Forming A Real Estate Syndication: Why Not Start At The Top?

Founder of Apartment Loan Store a Commercial Mortgage Firm. Author of “The Encyclopedia of Commercial Real Estate Advice,” Publisher- Wiley.


Raise your hand if you’ve ever thought to yourself, “I want to be a real estate mogul making millions of dollars. And I don’t want to start out at the bottom with a small property and work my way to the top. I want to start out at the top with a large property. Yes, I want to be the one who finds the properties, gives them a shine, calls the shots and makes the big money when they sell. And by the way, I won’t be using much of my own money for the down payments. There will be investors for that.” If those thoughts get your adrenaline going, please read on.

As a commercial mortgage banker, I have closed over 50 syndicated real estate deals over the past 24 years, some of which were run by new inexperienced syndicators. In 2005, a woman named Kelly in her early thirties called me about a loan. Kelly was going to retire from her job and become a millionaire by investing in apartments. She did indeed start out at the top. She made an offer on a 6.3-million-dollar apartment complex in a city in Kansas with no experience and very little cash. She brought in a wealthy executive from a major corporation, relatives and some other investors and syndicated the deal. She went on to duplicate this process over and over.

In my book, I go over all the pros and cons of forming a real estate syndication — and I recommend that someone just starting out investing in real estate not go this route as it is complicated and expensive. But if you are like Kelly and don’t tend to have thoughts like, “What if everyone can tell I’m just winging it” and mostly have thoughts like, “I can do just about anything I set my mind to” and “If I don’t know how to do it, I will learn,” and you love real estate, then you just might be a candidate to become a newbie real estate syndicator.

What Is A Real Estate Syndication?

A real estate syndication is the pooling of funds from many passive investors to purchase income-producing real estate. A passive investor has one role: investing cash in a solicited real estate investment for a specified return. If you are putting a deal together with passive investors, the Securities and Exchange Commission (SEC) will mandate you form a syndication. This is because the investors have to trust you just as they have to trust a funds manager when investing in a publicly traded stock. As the manager, you are called a syndicator and have a fiduciary responsibility to define the returns and risks to investors and protect their investment. You will also be overseeing management, disbursing income to investors, handling financing and selling the property.

Pros And Cons Of Becoming A Real Estate Syndicator

Just being able to call yourself a syndicator gives you clout with investors. It tends to be much easier to raise money and oversee the property with passive investors whose only role is to write you a check than with active ones who will manage the property with you and expect decisions to be made by consensus. Boy, can this give you heartburn. Making your investors feel safer, syndications require a government-regulated private placement memorandum (PPM), which spells out how the investment is being set up and the returns and risks involved.

On the negative side, real estate syndications are expensive and complicated with quite a learning curve. They mostly make sense for larger commercial real estate deals of $2 million and above. The main culprit here is the cost of hiring a syndication attorney, which will typically run between $450 and $1,000 per hour. Worse yet, first-time deal managers are often overwhelmed by all the due diligence after their offer has been accepted and are pushed over the edge when adding on syndication.

Why People Will Want To Invest With You

There are plenty of experienced syndicators out there, so why would someone want to invest with you? Because you are going to give them a very tempting PPM to review that offers four attributes:

1. A phenomenal property in a good neighborhood with upsides such as under-market rents that can be greatly increased after you put in low-cost cosmetic upgrades like fresh paint and new floor coverings.

2. An annual internal rate of return (IRR) on cash invested of 30% or more in five years.

3. A preferred annual return, which means investors will get paid before you do, of 10% or more.

4. A projected increase in property value of 20% or more in five years when you sell.

How To Get Started

Start out by learning how to analyze and perform due diligence. Then consider taking on a high net worth, experienced investor as your first partner. Their experience will help you sell the deal to investors and lenders, and they can mentor you.

Next, before you find a property, put your professional team together: your buyer’s real estate broker, real estate attorney, syndication attorney, lender or mortgage broker and property manager. Then make a list of everyone you know who might have some money to invest and pitch them the preferred return, highlighting how much they will earn in appreciation when the property is sold.

A Few Last Remarks

If you were born to invest in real estate, then becoming a real estate syndicator can open many doors. With each property potentially taking over a thousand hours of work over many years and most of your earnings coming from appreciation, be sure to shoot for owning a minimum of 20%–25%. Lastly, it is important that you invest some of your own money in each deal — at least 10%–15%. All investors will ask you how much you are putting in and it will be beyond embarrassing if you tell them zero.

Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?

Founder of Apartment Loan Store a Commercial Mortgage Firm. Author of “The Encyclopedia of Commercial Real Estate Advice,” Publisher- Wiley. Read Terry Painter’s full