By Joe Firmin 5-Minute Read... it's worth it.
This is a straightfoward guide. No B.S. or fluff, just brass tax. I want to take you through the process of investing in your first real estate sydnication so it is abundantly clear. Set expectations.
First, I'll assume you want to invest in real estate. Good? Great. If unsure, check out THIS POST where I discuss investing in real estate and whether active or passive investing is right for you.
Second, I'll assume you have your investing goals set or at least a good idea of what you want? If not, I suggest you read THIS POST where I discuss truly taking the time to write down your investing goals.
Got 'em down? Good.
Some deals have different timelines, investment summaries, and logistics, but more or less, these are the 5 Steps you'll take:
You discover an investment opportunity that fits Your Needs
Reservation - Get One (in the deal)
Review the PPM (Private Placement Memorandum - like a prospectus)
Send in your funds
Fist Pump & Celebrate
OK, Ándale!
STEP 1: YOU DISCOVER AN INVESTMENT OPPORTUNITY THAT FITS YOUR NEEDS
In the real estate world, there are many different "asset classes." Sounds technical - no, hang in there. Assets is a nice word, a beautiful word. Get comfortable with it. It refers to something that creates income for you. You can get income from many types of real estate assets such as an apartment building, self-storage units or a mobile home park - among MANY others...
So which asset class do you want to invest in? We like multifamily apartments. WHY? - Well you can read all about it here.
As you look at different asset classes you'll discover what you like and don't like. You'll start to define your needs that align to your previously identified goals. Different sponsors of real estate syndication opportunities typically give you the details of the opportunity via: Investment Summaries & Webinars. In the Investment Summaries, I pay attention to a few key things before either dismissing it or getting more interested:
- The team - Can I trust them? Gut feel. If they're newer are they working with some veterns or partners?
- The business plan - Is it doable, too aggressive?
- The market & trends - Is this a market that is growing? Where is it in the economic environment now?
- Minimum investment, projected returns and hold time - Do these fit my needs?
- Conservative underwriting and exit strategies - Are they inflating any numbers? Do they have contingencies if the business plan doesn't go as planned?
If this stuff checks out, more than likely I'm moving forward. Again, you may be different or have different criteria but these are the key things to look for in a potential real estate syndication investment opportunity.
STEP 2: RESERVATION - GET ONE
Opportunities to invest are on a first-come, first-served basis typically. Meaning, once the opportunity is made available to invest, those that reserve their spot in the deal are prioritized. Many times a deal will be over-subscribed, there are more investors wanting to participate than the deal warrants or needs.
This is why it is important to reserve your spot. Many sponsors will have a soft-commit period once the announcement of the deal is made. You can reserve your spot in the deal, with no commitment to participate, and still have plenty of time to review the materials prior to locking in your commitment.
This is helpful as it ensures you have a place in the deal and also lets you review the investment summary and PPM at your own pace without having to make a decision within the first 48 hours.
STEP 3: REVIEW THE PPM
Now that you've decided to invest in the deal. You submit your "hard commit" to the sponsor and they'll provide you a PPM (private placement memorandum) for the investment. You must review and sign the PPM. This is a lengthy legal document that spells out the investment, the risks and the roles of the partners. While similar to a prospectus for a fund, you need to review this one in its entirety.
While not a Tom Clancy thriller, it is very important that you read it. You should understand each part thoroughly. When you participate in a syndication, you are purchasing shares in the legal entity that is purchasing the real estate. You need to specify how you'd like to hold those shares - in your personal name, in an LLC, etc. You should also specify whether your distributions should come to you via bank direct deposit or by check.
STEP 4: SEND IN YOUR FUNDS
Sounds simple. It should be. The sponsor will let you know how to wire your funds. To ensure your spot in the deal and no snail mail is lost - I'd recommend wiring. Always. Double & triple check the wiring information is correct and send it in. It is also best practice to notify the sponsor or general partner to expect your funds and ask for a confirmation of receipt. It's your money and the sponsor should have no problem with this.
STEP 5: FIST PUMP & CELEBRATE!
Hey-oh! Whew! You've just invested in a sweet deal that fits your goals - #WINNING. Now you're ready to kick back and receive that mailbox money. It's your chance to be a passive investor.
The next time you hear from the sponsor should be once they've closed on the property unless a delay occurs with closing (not uncommon). Once closed, you should receive monthly or quarterly communications and reports about the performance of the asset, the cash flow distributions according to the schedule outlined in the investment summary and an annual K-1 for your tax returns. A K-1 is a document that you receive from a business where you have ownership. Get used to these... 😉
THAT'S A WRAP
I told you this would be no-fuss. Hopefully I delivered. Let me know if you have any questions, always happy to answer! If you'd like to see an example of an investment summary, CLICK HERE.
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