Real Estate Syndications - How & Why
Real Estate Syndication: A SIMPLE Guide
~ Important to Note - Can not 1031 Capital Gains when property sales (unless all partners 1031 into next project)
We took an hour at the East Austin Coffee in August to discuss Real Estate Syndications. Special SHOUTOUT to Voltek and Lee Snedaker for sponsoring the coffee! Some notes from our conversation
Like Crowdsourcing to Buy Buildings
Accredited Investor
Income Criteria: The individual must have an annual income of at least $200,000 (or $300,000 combined income with a spouse) for the past two years, with a reasonable expectation of maintaining that level of income in the current year.
Net Worth Criteria: The individual's net worth, either alone or with a spouse, must exceed $1 million, excluding the value of their primary residence. This net worth can include assets like investments, real estate, and other valuable holdings.
Professional Experience: In some cases, individuals with certain professional credentials, like Series 7, Series 65, or Series 82 licenses, are considered accredited investors due to their expertise in financial matters.
Entity Criteria: Certain entities, such as corporations, partnerships, and trusts with at least $5 million in assets, can also be considered accredited investors.
Some allow Non-Accredited Investor
Going to be a GP - General Partner - have a good Attorney write your documents. LP - Limited Partner- Have a good attorney read over docs sent to you from GP.
Do you Due Diligence on the GP. DeLea recommends that you work with GP that puts their own money in the deal also. Warning Story - Things Can Go Wrong - StoryBuilt
Promote (Profit Sharing): Once the preferred return is satisfied, the "promote" comes into play. The promote is an additional share of profits that the GP receives beyond the preferred return. It's designed to incentivize the GP to achieve higher returns for the investors by allowing them to earn a larger portion of the profits once a certain profit threshold is reached.
NOTE - Negative to Synidcation = “Cash Call”. When the project income is not meeting expenses or more money is needed for Loan - GP can do a Cash Call. LP have to put in more cash.
Podcast recommended by Coffee Attendee - The Real Estate Guys - here is an episode
Example Structure by an Attendee - 60% to GP , 40% to LP (investors) with a 9% Preferred Return to LPs
Other suggestions on where to put money to make money:
Money Market Acct - some paying 5%-5.5% August 2023
CD
Bonds
Dividend Stock
Index Funds
Join us at our next East Austin Coffee? Get on the LIST
A SIMPLE Guide to Syndication
Why Buy Real Estate?
Real Estate is hard tangible asset and it’s generally stable and less volatile. There will always be some value in the land and the building itself and you can use leverage or debt to purchase it.
Example Commercial Real Estate Purchase
if you purchase a property and borrow 75% of the property’s cost, and the property value increases 25% in 1 year, you’ve essentially doubled your money.
Purchase Price of Warehouse: $1,000,000
Amount Borrowed (75% of Purchase Price): $750,000
Property Value Increase: 25% in 1 year
Property Value After Increase: $1,000,000 + ($1,000,000 * 0.25) = $1,250,000
Returns Calculations:
Initial Investment (Equity) $1,000,000 - $750,000 = $250,000
Final Equity Value : $1,250,000 - $750,000 = $500,000
Profit: Final Equity Value - Initial Investment = $500,000 - $250,000 = $250,000
Return on Investment (ROI): Profit / Initial Investment = $250,000 / $250,000 = 1 (or 100%)
Why Real Estate Syndication?
- Benefits of real estate investing for busy professionals.
- Tangible asset, stability, leverage, and wealth growth.
- Long-term appreciation, forced appreciation, and inflation hedge.
- Tax advantages and skill development.
Understanding Syndication: A Passive Investment Approach
- Definition of syndication: Group investment in real estate.
- Passive investor's role as a limited partner.
- Sponsor's role as operator/general partner.
- Fully passive nature of syndication.
Benefits of Real Estate Syndication
- Complete passivity for busy professionals.
- Geographic and asset class diversification.
- Lower investment thresholds compared to property ownership.
- Time savings through expert management.
Risks of Real Estate Syndication
- Dependence on sponsor's execution of business plan.
- Limited control as a passive investor.
- Lack of liquidity and extended investment horizon.
- Risk of capital loss.
Vetting Partners and Sponsors
- Importance of communication and interaction.
- Assessing sponsor's experience and track record.
- Co-investment and character evaluation.
- Transparency and handling challenges.
Identifying Red Flags in Operators
- Experience, effective communication, and consistency.
- High fees or fee inconsistencies.
- Thorough review of subscription and operating agreements.
Understanding Syndication Fee Structures
- Asset management, acquisition, disposition, and construction fees.
- Ranges and averages for different fee types.
Evaluating Investment Opportunities
- Fundamentals: property type, location, growth prospects.
- Sponsor's value-add strategy and operational improvements.
- Leverage and interest rate assessment.
- Evaluation of return metrics: IRR, cash-on-cash return, equity multiple.
Key Syndication Terminology
- Internal Rate of Return (IRR): Time-adjusted total returns.
- Cash-on-Cash Return: Annualized return on initial investment.
- Equity Multiple: Total distributions divided by initial investment.
- Equity Split: Distribution ratio between sponsor and passive investors.
- Preferred Return: Investor's claim on profits before sponsor.
Conclusion: Empowering Informed Syndication Decisions
- Real estate syndication benefits for busy professionals.
- Proper vetting and due diligence for risk mitigation.
- Understanding key syndication terminology and metrics.
- Making informed investment decisions to achieve financial goals.