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I’ve been a practicing real estate securities attorney since 2008, and I’ve written two best-selling books on raising capital for real estate, the latest of which is How to Raise Capital for Real Estate Legally.* Over the course of helping hundreds of clients, I’ve observed the differences between those who do many, many deals, and those who only do one or two. Based on these observations, here are the steps taken by clients who become successful syndicators:
If you’re not sure what asset class to pick, get trained in different asset classes. Real estate trainers (like Joe Fairless) offer live boot camps, webinars, YouTube videos, podcasts, and home study courses. Pick the asset class (and trainer) that feels right for you. Then get further training from advanced courses, an experienced mentor, or a coach. Our most successful clients use a coach for their first two to three deals.
Syndication is simply pooling money from passive investors to buy real estate. You’ll need to raise funds for the property down payment, closing costs, legal fees, capital improvements, pre-closing expenses, operating capital and reserves, and a manager’s acquisition fee. A typical capital raise for a value-add property is one-third of the purchase price.
You can do joint ventures or you can syndicate, but joint ventures require that all investors stay actively involved in generating their own profits. That works for small deals with small numbers of investors (less than five, in my opinion); but when you want to do bigger deals or need to be in control of a larger group of investors, you’ll need to learn to raise capital from passive investors legally through syndication.
There are specific securities laws that apply to pooling capital from private investors. If you don’t follow securities laws and a deal goes bad, you could be barred from ever raising capital again, you could be held responsible for losses incurred by your investors, and your reputation could be irreparably harmed.
Choose a brand name that fits your personality and business model. It should include one or two words that mean something to you, but shouldn’t be confusingly similar to someone else’s name. First, do a Google search; next, see if the .com domain is available; third, go to your Secretary of State’s website and see if the name is available. If any of that fails, start over. Try to avoid the word “capital,” as it’s over-used. Other suffix words to consider are investors, investments, partners, holdings, group, etc.
You’ll use your brand name to form a company that represents you, perhaps in multiple deals. Further, you’ll use it on your business cards and investor marketing materials.
Your business model will identify your selected asset class, where you’re looking, what you’ll do to make it profitable, and how long you plan to own it. Your investors want to know where the money is coming from, how it’s being spent, when they’ll start to see a return, and what has to happen before they get their money back.
You can put all of this in writing, usually in a 15- to 20-page pitch deck (see Chapter 27 in my book for guidelines on creating and presenting a pitch deck). Additionally, you’ll want to explain your business model in a credibility website that shows brokers, lenders, and investors that you’re a legitimate business.
While you’re looking for deals, you can use your pitch deck to explain to investors what you’re doing, why it’s a good idea, how syndication works, and how they can participate when you get a deal. You can also direct them to your website. You may also want to create a monthly newsletter or meetup to keep in touch with them and to continue their education about group real estate investments.
Your team should include potential partners whom you can meet at local networking events such as real estate investor associations (REIAs), real estate meetups in your area, and live real estate networking events offered by real estate trainers nationwide.
Additionally, you need to develop relationships with real estate brokers and property managers in your selected market who can alert you to off-market listings, as well as mortgage brokers who can help you get the best loan terms, high-net-worth loan guarantors who can help you qualify for loans, tax professionals such as bookkeepers and CPAs, and insurance agents.
This is perhaps the most important thing you need to do — build relationships with prospective investors. You should have 30–50 pre-vetted investors with $50,000–$100,000 each to invest by the time you have a deal and need to start raising money. A comfortable raise for new syndicators is $1 million to $2 million. According to the U.S. Securities and Exchange Commission (SEC), the median raise in a private securities offering is $1.5 million with 14 investors. You need two to three times that many people in your database to be able to fund a $1.5 million raise.
Don’t look at huge deals that require $3 million+ raises for your first deal. Leave those properties for when you have a track record of closing five or more deals with investors and lenders — and after you have a database of hundreds of pre-vetted investors.
Go find deals — they don’t all have to be your own deals. You can leverage off others’ experience and track records by partnering with experienced syndicators and bringing them investors or pre-analyzed properties. If a deal doesn’t make sense, or something seems off, don’t risk your reputation by referring investors to it.
If you are looking for your own deals, you need to send out LOTS of letters of intent (LOIs). If you send out 10 per week, you’ll begin to see results. If you send out two per month, not so much.
Once you have an accepted LOI, don’t talk about the deal with anyone except your legal team or immediate partners until you have a signed purchase agreement. At the LOI stage, other investors can steal your deals. Even if the LOI says it’s legally binding, it will be a huge waste of time, effort, and money suing the seller to try to enforce it. It’s better just to move on.
Hire a commercial real estate transaction attorney (we offer those services, too) when you have an accepted LOI. Don’t use the broker’s purchase agreement. It only protects the broker and their right to the commission. Your real estate counsel will draft a purchase agreement that protects you.
They’ll also help you get title insurance, set up escrow, provide vendor and property management contracts, and work with the lender (and lender’s counsel) to get them the information they need to get the property closed. Your real estate counsel will work in parallel with your securities counsel.
Note that there is a distinction between real estate transaction counsel and real estate litigators. You won’t need a real estate litigator unless you get into a dispute with a seller or buyer.
Don’t let your real estate counsel draft your securities offering documents unless securities offerings are a regular, published part of their practice. Many real estate attorneys don’t understand securities laws — or that they even exist. I have had many commercial real estate attorneys tell me, “We just draft limited partnerships.” They may be unwittingly helping their clients violate securities laws.
You’ll need a purchase agreement that gives you an escrow period of at least 90 days, with 45 days for due diligence, if you’re raising capital from investors. Build in a 30-day extension if you can. If you can only get a 60-day escrow, build at least one or two 30-day extensions into your purchase agreement.
It’s in your best interest to hire a securities attorney whose practice area focuses on real estate securities offerings. Hire your securities counsel when you have: 1) a signed purchase agreement, 2) been to the property, and 3) reviewed the financials. Eighty-five percent of our clients who do this before hiring us close their deals. Complete these things within the first one to two weeks of your escrow period and before you spend any other money on the deal. These are the most likely deal killers.
If it still seems like a viable deal, then hire us. Ideally, we should complete your offering documents at the same time as your due diligence period ends. This will give you 30-45 days to raise the money while the lender processes your loan.
Make sure your securities attorney has significant deal structuring experience. There are certain deal structures that work with investors and others that don’t. If you structure your deal wrong, you could create adverse tax consequences for you and your investors, or additional liability for yourself, putting your outside assets at risk.
Don’t offer specific returns or splits to investors until you’ve structured the deal with your securities attorney. Once you’ve shown your terms to investors, it’s hard to go back and offer something different if your securities attorney tells you that your terms are unmarketable or that you’ve left money on the table.
Securities counsel will help you choose the correct securities exemption, draft the appropriate offering documents, and file securities notices with the SEC and state securities agencies within the required deadlines.
Start collecting money as soon as you have your final offering documents. You’ll need sufficient money in the bank to close at least a week before closing. Don’t wait for investors who say they will send the money — no one is an investor until their money is in your company’s bank account. Until then, just keep raising money. Let the slow payers know that it’s a first-come, first-served offering and that others are sending in their funds now. Beware of investors who say they’ll do the whole deal — they usually disappear or change the terms right before closing.
Your first deal is the hardest; the second is easier, and by the third, you’ve got it down. Persevere and you can have the life of your dreams. I’ve seen it happen for many clients. For most people, it takes six to eight years before they feel financially successful. It’s then that I see them taking dream vacations and buying their dream homes.
Plan to be in this business for the long haul — syndication is NOT a get-rich-quick scheme. It’s hard work. If you follow the steps and stay on course, your syndication dreams can and will happen for you.
The most important things are to: 1) never stop building your investor database, 2) never stop networking, and 3) never stop learning. Those are the things that will allow you to do more deals and bigger deals that will ultimately carry you and your investors into a comfortable retirement.
*How to Raise Capital for Real Estate Legally by Kim Lisa Taylor is available on Amazon, or you can get a free copy mailed to you by texting the word SYNDICATE to (844) 796-3428.
About Syndication Attorneys:
Syndication Attorneys, PLLC goes beyond crowdfunding, uniting a national network of seasoned attorneys with over 20 years of securities experience, covering real estate, business, and tech startups. Their adept team handles JOBS Act nuances, international investor dealings, 1031 exchanges, and securities services for startups, fostering clients' success across all business levels. Learn more at syndicationattorneys.com.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.