Pooling money for down payment

[Craig Herrman]

Hey BP! As an extremely new investor with no experience looking to get into the game, what experiences do you have with pooling money together for a down payment. I know a couple buddies of mine want to also get started and are thinking about putting money together to purchase our first multi. I know there's a gray area between the LLC route or syndication so what is some things to be aware of and to look out for?

[Jonathan Twombly]

@Craig Herrman Usually a syndication deal is structured using an LLC. A syndication is a deal structure and an LLC is a legal entity.

A syndication is essentially a form of partnership in which limited partners invest money and have no rights to operate the property, which is run by the general partner.  The GP may or may not also be an LP, depending on whether he has funds in he deal.  The GP receives something extra, called a "promoted interest" over and above any funds he has invested, in exchange for him operating the deal.  In most cases, the GP does everything from find the deal to financing it to running it to deciding when to sell.  The LPs have no legal liability for anything beyond their membership interests.  That's why their liability is said to be limited.  

Contrast this with a regular partnership, which may or may not be structured as an LLC legally, in which all partners have the same level of liability. You can structure this pretty much any way you want. You can designate an operating partner and give him a little more equity. Or you can give someone who does not put money into the deal some equity because they found the deal, or signed on the debt, or are going to run it, or whatever.

Usually the kind of deal you are talking about, where some friends get together and buy a property, is the second scenario because they are working together on the deal and most people are not passive investors, though some might be.  

Syndications are usually used when there is one sponsor/GP who does everything and the investors are all purely passive and not looking to do anything more than write a check.  

Hope this helps.  

Jonathan Twombly