Syndicating is a term that you may have never heard before, but the concept is something you do know, or should (especially as it relates to real estate). Here is a simple definition of this term:
Syndication: The pooling of investor's money to buy bigger real estate investments than you would be able to purchase on your own.
So, I imagine that you might now wonder why this concept is so important. One would argue that syndicating to create real estate deals is the most effective way to become wealthy in this business, unless you have a lot of working capital to start with - not all of us are so lucky.
As we continue to thrive in this business, we continue to come across real estate deals that we may not be able to purchase ourselves. This leaves an opportunity to create partnerships, and relationships, where we can leverage large pools of capital in order to make a purchase of an investment property. Since we are purchasing cash flow properties primarily, this would translate to higher returns on investment, or cash-on-cash returns (COCR), than investing in the stock market, a CD, bond, or other financial vehicle. Even obtaining 5%-10% COCR would be double or triple some of the best dividend yields in the stock market.
To that end, let's look at the important parts of a syndication deal: The Offering, or Target Property, the Location/Demographics, the Financials, the Deal Structure, and the Management Team. We will breeze over each of these, and come back to them in the future, but for now, a brief highlight should lend valuable insight if you see our deals, or other investor's deals.
The Offering/Target Property
If we are creating a write-up for a target property or set of properties, it helps to have the description of the property and the most important factors such as size, number of bedrooms, address, price, etc, all in one section, right at the top. This gives an investor the opportunity to save time, if something doesn't appeal about the property at first glance. However, this should not dictate your decision, but instead, give ample background about the property(ies).
Here I might also want to know about the condition of the property and if there is expected maintenance. If there are reasons the target property does not need maintenance, this will make a better case for the property.
In real estate, we find that location (and somewhat correlated, the demographics), is one of the most important factors in determining viability for an investment. You should not purchase a coffee shop next to a Starbucks, or residential building next to industrial space. You cannot assume an estimated rent for two buildings that are similar, if they are in two different locations. The old adage, 'Location, Location, Location!', certainly holds true when investing in real estate.
When writing these offering packages, giving as much unbiased information about the location enables the investor to make a more educated decision. Using factual sources on the web, we can paint a picture of the location that includes information about schools, crime, make-up of the neighborhood, and more, to help guide the conversation. The local amenities and other reasons this location would be up-and-coming, or stable, in the future, are important to help tell the story. This also helps the potential investor make an educated guess on future growth or property appreciation.
The numbers, the ROI (return on investment), the financials.
We have met investors that will skip to this section before looking at anything else (for good reason). The financial picture is arguably the most important aspect of a real estate deal - it's all about the money!
If I were on the other end, acting as the investor, I would want the financial projections to tell me a few important things (this is a non-expansive list):
What is my Cash-On-Cash Return: This is the ratio of money you put in, to money you are taking out;
What is the total income and expenses of the building, and is there enough money that is projected to be lost to account for difficulties with all the unknown aspects of property management?
How much money is needed in the deal?
Also, depending on who writes the deal, the deal analysis might be found here - the market evaluation of the property that would determine that the target property isn't being purchased at a price too high for the market. This would include an explanation of the comparable properties, as well an estimate of the rent for the property with rent comparables (assuming it is a rental property). Discussion of the stability of the real estate market might be expanded upon in this section.
The Deal Structure
Hand-in-hand with the Financials, is the Deal Structure. This tells you more about the actual relationship between investor and manager, or the person/people/company that is making the deal happen.
Here I would want to know a few important things as well:
How much will I get paid, and how often?
How is the deal manager getting paid?
How are management of the property, vacancy, and other minutiae handled?
Here you might also want to ensure the person bringing this deal together has done their homework regarding the way the investors are handled, and the legal structure. Is the property(ies) being placed in its own LLC? What will you actually own, the LLC or the property, or both? How and when can you get your money out? There are a lot of questions to be answered, so the more information about the deal, the less surprises come up. You might also see the actual contract already completed.
The Management Team
Let's not forget the who (and we don't mean the band). We like to compare this business to the startup world, since we are seeking seed funding for a project. If you come to an investor in a startup that you have created, they might value your team higher than your product, since the vision to get things completed in a certain way might be more important than the product itself.
Buying a real estate investment is no different - the team that is managing and closing the deal, their trustworthiness, work ethic, experience, are all essential to what might be a failed/successful enterprise.
This section is an opportunity for the investor to learn more about us (you) when writing the deal. If you have no experience in real estate and might be trying your first deal, the other aspects of the offering must be killer, the COCR higher than anything else out there. But, if you have a huge amount of experience, and a proven track-record, this section might just take the pressure off the numbers.
Now that we have breezed through the sections of the deal, it is important to start looking at some sample deals before you write your own. Go to real estate investors websites, and seek as many examples as possible. Also feel free to ask us about our deals, which can get you on our email list for the future.
Remember, we are here to be a guide in all things investing related, so don't hesitate to reach out to us, as we are glad to pass on our knowledge, and answer any questions you might have.
Chris and Joe have years of knowledge, stories, and experience to share with you. This is where you can access their minds, to learn about what they do and how homeowners can be more effective when in tough situations.