By Chris Pauling
My wife Yeimy and I were a bit overwhelmed – and a little confused – when we first considered investing in a real estate syndication. And the two of us have a lot of real estate transaction and investing experience. As you know, we have flipped a ton of houses; we have bought houses at foreclosure auctions, direct from owners and through real estate agents. We had also dabbled in land development, construction of new homes and owing small commercial office buildings.
But when we decided to invest passively with other people in their deals located in other states, we had a lot of concerns, as I’m sure you can imagine.
One afternoon Yeimy and I visited a local winery at a tasting room close to her office. It had been a busy day for both of us, and we were finally able to connect and go over the details of an upcoming investment opportunity. Other deals had come our way but we had not decided to invest yet. This one was a bit different from the typical apartment building renovation and had piqued our interest as it was new construction from the ground up.
We had attended the online presentation and downloaded all the details provided by the General Partners and it all made sense. Yeimy looked at me and her question was, “What do you think, are their projections realistic?”
Now, I’m a detail guy and love to dive into a spreadsheet and analyze an investment. Yet, at the same time, I want to look at the big picture and do a gut check analysis on the whole project. I had spent some time reviewing the data for this one and felt good about it. “Yes,” I replied, “I think they are on to something here. I like this project.”
“Then let’s do it!” my wife said.
We signed the Subscription Agreement then and there and toasted our decision with a full pour of Longship Cellars Starship Cabernet!
It proved to be a wise decision and that investment is still paying off handsomely. Here are the steps we went through to be prepared to make such an investment.
Step One – Review Your Real Estate Investing Goals
If you haven’t done so yet, now is the time to hone in on your true investing goals. There are so many ways to invest your money. As you know, Yeimy and I think investing in Apartment Buildings is one of the safest and most lucrative investments anyone can make. Yet different opportunities offer different types of returns. Make sure you know what you’re looking for in an investment so you can determine if a particular opportunity aligns with your goals.
Investing in single family or small multifamily buildings by yourself can be lucrative, as long as you have the time to invest in managing and maintaining those properties.
If you are looking for a hands-off approach, however, investing alongside others in a real estate syndication is probably right for you.
Step Two – Find Opportunities for Investing
The rules that govern this type of investing are in place for good reasons and are quite strict. Some investment opportunities are only available to those who personally know the sponsors of the project. These are “friends and family” deals, where the investors all have some relationship with the people who are running the investment. One of the limitations is that they cannot be advertised publicly.
Other transactions – typically larger projects – can be advertised, yet most sponsors of those deals don’t advertise in ways that we normally think of. They might post a few notices on social media channels or in some chat rooms but they aren’t taking out radio or TV ads, there are no print ads or direct mail campaigns. For the most part, both types of investments are made available to investors in the same manner: with an email notification.
So how do you get those emails? By signing up for the Special Investor Group, you will receive email notifications of upcoming investment opportunities our group has for you, along with some that other sponsors we respect and have confidence in are offering. If you haven’t signed up, we encourage you to do so today. Of course, you can unsubscribe at any time if you choose to.
Step Three – Review the Opportunity
Each investment opportunity will have its own characteristics. The Sponsorship Team will prepare information for investors to review and, typically, they will conduct an online presentation which you can attend. There you will get a feel for the project and the sponsors, and you will have the chance to ask questions. Also, other interested investors like you may ask questions you hadn’t thought about.
The sponsors may have sent you some materials already or they will send you a recording of the webinar with all the numbers, facts and figures, so you can review the information yourself. When reviewing an investment opportunity, we look at three main areas:
- The Investment Itself – the building and business plan.
- The location – what region, city and neighborhood is it in?
- The Sponsor Team – the people involved.
Let’s look at each area.
We like to learn first about the sponsors. What do we know about them and what can we learn? How much experience do they have investing in real estate? What is their track record? We want to have confidence that the people who will be managing the property have the chops to execute the business plan effectively.
Next, we look at the area. What do we know about this region? Does it have the characteristics that support a real estate investment even in slow economic times? What are the population and job growth trends for the metro where it is located? What about the neighborhood where the apartment building itself is located? What is the transportation infrastructure like? How about the crime rates? Is there any new development happening?
The sponsors will share their research and tell us why they believe in the region and the neighborhood. We not only review what they are telling us, but also what might be left out. If there are some metrics missing, maybe crime rates for example, we will look that up ourselves.
Finally, we review the specific property itself and the business plan the sponsors are presenting. Does it make sense? Are the projections of rent growth, expenses, and the cost of any capital improvements reasonable? What are the projected returns? What is the exit strategy? How conservative is the analysis?
If all of this makes sense, this is an opportunity to consider investing in.
Step Four – Make a Soft Commitment
Real estate investments are offered on a first come first served basis. It is surprising how quickly an investment can become “fully subscribed,” meaning all the investment slots have been committed to by investors.
That’s why it’s so important to educate yourself and become familiar with the key metrics and the jargon used in this space. You want to be prepared to decide to reserve your spot in time before it fills up.
Once you make a soft commitment, your place in line is reserved and that gives you an opportunity to review all the information again. If you decide it’s not for you, no problem. You can notify the sponsor and let them know you are dropping your reservation. Unfortunately, the opposite is not true. If you wait to make a soft commitment to allow yourself time to review the information, then eventually decide you want to invest, there may not be room left for you.
Step Five – Review the Private Placement Memorandum
Group investments like this are governed by certain rules. A Private Placement Memorandum (PPM) is the document that spells out all the fine details controlling how the investment works, rights and responsibilities and more. These are lengthy documents filled with legalese. It is important that you review it and ask questions to make sure you understand everything. Some investors have their attorney review the documents as well, though most of the time that isn’t necessary.
You will also review the Subscription and the Operating Agreements. These documents detail the amount of your investment and what name you want the investment under (your personal name, your trust, or maybe an entity you might want to use). The Operating Agreement governs the entity that will actually own the building.
You also can specify how you would like to receive your cashflow distributions – by direct deposit or by receiving a check.
Step Six – Fund Your Investment
Once you have completed signing the PPM and other documents, you will send your money to the bank. The General Partners will have chosen a bank to handle all the banking needs of the property. Depending upon the timing and how soon the closing will take place, you can send a check or, more conveniently, a wire to fund your investments.
If you are sending a wire, we strongly recommend that you get on the phone with the sponsors and confirm the wire instructions before you send in your money. You want them to know you are sending it and you should confirm you have the correct routing and account numbers for this investment.
Congratulations!
Now it’s time for a celebration!
You have just made an important decision and have invested in a large commercial property, where others will do all the heavy lifting and execute the business plan for you. You will reap the benefits of owning real estate without the headaches that come along with being a landlord.
As an investor, you will receive regular updates, usually monthly or quarterly, from the General Partners about the property. These updates will share the details of how the closing and transfer of ownership went and each step along the way to executing the business plan for the property.
Once the property reaches a certain point, you will start receiving regular checks with your share of the cash flow distributions. Each property is different: where some investments provide more cashflow during the hold period, others might produce little monthly cash flow and, instead, provide a big payoff when the property is sold.
Annually, you will receive a K1 Partner’s Share of Income, Deductions etc., a tax document you will need to provide your tax preparer.
Well done! Now it’s time to toast your decision with your favorite glass of wine.
Cheers!
