7 Steps To Investing In Your First Real Estate Syndication

3January, 2020

7 Steps To Investing In Your First Real Estate Syndication

By Shirley Xu

For most people, the process of buying a house is fairly familiar.

And the traditional types of real estate investing are not hard to understand: such as Fix-and-flip: buy a house, renovate it, sell it for a profit. Buy and hold: buy a house, rent it out, get monthly rent checks. They are good investment strategy but it does require your efforts. It is never as easy as the TV” Flip this house” make you believe.

On the other hand, Real estate syndication- buying a large asset (such as an 300 unites apartment building) with group of investors sounds like complicated. In reality, it was easy and clean for investors once you learned the process.

In this post, I’d like to take you through that 7 steps process from start to finish, so you have a clear understanding of all the steps involved in investing passively in your first real estate syndication.

Decide whether to invest in real estate, period!
Determine your investing goals
Find an investment opportunity that fits
Reserve your spot in the deal
Review the PPM (private placement memorandum)
Send in your funds
Celebrate

Step #1 – Decide Whether to Invest in Real Estate, Period

This is perhaps the most important step of all, the decision of whether you want to invest in real estate, period. After all, there are many other things you could invest in, from gold to stocks and bonds…

This is a decision that I won’t be able to make for you. You’ll have to look at your overall portfolio, reflect on your goals, and decide whether investing in real estate can help you reach those goals.

What I can tell you, is a bit about how I got into real estate investing.

In 2003, After I worked at corporate America for 10 years, I was really sick of the long hours, and the constant pressure. My 2 boys were still young, 5 and 7. Sometimes, I have to ask my friend to pick them up from school since I was late and my husband worked in another state. One night, I saw the late night commercial on TV about investing in Real Estate, The guy said rain and shine, my rent still comes to my mail box. I was totally hooked and ordered his material, started my real estate investing.

For years, I bought and sold many houses and accumulated a quite size residential rental properties. I have done all the traditional Real estate investing, wholesaling, flipping, retailing. It was never sunny all the times, there were struggles and dark time.. Real estate had provided income and wealth for my family. Every person and every family is different, so you’ll need to do some research, thinking, and reflecting to decide if real estate investing is for you.

Step #2 – Determine Your Investing Goals

Once you decide that you want to invest in real estate, think about what you’re hoping to get out of it. Are you looking for a long-term or short-term investment? Are you hoping for a lump sum fairly quickly, or a steady stream of passive income over time? How much do you have to invest, both in terms of money and in terms of time?

If you’re not afraid to roll up your sleeves and put in some sweat equity, or you want to choose your own tenants or cabinets or flooring, you might consider trying a fix-and-flip, or buying and holding a small rental property.

If, on the other hand, you want more of a set-it-and-forget-it type of investment, a real estate syndication might be a better fit. You can invest your money alongside other investors, then have an asset manager take the helm, manage the asset, and carry out the business plan to update the units and maximize impact and returns. Looking back, had I know what I know now, and I have money, I would chose the “lazy man” route, if you are expert in your professional field and you love your job, syndication through Real Estate might be a good idea.

Step #3 – Find an Investment Opportunity That Fits

Ifyou’ve decided that a real estate syndication is the best fit for you, the next step is to find a syndication opportunity that works for you. To help investors learn about investment opportunities, deal sponsors typically provide some variation on the following materials:

Executive summary
Full investment summary
Investor webinar

These are the core materials that will give you a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.

Personally, when I review these materials, I’m looking first and foremost at the team who’s running the project. I want to make sure they have a solid track record and that they’re good people. As you know, you can give a great project to a terrible team, and they’ll drive it into the ground. On the flip side, you can give a struggling project into a terrific team, and they’ll turn the whole thing around.

Beyond the team, I look to see if the business plan makes sense, given the asset class, submarket, and where we are in the economic cycle. I do my own research on the market, looking at job growth, population growth, and other trends. I look at the minimum investment amount, projected hold time, and projected returns. I look to make sure that the team has multiple exit strategies in place, in case their Plan A doesn’t pan out. I look for conservative underwriting. I attend or review the investor webinar and ask tough questions.

Basically, I look for any reason NOT to invest in the deal.

If, after all my research and analysis pans out, I consider investing in the deal.

But again, this is my personal philosophy and methodology. As you review different investment summaries, you’ll come up with your own criteria of what you’re looking for. The more you review, the better you’ll know exactly what you’re looking for.

Step #4 – Reserve Your Spot in the Deal

One thing to note about real estate syndications is that the opportunity to invest in the deal is on a first-come, first-served basis.

This can be especially important for deals in hot markets with strong deal sponsors.

I’ve seen multi-million-dollar investment opportunities fill up in a number of hours. ( ask our current investors)

That’s why it’s important to do your research ahead of time, to know how much money you want to invest, and what you’re looking for in an investment opportunity.

That way, when the opportunity opens up, you can jump on it.

Often, there will be an opportunity to put in a soft reserve amount. This is to hold a spot for you in the deal while you take some time to review the investment materials. If you decide to back out or reduce your investment amount later, you can do so with no penalty.

The flip side is, if you don’t hold a place, but then later decide you want to invest, there may no longer be room for you in the deal, and you’ll have to join the backup list.

Not every deal offers a soft reserve, but when there is one, and I think I might be interested, I always put in a soft reserve to buy myself some more time to think about the deal, review the materials, and do my own research.

For deals with a soft reserve, this step and the previous step #3 might be flipped or more fluid, so I tend to review the executive summary, reserve my spot in the deal, then review the rest of the materials.

Step #5 – Review the PPM

Once you’ve decided to invest in a deal, the first “official” (aka, legal) step is the signing of the PPM (private placement memorandum).

This is a legal document, often quite lengthy, that goes into detail about the investment opportunity, the risks involved, and your role as an investor in the project.

The PPM is certainly not the most fun document to review, but it’s very important that you read through it, so you fully understand all aspects of the investment opportunity, including the risks, subscription agreement, and operating agreement.

As part of signing the PPM, you’ll also need to decide how you want to hold your shares of the entity that’s holding the asset. Often, you can also specify whether you want your cashflow distributions sent via check or direct deposit.

Step #6 – Send in Your Funds

Once you’ve completed the PPM, the next step will be to send in your funds (aka, the amount you’re investing into the deal).

Typically, you will have the option to either wire in your funds or to send in a check. I’ve used both methods before and have had no issues with either method.

Pro tip: Before wiring in your funds, be sure to double check the wiring information, and let the deal sponsor know to expect your funds so they can be on the lookout.

Step #7 – Celebrate

You did it! By this point in the process, you’ve done your due diligence on the investment, reserved your spot in the deal, reviewed all the legal documents, and sent in your funds.

The next piece of communication you’ll likely receive is a note once the property has closed.

After that, expect monthly updates on the project, more detailed quarterly reports on the financials, quarterly cashflow distributions, and an annual K-1 for your tax returns.

Conclusion

So, there you have it.

Real estate syndications are more of a set-it-and-forget-it type of investment, so most of your active participation is up front. The first time you do it, it might seem a bit confusing as to what to expect and what questions to ask. However, as you review and invest in more deals, the process will become second-nature. And we will help you along the way.