Syndication without "a" syndicate?

[Mike Landry]

I would like to deploy some money into Multi family 10 to 50 units in the next couple of years.  From what I read it seems to fall into 2 categories.  

1.  Either you have a lot of money and buy one on your own.  

Or

2. You put your money in a syndication, where the "syndicate" benefits substantially from your capital (rightfully so, I'm not disagreeing with the value they can have).  

However I am looking for something in between and curious if anyone out there does this. 3 to 4 partners (that are already involved and experienced in REI) each contributing $50,000 towards a multifamily unit. Everyone taking part in the decisions, equity, and cashflow on an equal basis.

I'd like to prepare myself for when/if the small multifamily market in the Houston area corrects and be ready to buy a deal if I come across a good one.  Iv'e been successful with direct marketing SFR's and would like to try a multi-family campaign in the Conroe, Spring, Willis, north Houston areas.  I like the idea of diversifying away from SFR's.  I'm not really interested in selling most of my SFR's with low interest rates to go all in on a small multi.  I'd rather team up and leverage a few peoples experience and $ along with mine to break into the multi side.  

Most local investors I talk to want to just wait and 1031 one (long) day down the road, don't have the capital, or are trying to syndicate themselves.

Is a small partnership like this too risky?  Is anyone doing something like this?

[Amy Wan]

A number of misunderstandings in this thread. 1) Structuring something at a partnership or TIC does not mean its not a security. The SEC came out a couple decades ago and declares that TICs are a security, and much of that entire industry blew up (see Triple Net Leasing, LLC, SEC No-Action Letter, 2000 SEC No-Act. LEXIS 824 (Aug. 23, 2000). 2) Loans or "notes" does not mean its not a security (and also has added complications because then who has the first lien?). A "note" is actually one of the first terms mentioned in the SEC laws as being a security. 3) Just because its friends and family doesnt mean its not a security. Actually, unless you're doing a 506c or public offering that allows for general solicitation, by default, you can ONLY solicit from family and friends. 4) Everyone always thinks that accepting $ from family/friends means fewer issues. I disagree--it can mean more. Emotions and relationships suddenly come into play. I just raised a small round from friends and family, and you can bet they signed the whole gamut of legal documents. Because down the line, if they complain about something, all those documents protect YOU the issuer, and you can point to the paper that disclosed EVERYTHING.

Like @Jeff Greenberg said, structure does not dictate whether or not something is a security. It's all about control and who is actively managing the project. If they're not actively managing and contributing something, then they're likely passive investors.

The reason the SEC cares is because their governmental mandate is to promote capital formation and protect investors. Too many people get swindled and lose their money in "investment" opportunities, hence their regulation of financial relationships between folks.

If you want to do a syndication for the first time to "learn" I highly recommend partnering up with a mentor with a lot of experience. From what I've seen clients do, the failure rate is much lower.

One last thing--I dont know where people get this advice, but everyone always seems to be running around thinking "partnership" (whether LLP, GP/LP, etc.) is the "best" structure for these types of deals. There is no "best" structure for everyone--there is only a "best" structure for your and what your intended goals are. There are a lot of people in partnership who, quite frankly, shouldn't be, and they only find out too late when things go sideways.