estate syndicator, I juggled many tasks simultaneously. Although I outlined how to do real estate syndication process in seven steps, some of these steps often occurred concurrently.
Managing everything at once, from finalizing property acquisitions to securing investor funds and providing guidance on topics like Self-Directed IRA, can be challenging.
I recommend seeking a reliable partner to collaborate with throughout this intricate process.
Despite the demanding nature, the real estate investing process was worth it as I successfully acquired a $5M property, which I wouldn’t have accomplished with my own money alone.
Real Estate Syndication FAQ
How do I start my own real estate syndication?
Begin by building a strong network of potential investors, establishing a legal structure for the syndication, and creating a compelling investment offering with detailed financial projections and a clear exit strategy.
You will also need your own money for the legal paperwork and to invest in the syndication known as “skin in the game”.
How profitable is real estate syndication?
The profitability of real estate syndication can vary depending on various factors, such as the specific investment properties, market conditions, and the expertise of the syndicator.
Real estate syndication has the potential to generate substantial returns for both the syndicator and the investors involved.
How much money do I need to invest in a real estate syndication?
The amount of money required to invest in a real estate syndication can vary greatly depending on the specific opportunity and the requirements set by the real estate syndicator.
Syndications can have minimum investment amounts ranging from tens of thousands to millions.
Review the Offering Memorandum or Private Placement Memorandum documents and consult with the syndicator to determine the specific investment threshold for each opportunity.
What is a GP and an LP?
The roles and differences between a GP and LP are:
- GP (General Partner): The GP manages and operates the investment project. They are the syndicator. GPs make key decisions, oversee daily operations, and typically earn a share of the profits and fees.
- LP (Limited Partner): The LP invests capital in the project but generally has a passive role. They are the investor. LPs have limited involvement in management decisions and primarily seek returns on their investment.