Show132: Real Estate Syndication: Understanding How to Invest in Large Deals

Real estate syndication

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I get it...real estate syndications are intimidating.

For pretty much the entirety of our real estate investing career I have stayed clear of this path of investing because the term itself just scared me.

It sounded so serious and seemed like it would require a ton of money and so I basically ruled them out as an option for us.

As always, Kirk approached me about actually getting involved in one and so the real homework began to learning what they were all about and to see if they were as intimidating as I once thought.

The idea of being a passive investor when we have been such active real estate investors ones terrified me. I felt like I was giving up control.

And one of the things we really love about investing in rental property is the control you have on your cash flow and return.

Even more, to this point we've only invested in residential real estate so taking the next step into the lad of commercial real estate was also a bit nerve wrecking for me.

What is a real estate syndication?

In its most basic terms, a syndication deal is when a group of investors all contribute a certain amount of money toward the acquisition of a deal.

Think of it as real estate crowdfunding.

Let me break it down...

Let's say we have Paul and Mark and they found this awesome 50 unit apartment building that they feel they can get below market value.

Not only that they can add value because the units haven't been updated, the common places haven't been updated and the rents are below market value already.

So in an effort to be able to purchase this property, they decide to raise money from investors to help purchase the property.

Once they have secured the funding (from investors) that they need they purchase the property and move forward with renovations and property management of the real estate.

Now it is Paul and Mark's job as the "sponsors" of this syndication deal to do all of the due diligence on the property, the market in which the property is located, the bank terms, etc.

This all is presented to investors before any money is collected so investors can decide if the deal and the information meets their individual goals as investors.

4 Things to Understand About Real Estate Syndication

  1. The sponsors of the deal will typically collect an acquisition fee and a management fee for putting the deal together and continuing to manage the deal through closing and renovations.
  2. As an investor you should look to received a preferred return. Which basically means that before any sponsors can collect any profit from the cash flow of the property, the investors must be paid out what was quoted to them in the terms of the deal. Typically you see this anywhere from 8-10%.
  3. Real estate syndications can be set up as different entities. You may see them structured as a limited liability company (LLC) or a limited partnership (LP). Be sure to pay attention to how they are structured.
  4. Be sure that when you are reading through the information packets for the deal that you look at the cash on cash return and that it meets your goals as an investor. Each investor is different and it's important to be sure you're comfortable with the terms of the deal.

In this week's podcast episode, Kirk and I break down our own syndication deal and how we went about determine whether it was right for us.

Even more we share the details of real estate syndications so that they can be less intimidating to you as a novice investors.

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