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10 Steps to Invest in a Real Estate Syndication (Step 10: Repeat and Grow Your Capital)

Franklin Roosevelt was once quoted as saying:

“Do something. If it works, do more of it”

Step 10 is perhaps the easiest step of all as it simply involves repeating steps 1-9 and continuing to increase your wealth through various investments in real estate syndications.

So, let’s recap:

Step 1: Define your goals – Start by identifying what it is you really want – life goals and financial goals. It will help you draw your roadmap and dictate your investing decisions.

Step 2: Research investment options – Do you research, get educated and meet as many syndicators as you can to see who might be the best fit for you.

Step 3: Evaluate potential opportunities – Sign up for syndicator’s mailing lists so you receive new deal alerts.

Step 4: Review the project specs – Attend the webinar and ask questions. Get to know the team, market and deal a little better.

Step 5: Sign up for the investor portal – Use this as your home base to subscribe to the deal and keep track of your documents and investments.

Step 6: Review and Sign the PPM – Read through the subscription docs carefully or get an attorney to review them for you.

Step 7: Wire the funds – print the instructions and bring them to the bank with you and verify your account numbers before submitting!

Step 8: Let your money work for you – sit back and enjoy your distributions while the sponsorship team works the business plan!

Step 9: Reinvest funds via a 1031 – Defer capital gains taxes by investing directly into another like-kind investment.

Step 10: Repeat and grow your capital – Enjoy the benefits of compounding as you continue to grow your wealth through real estate.

It’s that simple! Now, of course, you can make small adjustments along the way by investing in different asset classes, in various parts of the country (or world), etc. But one fact has consistently remained true: 90% of the world’s millionaires become so through owning real estate.

So get started on your journey to financial freedom!

10 Steps to Invest in a Real Estate Syndication (Step 9: Reinvest Funds)

A typical real estate syndication may last 3-5 years or longer but once the return hurdles have been met and/or the property increases significantly in value, the sponsor team may opt to sell the property.

This is an important step because commercial property values are based on the amount of income generated. Improvements made to the property along with more efficient operations, and market appreciation, lead to an increase in the net operating income (NOI). And the greater the NOI, the greater the value of the asset, thus leading to sizable profits upon the sale.

When the property goes full cycle, it’s an exciting time! The investors are returned their original capital plus equity from the sale and everyone is happy.

However, once the asset is sold, capital gains taxes (and often depreciation recapture) are owed. At this point, investors may opt to defer their taxes through the use of a 1031 Exchange.

A 1031 Exchange refers to a section in the Internal Revenue Code that allows you to sell one investment property, and, within a set amount of time, swap that asset for another like-kind investment property.

Doing so means that, instead of having the profits paid out directly to you, you roll them into the next investment. As such, you don’t owe any capital gains when the first property is sold.

Here are three important things to know about 1031 Exchanges:

Both assets in an exchange, the one sold and the new property to be acquired, must be like-kind investment properties of similar value
Investors cannot receive the funds directly. A qualified intermediary is needed to facilitate the exchange
Investors have 45 days after the sale of the asset to identify potential replacement properties

Note that the properties — both the one you relinquish and the one you receive — must be business or investment properties. So you couldn’t take your the returns from an investment property and use it to purchase a personal residence

Only some real estate syndications offer a 1031 exchange as an option. Every sponsor is different and approaches 1031 exchanges differently so if this is something that you are interested in, be sure to ask the sponsor about it directly.

10 Steps to Invest in a Real Estate Syndication (Step 8: Let Your Money Work For You)

The hard part is over! Now that you have signed the PPM and wired your funds, this is where the magic begins and your money begins to work for you.

Here is what you can expect as a limited partner (LP):

1. Regular updates and newsletters

Depending on the team, you will receive monthly or quarterly communications. The sponsorship team may share financials, occupancy updates, photos of renovations and details about how they are adding value to the property. Sometimes you’ll receive updates about on-site events, such as food trucks, ice cream socials or pool parties which are a great way to show appreciation to the tenants.

2. Distributions will start

Depending on the deal, you will typically start to receive your first distributions within a few months or up to a year. Be sure to ask prior to investing when you might expect distribution payments. If it’s a deeper value-add business plan, payment may not start until much later due to the property having higher economic vacancies for renovations. Returns for the first year are often lower than subsequent years; however, if your deal has a cumulative preferred return, you will see those returns made up once the property is stabilized.

3. Refinance Returns

Sometimes, you may experience a refinance on the around years 2-3 once the asset is fully stabilized. When this happens, some or all of your original investment is returned back to you; The coolest part is for some deals, you may retain equity in perpetuity and continue to cash flow even when your money isn’t in the property anymore. And once the property sells, you still get a share of the upside from the profits. Not all deals are like this, and some are structured differently so be sure to read the PPM and ask questions. This should all be spelled out in advance.

10 Steps to Invest in a Real Estate Syndication (Step 7: Wire The Funds)

Once you have committed to the deal and signed the PPM, the last step is to wire the funds. Typically, the syndication team will provide a document with the wiring instructions as part of the subscription docs and they may also upload it as a separate sheet into the investor portal.

Be sure to fill this form out carefully! Make sure you have supplied the correct and accurate information to ensure that the operator receives it in a timely manner. It’s a good idea to print the instruction sheet and take it with you to the bank so you have it handy for the wire transfer.

Once the wire is completed, check in with the sponsor team directly to make sure it has been received. Some banks will wire the funds immediately while others may batch their wires and send them all out at the end of the day. You should see the investment reflected into your portal dashboard within a few hours or by the next day. If your wire has not been received within 24 hours, you should definitely contact your bank to get the status and ensure that the wire has not been delayed somewhere in their system.

This step is admittedly the most nerve-wracking and also, very exciting! Once the money has successfully made it to its destination, be sure to savor this moment and celebrate.

You have made a huge step towards growing your wealth! Congratulations!

10 Steps to Invest in a Real Estate Syndication (Step 6: Review and Sign the PPM)

The Private Placement Memorandum is an offering document, sometimes called a prospectus, offering circular, or PPM. The majority of early startups, real estate syndications, and emerging growth companies commonly raise money through what are called private placements.

A placement is simply a sale of equity ownership (or debt) in the company to private investors that become owners (or lenders) in the company. The reason they are classified as private is because the offer and sale of equity (a security) does not involve any public filing or registration of the security with the US Securities & Exchange Commission (“SEC”) and falls under an exemption to the registration requirement.

Put simply, private placements are not available on the open market so not everyone has access to these opportunities. They are private transactions.

The PPM is a legal document prepared by an attorney and provided to prospective investors and its purpose is to 𝐟𝐮𝐥𝐥𝐲 𝐢𝐧𝐟𝐨𝐫𝐦 𝐭𝐡𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐚𝐛𝐨𝐮𝐭 𝐚𝐥𝐥 𝐚𝐬𝐩𝐞𝐜𝐭𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬, 𝐜𝐨𝐦𝐩𝐚𝐧𝐲, 𝐢𝐧𝐝𝐮𝐬𝐭𝐫𝐲, 𝐦𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭, 𝐩𝐫𝐢𝐨𝐫 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞, 𝐚𝐧𝐝 𝐟𝐮𝐭𝐮𝐫𝐞 𝐩𝐫𝐨𝐬𝐩𝐞𝐜𝐭𝐬, 𝐚𝐬 𝐰𝐞𝐥𝐥 𝐚𝐬 𝐩𝐫𝐨𝐯𝐢𝐝𝐢𝐧𝐠 𝐜𝐞𝐫𝐭𝐚𝐢𝐧 𝐫𝐢𝐬𝐤 𝐟𝐚𝐜𝐭𝐨𝐫𝐬 𝐢𝐧𝐯𝐨𝐥𝐯𝐞𝐝 𝐰𝐢𝐭𝐡 𝐢𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠,

The SEC and state regulators want to be sure that you disclose what is required and don’t over-hype your company. The anti-fraud statutes state that you need to fully disclose all material information so that you are not defrauding or misleading investors.

The PPM is a very long legal document. It is recommended that you thoroughly review it with your attorney. If you don’t have one, try to review it completely to the best of your ability so that you fully know what you are getting into.

When the PPM is signed, you have officially committed to the investment. However, you are not 100% in yet until you complete the final step, wiring the funds.

10 Steps to Invest in a Real Estate Syndication (Step 5: Subscribe To The Deal)

Once you have reviewed all the specifics of the deal, attended the webinar and received answers to your questions, it’s decision time. Are you going to move forward?

Only you can decide if a particular project aligns with your individual investing goals, but in the event that it does and you’d like to subscribe to the deal, the next step is the paperwork.

First, you will need to sign up for the investor portal to review the documents and sign the Private Placement Memorandum (PPM). Once you have committed to a deal, the sponsorship team will send out an email with instructions on how to create a portal account so you can access the PPM.

Many syndicators use a secure online dashboard that keeps track of your investments and documents. It’s an easy way to communicate with the general partners, be kept up to date on the status of the property and manage your transactions and distributions as well.

The portal also houses many of your important documents, such as the OM, PPM, bank wiring instructions, K1 or other tax documents.

You can also set up whether you would like to receive your distributions via direct deposit or a check mailed to you. In the case of direct deposit, you can use the portal to directly link your bank account so your distributions get automatically deposited.

Transparency is important with any investment and this dashboard is a great way to see your money in action from the start to end of the investment.

10 Steps to Invest in a Real Estate Syndication (Step 4: Review Project Specs)

Once you have identified a project in which you are interested in investing, it’s time to do a deep dive on the deal specs.

Most syndicators/operators will hold a webinar shortly after a deal is issued. This could be live or pre-recorded. During live calls, they will usually have a Q&A where you can ask direct questions and listen to questions from other investors as well. If the webinar is recorded, you can draft your own list of questions and then follow up with the sponsorship team after the presentation.

If you are new to syndications, you should definitely watch these investor webinars for educational purposes, even if you don’t plan on investing.

During the webinar, you will receive a lot of information about the project including:

The Team – You will get a chance to meet the general partners (GPs) and the sponsorship team, learn about their backgrounds and track record and listen to the details of the deal directly from them.

The Market – The general partners (GPs) will detail their market analysis, and explain what they love about the area including demographics, major employers etc and why they want to invest there.

The Business Plan – The GPs will outline the business strategy for the property and how they plan to monetize the asset so their investors will make money.

Some common strategies include:

Value-add: Renovating existing units and improving operational inefficiencies
Loss to lease: Bringing under-market rents up to current market prices
Additional income streams: Adding services and amenities such as covered parking, valet trash and storage rentals to increase revenue
Buy and hold: Purchasing the property with the intent to own for an indefinite period of time for ongoing cash flow

The Financials – The team will provide an overview of the information outlined in the Private Placement Memorandum (PPM) including the pro forma financials, market comps, debt structure and cash flow assumptions along with the project timeline.

Once you’ve had a chance to review the deal specs with the operating team and ask any questions, you will have a clearer understanding if this particular project will be a good fit for your personal investing goals.

Be sure to check out the additional blogs in this series to see all 10 Steps to Invest in a Real Estate Syndication.

10 Steps to Invest in a Real Estate Syndication (Step 3: Evaluate Potential Opportunities)

[𝐍𝐄𝐖 𝐃𝐄𝐀𝐋 𝐀𝐋𝐄𝐑𝐓]

After you sign up for an investor club list, when a deal is under contract and open to limited partners, you will likely get an email titled [NEW DEAL ALERT].

Most operators will schedule a follow up webinar or Q&A session so this is your first opportunity to review a general overview of the deal.

Here are some factors to consider:

𝙇𝙤𝙤𝙠 𝙖𝙩 𝙩𝙝𝙚 𝙡𝙤𝙘𝙖𝙩𝙞𝙤𝙣

– Is it an area that has great population growth and job/economic diversity?

– What kind of neighborhood is it in?

– Is it close to any employers?

– Is it convenient to shopping, grocery, restaurants, entertainment, etc?

𝙒𝙝𝙖𝙩 𝙞𝙨 𝙩𝙝𝙚 𝙘𝙤𝙣𝙙𝙞𝙩𝙞𝙤𝙣 𝙤𝙛 𝙩𝙝𝙚 𝙥𝙧𝙤𝙥𝙚𝙧𝙩𝙮?

– Is it a light value add?

– Is it a heavy lift?

– What’s the business plan?

– Are we looking to increase rents? If so, by how much and can the market support the increase?

𝙒𝙝𝙤 𝙖𝙧𝙚 𝙩𝙝𝙚 𝙡𝙚𝙖𝙙 𝙨𝙥𝙤𝙣𝙨𝙤𝙧𝙨 𝙖𝙣𝙙 𝙬𝙝𝙖𝙩 𝙙𝙤 𝙩𝙝𝙚𝙮 𝙡𝙞𝙠𝙚 𝙖𝙗𝙤𝙪𝙩 𝙩𝙝𝙚 𝙙𝙚𝙖𝙡?

– What is the track record of the general partners?

– How many of their previous deals have gone full cycle & did they hit their projections?

– Why made them pursue this particular deal?

𝙒𝙝𝙖𝙩 𝙖𝙧𝙚 𝙩𝙝𝙚 𝙧𝙚𝙩𝙪𝙧𝙣𝙨? 𝙃𝙤𝙬 𝙡𝙤𝙣𝙜 𝙞𝙨 𝙩𝙝𝙚 𝙝𝙤𝙡𝙙 𝙩𝙞𝙢𝙚?

– Is there a preferred return?

– When will distributions start & how often will they be received?

– What is the hold time for the project?

𝙒𝙝𝙖𝙩 𝙖𝙧𝙚 𝙩𝙝𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙧𝙚𝙦𝙪𝙞𝙧𝙚𝙢𝙚𝙣𝙩𝙨?

– Is this deal open for both accredited and non-accredited investors?

– What are the minimum/maximum investment amounts?

– Are there different classes of investors with different return structures?

𝙒𝙝𝙖𝙩 𝙞𝙨 𝙩𝙝𝙚 𝙩𝙞𝙢𝙚𝙡𝙞𝙣𝙚?

– Is there an investor webinar?

– When to sign the PPM?

– Where and when to wire funds?

– When is the closing?

𝙄𝙨 𝙩𝙝𝙚𝙧𝙚 𝙖𝙣 𝙞𝙣𝙫𝙚𝙨𝙩𝙢𝙚𝙣𝙩 𝙨𝙪𝙢𝙢𝙖𝙧𝙮 𝙙𝙚𝙘𝙠 𝙖𝙣𝙙 𝙋𝙋𝙈 𝙖𝙫𝙖𝙞𝙡𝙖𝙗𝙡𝙚 𝙩𝙤 𝙧𝙚𝙫𝙞𝙚𝙬?

If not at that moment, when will it be issued?

These are some of the key things you’ll see on a new deal alert. It’s basically the first communication that goes out that there’s a deal on the horizon. Sometimes in the first email, you will get the opportunity to “soft reserve”. You aren’t committed to the deal at this point, but you are just saving your spot since some deals can fill up in just a few hours.

Be sure to check out the additional blogs in this series to see all 10 Steps to Invest in a Real Estate Syndication.

10 Steps to Invest in a Real Estate Syndication (Step 2: Research Investment Options)

There are a lot of operators out there and everyone does things differently. It’s important to do your research to get a clear picture of each operator as well as their communication style.

Here are some steps you can take to get to know a potential partner:

Sign up for their newsletters and investor lists – This will get you on their mailing lists and you will receive access to their company updates and educational materials.
Check out their content – Many syndicators have their own podcast or are frequent guests on other podcasts. They may also produce regularly scheduled webinars or post educational content via a Youtube channel.
Social media presence – Which platforms are they active on and how do they present themselves?
What are their goals and do they align with yours? – Get to know their WHY. Why are they in this business and what do they hope to accomplish? Make sure their values align with yours.
Ask for references from past or current clients – Talk with others who have passively invested with them to understand their experiences. Did they receive regular updates on their investment? And what was the operators’ communication style.
What is their investor retention rate? – Do their investors participate in multiple deals or are most of their relationships one-and-done investors?. It might seem awkward to ask, but it’s important. If they are legitimate and have experience in the business, you better bet this is a metric they are tracking. Typically, anything over 70% is pretty good.
Check out their track record – Get their resume and portfolio. Have they gone full cycle? What have their returns looked like? Did they meet or surpass their financial projections?
Where do they focus and how do they execute? Where do they invest? Do they focus on one area or do they operate all over the country? Do they have boots on the ground? Are they vertically integrated? Who is on their team?

Lastly, one key question I ask is for them to tell me about a deal that went wrong. You can learn a lot about someone by how they handle the unexpected. When a past deal went sideways, what did they do? Were they able to find creative solutions? Did they put their own money in to protect their limited partners’ capital? And most importantly, how and when did they communicate these challenges to their investors?

Taking the time to properly vet syndicators prior to investing with them will ensure that you have the partner that is most aligned with you and your goals and will save you a lot of angst in the long run.

10 Steps to Invest in a Real Estate Syndication (Step 1: Define Your Goals)

Step 1: Define Your Goals

Investing in a real estate syndication can be both exciting and daunting. Syndication is a great way to build your passive income by partnering with an experienced team

Of course, as with any investment, it’s important to research and gather information to help guide your investing decision.

So, to help you in your journey, we are sharing 10 Steps to Invest in a Real Estate Syndication. We will unveil each step over the next two weeks along with some suggestions on how to get started.

10 Steps to Invest in a Real Estate Syndication

Step 1: Define Your Goals

1. Cash Flow or Equity Upside?

Before you invest in anything, it’s important to clearly define your long term goals. Your life stage is a good starting point. Are you in your 20-30s and plan on working for a while? Or, are you in your 50-60s and closer to retirement? Do you want a higher cash flow for a consistent stream of income? Or would you prefer a higher upside that will potentially multiply 2-3x over 5 years? Sit down with your spouse or partner and think about what you want and the best fit for your current situation

2. Assess your Finances

Take a look at your finances and investment portfolios. Do you have a lot of cash sitting around in a checking or savings account? Are you too heavily invested in one investment vehicle? Would you like to diversify? Do you have a freedom number to achieve your goals? How much income do you need to make to cover your basic living costs? Think about how much you want to invest to start.

3.Are you an accredited or sophisticated investor?

Accredited investors meet one or more of the following criteria: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years OR someone with a net worth of $1,000,000 or more, excluding their primary residence.

4. Do your homework

Start researching different syndication or investment groups. Start by meeting people. Join a Facebook group or investment club for passive investors. Start by looking up at their website and signing up for their lists. Book a call to get to know these individuals.

Ask questions about them and their experience or track record and pay close attention for clues on how they treat their investors.

𝙂𝙤𝙤𝙙 𝙨𝙞𝙜𝙣𝙨:

– They are taking an interest in you, and genuinely trying to help you with your financial goals

– They are open to build a relationship with you

– They are truthful and honest about themselves and their group

– They are not pressuring you to invest in anything

𝙒𝙖𝙧𝙣𝙞𝙣𝙜 𝙨𝙞𝙜𝙣𝙨:

– They don’t have time for you

– They rush the call

– They don’t seem interested in you and your goals

– Their only objective is for you to invest with them