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Updated almost 7 years ago on . Most recent reply
To Syndicate or not to syndicate...that is the question?
Hello all,
I am new to BP and new to real estate investing other then having dabbled in it on the small personal level. I have invested in the NNN word, SFR rental market and invested in other larger funds simply to diversify and get a feel of different types of investments and investment styles.
I am interested in hearing from others on this site who have history and experience in putting together an investment structure. I have a market I am looking at investing in and my thoughts were to find smaller 4 plexes and maybe smaller MF's properties ( 10-20 units ) and initially raise some capital with friends and family to invest in these types of properties. Something along the lines of $1mm-$5mm initially to work on proof of concept and start building track record with the hopes of taking that in to a round two of raising capital and then on to a round 3.
What I am really seeking advise on ( besides anything else anyone wants to chime in...as this is all part of the learning process ) is setting up the best and easiest type of structure to start this concept out. The least restrictive as far as regulations and what have you. Again initially this would be funds coming from F&F to start and the initial idea I had was to isolate these investment properties, rehab them, raise the rents and depending on rental income at that point to either return investment and additional profits off the income or refi and pull the cash out OR sell it and find the next investment.
I know this might be a very broad topic but was hoping that with all the knowledge and experience on this site that I could get some good insight and tips to start this process as I know most of you have all been here before.
Thank you in advance for all and any responses and I truly look forward to reading them.
Best,
Gregg
Most Popular Reply
Syndication can be a great avenue to purse if you do not have all the funds yourself to invest in real estate or want to go bigger than your current capacity. For me, syndicating deals has been able to take my real estate business to the next level. It does add pressure because I steward my investors money better than I would my own money. I feel like I have a fiduciary duty to my investors to do the best I possibly can for them.
Structure of Deal
I'd first recommend creating an LLC for your company. These are easy to create and inexpensive. Depending on exactly what you are doing will depend how many you should set up. We have the managed member LLC the a managment LLC and an LLC for each property. Depending on where you invest you could create a series LLC. There isn't much case law on series LLC's yet so this is why we didn't select the series LLC option.
All the deals I've ever syndicated we created a private placement memorandum (PPM) and registered it with the SEC. This type of structure can be costly, but if you are wanting to continue in the syndication business I think it would be good to do this from the beginning. This will show your investors that you are legit and want to build lasting relationships with them. This is not the easiest structure, but I believe it is the best. I've paid anywhere from $15,000 to $35,000 for a PPM and all other filings the lawyer handles.
If you do not want to create a PPM you can create an partnership or LLC for each project with an operating agreement that outlines all the responsibilities of all partners. This is less capital and time intensive and might suit your needs perfectly for your first couple deals.
You mentioned you are going to be dealing with friends and family. I'd still highly recommend that you setup your business as a real business. If the deal ever starts to go bad it could get hairy quickly. Additionally, if your friends and family are non-accredited investors statics have shown non-accredited investors are much more likely to sue than accredited investors. You will want asset protection and create companies/partnerships will provide this.
I would recommend talking with a lawyer that practices law in the area/state you want to invest in. They will be able to ask and answer all your questions and can provide better guidance on how you should proceed.
Syndication can be a great avenue to purse if you do not have all the funds yourself to invest in real estate or want to go bigger than your current capacity. For me, syndicating deals has been able to take my real estate business to the next level. It does add pressure because I steward my investors money better than I would my own money. I feel like I have a fiduciary duty to my investors to do the best I possibly can for them.
Structure of Deal
I'd first recommend creating an LLC for your company. These are easy to create and inexpensive. Depending on exactly what you are doing will depend how many you should set up. We have the managed member LLC the a managment LLC and an LLC for each property. Depending on where you invest you could create a series LLC. There isn't much case law on series LLC's yet so this is why we didn't select the series LLC option.
All the deals I've ever syndicated we created a private placement memorandum (PPM) and registered it with the SEC. This type of structure can be costly, but if you are wanting to continue in the syndication business I think it would be good to do this from the beginning. This will show your investors that you are legit and want to build lasting relationships with them. This is not the easiest structure, but I believe it is the best. I've paid anywhere from $15,000 to $35,000 for a PPM and all other filings the lawyer handles.
If you do not want to create a PPM you can create an partnership or LLC for each project with an operating agreement that outlines all the responsibilities of all partners. This is less capital and time intensive and might suit your needs perfectly for your first couple deals.
You mentioned you are going to be dealing with friends and family. I'd still highly recommend that you setup your business as a real business. If the deal ever starts to go bad it could get hairy quickly. Additionally, if your friends and family are non-accredited investors statics have shown non-accredited investors are much more likely to sue than accredited investors. You will want asset protection and create companies/partnerships will provide this.
I would recommend talking with a lawyer that practices law in the area/state you want to invest in. They will be able to ask and answer all your questions and can provide better guidance on how you should proceed.
Gregg S. 500-800k for the raise is usually a good rule of when to try and do a JV with few people or spend the 10-15k on a ppm.
@Gregg S. I would say shoot for the syndication model from the beginning even if that means that you have to spend a bit more time raising more money in order for it to make financial sense ($15K + for PPM, etc).
From what you say on your post it looks like the investors will be totally passive and expecting a financial return on their investment, it doesn't really matter if they are F&F for the purpose of being in the securities world and therefore regulated by SEC.
@Sam Bates answer was very much on point, I also believe that it also shows that you are serious about your business and looking to build not only a long term investment business but also long term relationships with your investors.
Good luck!
https://www.biggerpockets.com/users/GreggS10
Gregg,
If there’s more than 1 investor putting in $ & they are friends & family I’d go with a 506B exemption.
Make sure the raise & profit is sufficient & supports the cost of having a PPM drafted & filed with the SEC!
506B allows you to utilize 35 Sophisticated & unlimited Accredited investors.
Hope this helps.
To Your Wealth,
Dino