Should I start a syndication?

Question

Hello BP,

I have recently started my first house hack in a triplex in central Kentucky. Cold called roughly 85 landlords in my surrounding area to find my own off market deal where I could live for free to start off my real estate investing career. After sharing my small success with friends, I was approached by one with 200k that wants me to use for an apartment building. However, I have no experience with syndication. He wants to stretch his dollar the maximum amount by getting the largest loan he can with 150k and using 50k for renovations, then hold it until it would be time to refinance or sell, depending on interest rates and the market at that time. (not exact numbers, but that mindset)

My question is, how should I approach this opportunity?

Options:

-Should I attempt my first syndication by creating an LLC, creating a contract where I will have part ownership without any of my own money down, and find an apartment building to renovate and hire someone to manage? (currently reading "Complete Guide to Buying and Selling Apartment Building")

-Should I sway his mindset to instead buy a 2-4 unit (or group of SFH's) and use the BRRRR method?

I am not sure how risky it is to attempt my own syndication without a mentor and simply with knowledge from a handful of books and google.

Thank you in advance!

John Corey · Answer

Tyler,

You said, "He just wants to front the money and let me ... without any of my own money in the deal. Essentially he just wants to be passive."
There is a legal test to see if what someone is doing falls under the definition of a security. A few lawyers have explained it. From memory and I am not lawyer, what the cash investor wants forces the deal so your business would be offering a security.

Investing expecting a profit

Someone else running everything

The two points above are the issue from what I see.

If you set this up as a simple loan where you are liable to pay it back even when the project fails, that might, just might push things back onto the right side of the line. Or, the cash investor needs to take part in the management. BTW, that does not mean 'wink, wink, nudge, nudge' tell the judge I was active. They would need to do things which can be documented so years later there is proof.

Message me if you need names of lawyers who handle security offerings. They can tell you, likely at no charge, what you need to do to stay outside of the securities requirements. All of the names I have are folks who post here on BP. Some even have recordings you can listen to.

Taylor L. · Answer

Syndications require pretty hefty legal paperwork that can run up to $20k. Any deal with $200k down is going to be too small. You'll need to find another way to do this deal, so you're not selling a security. Syndication is required when you're bringing on investors who earn a passive return, the requirement isn't based on whether it's apartments or 2-4 units.

Would he be interested in having an active part in managing the investment? If so, then you could go into a partnership, as partnerships require GPs to have an active role in the company, and not act as passive investors.

As always, I'm not a lawyer.

Amy Wan · Answer

@Tyler Kimbriel it's not about what you call it (LLC or partnership)--its about what it actually is, ie, an investment from passive or active investors. That tells you whether securities laws apply or not. When you have 2+ passive investors, you're looking at a syndication (or securities offering).

It's not as expensive as one previous commentator posted. Fees start at 7500.

Tyler Kimbriel · Answer

Also I have a couple other friends that want to throw their money in as well. Would we just classify all of us and general partners under an LLC or is there a better way to structure this?

Tyler Kimbriel · Answer

Thank you all for the help. @Bjorik Mutize @Michael Bishop @Taylor L.

Alright so sounds like the best route would be to just call ourselves partners in a purchase. He just wants to front the money and let me find, buy, renovate, and manage a property without any of my own money in the deal. Essentially he just wants to be passive.

So is the proper route to create an LLC between him and I as partners then have a lawyer draw up a contract outlining the percentage of ownership I get by doing all of the work? (after speaking to my CPA)

Bjorik Mutize · Answer

You could learn how to structure an equity deal for small partnership opportunities then build and develop a track record to go larger. Grow with your investor/other soon to be investors.

Michael Bishop · Answer

@Taylor L. said it perfectly. That size deal will be too small to support a the cost of setting up a syndication. One option is to do a JV partnership, with your friend having a defined role.

Going smaller is not a bad idea either. He won't have to tie up ALL of his $200K, you can build experience and snowball that (start small, go big), and he can grow with you. Whichever way you decide, I would suggest straying away from syndication.

Should I start a syndication?

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