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As a real estate securities attorney, I have talked to thousands of people who were new to real estate syndication. Many of them have gone on to become seasoned syndicators. Some can now raise more than $10 million in a week. So, how does such drastic growth take place? The evolutionary process I’ve observed usually occurs in a series of “realizations,” followed by taking the appropriate actions.
A New Approach
Realization #1: You’re not going to achieve your future financial goals in your current job. Investing in real estate could augment or replace your current income.
Many syndicators start by buying single-family homes to fix and flip or buy and hold long-term. There’s a formula called BRRRR (buy, rehab, rent, refinance, and repeat) that many such investors follow. They recoup their invested capital on a refinance and use the funds to buy additional properties. There’s another model that involves buying four houses, selling three, keeping one, and repeating — eventually building a portfolio of wholly owned single-family properties.
Many single-family investors fund their deals with hard money loans or have a handful of private lenders who fund their deals, which is a fine way to get started. However, you can’t use private lenders on commercial properties that use institutional financing — the first-position lenders won’t allow it.
Single-family investors quickly figure out that fixing and flipping houses and being a solo landlord is really hard work. Most figure out after a few years that there must be a better way to scale. Managing tenants in long-term holds involves many risks and some big downsides; not everyone has the right mentality to do it.
Scaling
Realization #2: You need to scale.
This is when real estate investors start looking at buying commercial real estate so they can hire professional property managers to run the day-to-day operations. Many naturally gravitate to multifamily property. Everyone inherently understands apartments as an asset class as we all have either lived in an apartment or known someone who has, and nearly everyone has paid rent at some point in their lives.
Small-plexes (2–30 units) are attractive as they are often poorly managed or neglected, and it may be possible to find them in your own backyard. Those that are most neglected are usually owned by out-of-state investors who don’t realize how bad things are, or investors who have owned them for a long time and perhaps can’t care for them as they did in the past. These properties can be gold mines if you can find them within two hours of where you live. However, beware of buying them far from home; it can be difficult to find competent property managers to manage a small-plex, and it’s impossible to manage a small-plex on your own from afar.
Joint Ventures
Realization #3: You need money to do bigger deals, so you decide to do joint ventures (JVs).
By this time, new investors have run out of their own money; or can’t find hard money or private lenders willing to fund the type of deals they want to do, so they look for JV partners. In a JV, everyone needs to be actively involved in generating their own profits.
The problem with JVs is that having too many active members (less than five, in my experience) is a conflict waiting to happen. It’s hard to get people to show up, let alone agree on a course of action. And when one member starts calling the shots, it’s no longer a JV, and investors could be considered passive, which falls under the category of syndication (more on that below). JVs will keep you from scaling your real estate business. To scale, you need to learn to syndicate.
Syndications
Realization #4: You need to get some training and learn to syndicate.
What is syndication? It’s a tried-and-true method of organizing large groups of passive investors headed by a management team of two to five people to buy a previously identified property.
A quick internet search will yield lots of YouTube videos, books, podcasts, and other resources on real estate syndication — many of which are low-cost or even free. There is so much material out there that many investors think they can go it alone. They read a couple of books, watch a bunch of videos, and consider themselves competent. They find a handful of investors, mostly family and friends, and buy one or maybe two properties. Then one of two things happens.
- They eventually give up when they can’t find more properties and don’t have enough investors.
- They realize they can’t achieve their financial goals on their own and decide to hire a real estate coach so they can truly scale their syndication business.
Better Deals
Realization #5: You need to find better deals.
Investors usually hire a coach to help them find the right deals after they’ve had a few missteps, bought the wrong property, or haven’t made any progress toward their syndication goals after years of trying. A coach will hold them accountable and keep them on the right track.
An internet search for real estate coaches will yield plenty of trainers who are teaching multifamily investing, a handful who are teaching other real estate asset classes, and some who offer coaching programs. But not all coaches are created equal; some are using real estate training to cultivate their own group of passive investors and may have only done one or two deals themselves. Make sure you do some due diligence before hiring a coach. Ask other successful syndicators who coached them. Go to some networking events (like Joe Fairless’ Best Ever Conference), and watch the trainer (and their coaches) in action. Watch their YouTube videos and listen to their podcasts. Choose a trainer who has vast experience and offers a lot of educational resources.
Once you do hire a coach, do exactly what they tell you to do. Our most successful clients have all had a coach for their first two to four deals and then went out on their own to do many more deals or bigger and bigger deals. There is no question about this — if you are serious about scaling your real estate investing business through syndication, you need a real estate coach.
Securities Laws
Realization #6: You need a deeper understanding of securities laws.
By this point in your syndication journey, you will have learned that if you want to raise capital from private investors, you need to understand securities laws and how to structure your deals with investors. You will also need to learn what a syndication offering package looks like, and how to explain it to your investors.
That’s where we come in. Our website offers lots of educational resources, including two Amazon best-selling books on syndication, over 70 articles, FAQs, a podcast called “Raise Private Money Legally,” a YouTube Channel called “Raise Capital Legally,” weekly clients-only masterminds, and low-cost options for becoming a client before you have a deal to syndicate.
Investors
Realization #7: You need more investors.
This is where many syndicators take the wrong steps and get bogged down. Here are four common mistakes new syndicators make when looking for investors:
Mistake #1: Relying on “Single Check-Writers”
New syndicators start looking for “single check-writers”, believing this is the road to easy money. They hear about family offices, private equity funds with millions (if not billions) just looking for a place to put their money, and they meet a couple of “rich” investors. Collectively, we’ll call them high-net-worth (HNW) investors.
In the words of my friend Richard Wilson of FamilyOffices.com, the representatives of those companies are often too polite to say, “Come back and see us when you’ve done $10 million worth of deals from start to finish,” or, “Get some more experienced members on your management team.” Instead, the syndicator mistakenly believes that the HNW investor is actually interested in investing with them. Ninety-five percent of the time, HNW investors disappear before closing, something comes up and they can’t invest, or they simply don’t show up at the closing table — leaving you out of all the money it took you to get there.\
The reality is, HNW investors won’t invest with you until you have built a long and solid track record syndicating the same real estate asset class you want them to invest in with you.
Mistake #2: Opting for the Co-GP Model
New syndicators start raising capital for others or looking for co-GPs who will raise capital for them. The “co-GP” model (which stands for co-general partner) is not sustainable for several reasons:
- You are giving away money that would belong to your own management team if you found the property and had enough of your own investors.
- You may be acting as an unlicensed securities broker if you repeatedly bring investors to others’ deals, which is illegal.
- You are giving others control over your reputation. If their deal fails with your investors – it's your reputation that will be irreparably harmed. Don’t put your investors in a deal you don’t control.
Mistake #3: Advertising Without a Track Record
New syndicators try to advertise for investors before they have a track record. The first thing an investor you don’t know is going to ask is, “How many times have you done this before?” If you don’t have syndication experience, add someone to your management team who does. You can leverage others’ experience.
Your best investors, who will invest with you again and again, are people from your local community that you see every month at local networking or volunteer events. Get out of your basement, join some clubs, and start showing up every month. Do this for years, and you’ll have more investors than you can place.
For some great ideas on how to increase your local network, read the excellent book by Nick Gray, The 2-Hour Cocktail Party. I just held my first two-hour cocktail party, and I’m challenging the attendees in our clients-only masterminds to hold them, too. I invited about 30 random people from my community and 22 showed up at my first-ever party. It was super fun, and the goal was only 15. Think what might happen if you started inviting random people to a cocktail party once a month. How many new people would you meet in a year?
Mistake #4: Starting a Blind Pool Fund Without a Track Record
New syndicators try to start a blind pool fund before they have a syndication track record. There are some trainers who advocate raising a blind pool fund in order to raise money before you get a property under contract. However, the truth is that a blind pool fund based on a business plan, not a property under contract, is the hardest possible way to raise capital. Syndicating a property that you have under contract is much easier.
Our statistics show that 85% of our syndication clients close their deals. For blind pool funds, I believe the opposite is true — approximately 15% of blind pool funds actually raise all of the funds (or any) that they set out to raise. Build a track record and put a fund marketing plan in place before you try a blind pool fund. Anything else is a waste of money.
So, how can you accelerate your evolution as a syndicator?
Get a real estate coach, and learn about securities laws and deal structures with investors. Read one or both of my books (available at our website), and continually cultivate relationships with your own, local group of passive investors. Then, start finding and funding your own deals with help from your real estate coach — and us.
About SyndicationAttorneys.com:
At SyndicationAttorneys.com, we like to say, “We’re more than a law firm.” Our mission is not just to deliver legal documents; it’s to help our clients understand their obligations to their investors, teach them how to comply with securities laws, and how to properly structure their deals with passive investors. Check out our website for free educational materials. We look forward to having you as a syndication client soon!
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.
