How To Syndicate A Real Estate Deal As A Busy Professional

A new Passive Investors Circle member recently asked, “Jeff, how can I purchase an apartment building and bring in others to invest?”

After asking him a few questions about his background, I learned:

• he was a pulmonologist in the Midwest
• has been practicing for 16 years
• was married with three kids
• only debt – home mortgage
• he was searching for passive income to replace his expenses
• wants to cut back to 2-3 days a week in five years or less

He also informed me that he had $3 million in a 401k (stock market) and was a part owner in two medical office buildings.

He thought that in order to invest in real estate, you had to be actively involved.

When I first started, I also thought that there was only one way to go: Save up money until I had enough to do a deal on my own or bring in outside investors with me.

Luckily I learned about real estate syndication deals at a meeting in Dallas, TX.

My eyes were opened to the possibilities to grow our passive cash flow while sticking to what I knew best, treating patients. 

Regarding real estate syndications, there’s two main ways you can become involved: as an active or passive investor

At the time I first began real estate investing, I chose the passive role. It’s important to write down your goals for an exit strategy as they will help guide you through the many choices that come up.

For instance, we wanted to spend more time with our boys and I didn’t want to work extra hours or weekends (who does?). 

For these reasons, I chose NOT to be a landlord and go the passive route.

But I do talk with quite a few doctors that want to get actively involved in the syndication process. 

Whether you want to invest passively or actively, I feel that it’s a good idea to learn the process of what goes into syndicating a deal so you’ll be better informed if you decide to invest. 

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The deal sponsor finance deals with two forms of capital:

• debt
• equity

If you decide to become a real estate syndicate yourself, you’ll need to know that banks will not provide 100% of the money to finance, (debt) so you’ll have to find outside investors to make up the difference (equity participation).

Syndication Types

There are different types of real estate syndications that focus on:

• multifamily
• self storage
• mobile home parks
• land development
• hotels
• student housing
• warehouses

Most of the syndications I personally invest in and recommend to members of the Passive Investors Circle are value-add multifamily deals.

An example of this would be investing in an apartment complex whose units haven’t been updated in 12-15 years. These kitchens are outdated, counter tops are old, carpets are worn and new landscaping needs to be put in.

By making improvements, we can increase the rents, which increases the income of the property and thus, the overall value.

How A Syndication Deal Is Structured

The majority of syndication deals follow a similar structure but there are some differences. Here’s the basic structure:

#1 Sponsor identifies an asset and places under a contract.

#2 A Limited Liability Company (LLC) or Limited Partnership (legal entity) is formed

#3 The private placement memorandum (PPM) is created outlining the deal’s specifics. 

#4 General partner (GP) finds and secures the deal’s financing.

#5 GP begins the process of raising outside capital from investors via soft reserves.

#6 The property closes and GP begins either managing themselves or outsourcing.

#7 Cash flow is distributed to the limited partners (passive investor) based upon the agreement.

#8 Exit strategy is carried out. Typically this involves selling the property after the original hold period is completed. Limited partners receive a split of the profit based upon the initial agreement (ex. 70/30, 80/20 split).

What Kind Of Profit Is Available In Syndications?

Profit in real estate, regardless of a syndication or not, come from:

• rental income
• appreciation

When the property’s operating costs are less than the total rental income collected then a profit is generated.  

This is called the net operating income (NOI) and is the cash flow distributed to the limited partners via distributions.

Related article: 4 Ways Passive Investors Can Calculate ROI In Real Estate

After a property is sold in a syndication, this generates another form of profit.

Whether you syndicate a deal yourself or not, know that developers typically purchase an asset that they feel can be improved and sold for more than the purchase price plus improvement costs. 

How To Get Paid In Syndications

Depending on the role you play (GP or LP), there are various ways the parties involved get paid.

Let’s first discuss if you decide to become the deal’s sponsor.

Sponsor

If you plan on becoming the project’s sponsor, expect a tremendous amount of responsibility to be placed on you.

But for this work you’ll be able to be compensated for tasks such as:

• identifying properties to evaluate
• due diligence
• structuring the legal agreement

Also, as an incentive for performing to the deal’s projections, sponsors also receive a share of the profit once it sells. 

#1 Acquisition Fee

Finding a multifamily investment deal to syndicate is much tougher than it sounds. Our group typically will underwrite (evaluate) 250 deals a year to acquire 4-6.

We’re constantly looking for the “needle in the haystack” deal. 

Typically the sponsor charges a one-time fee on the purchase of a property. These acquisition fees usually range from 1-3% of the purchase price. 

This fee represents the work it took to acquire the deal and put it together. It’s earned at the close of escrow on the acquisition.

They also have other costs involved in finding deals such as:

• air travel
• hotels
• employee salaries

#2 Assets Under Management (AUM) Fee

This fee compensates the sponsor for their management of the property during the course of the investment.

Duties include:

• goal setting and meeting deadlines
• communication facilitation between investors
• taking care of the day to day operating issues 

Typically they charge 1-2% based on the gross revenue collected from the property and its usually paid quarterly.

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Passive Investor

Even though passive investors don’t take on the responsibilities involved in a syndication, they are still compensated for the risk they take providing the equity in a project in two ways:

#1 Preferred Return (Pref)

As previously discussed, a preferred return refers to the ordering in which profits from a real estate project are distributed to the passive investors/limited partners prior to the general partners receiving payment.

The pref is a percentage of the total amount LP’s have invested and is paid from either:

• ongoing cash flow or
• accumulated until the project has enough cash to make the payment

For example, if the preferred return is 6% and a passive investor has $100,000 in the project, they’ll receive $6,000 per year until they receive their initial investment back in full.

#2 Profit Share

The amount of profit share a limited partner receives after a deal sells is paid in proportion to how much they originally put into the deal.

Example: If you’ve planned to invest $100,000 in a deal this year with a 7% pref, you could potentially make $7,000 each year, as long as the property is generating enough income. 

Once all investors receive their preferred return, the remainder is divided between the GP and LPs. 

This is based on the originally set profit structure. Most are either an 80/20 or 70/30 split. 

In a 70/30 split, if there was $1 million left over in profit after the prefs were paid out, the LPs would receive $700K while the GP would receive $300K.

5 Steps To Syndicate a Real Estate Deal

#1 Research

Bottom Line

Whether you plan on syndicating a deal yourself or not, it’s a good idea to know the process involved. 

You’d be amazed at the opportunities that open up once you begin syndicating your own deals. 

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