How do you make money from a syndication?

Question

Hi everyone,

I am interested to know the reasons (pros/cons) for syndicating RE deals. I was running the numbers on a typical deal, and the GP usually makes anywhere between 5-10k depending on the Purchase price of 600k-1m. I understand that in these deals, the sponsor is only putting up 5-20% of the equity but how do you build wealth from syndicating? How do you make enough money each year to survive of a few deals which pocket you a few thousand dollars? Does the "real money" come through the sale or refinance? If so, what does the average syndicator make a year through syndicating each year after distributing the pref. return?

Also, if you source out the property management to a third party, besides oversight, what work does a GP do once the building is stabilized?   as in the day to day? Curious to hear everyone's answers who are seasoned syndicators! Thanks.

Brian Burke · Answer

@Yaya Y., If a syndicator is making $10K on a deal there are two problems.  First, the syndicator can't be profitable because business costs in general will soak that up faster than you can say the word syndication.  The second problem is that no investor should want to invest their hard-earned money with someone making $10K.  The sponsor's ultimate insolvency will be a death warrant for their invested capital.

Syndicators are typically compensated in two ways:  fees and promote.  The promote is their split of the profits, I'll get to that later.  As to fees, there are several different potential fees.  Acquisition fees (ranging 1% to 3% of the acquisition price), finance fees (up to 1% of the loan amount for acquisition loans and/or refinance loans), asset management fees (usually around 1% of either gross collected income or the invested equity or the invested equity plus debt--varies from sponsor to sponsor), and disposition fees (1-2% of the sales price when the property sells).

Where you have to be careful is in your quest to "make a lot of money".  You have to set that aside, if you do a good job you'll be well compensated.  Instead, what you have to do is strike a balance.  Too many fees or too high of fees and no one will want to invest in your deal.  Too light on fees and you can't keep the lights on.

Then there is the promote.  Typically you'll have a waterfall with a preferred return and then splits once the preferred return hurdle is met.  So for example, if you have an 8% preferred return (pretty common) 100% of all cash flow (after fees) is distributed to your investors until such time as they have received that 8% return (cumulatively).  This means that if you distribute 4% in year 1, 8% in year 2 and 12% in year 3, 100% of all cash flow went to your investors in all three of those years.  Then, in this same example, if in year 4 you distribute 12%, 8% goes to your investors and the remaining 4% is split according to your waterfall.

For splits, you tend to see 50% to 80% going to the investors.  Many of mine have multiple tiers, so it might be (after pref) 70% until reaching a 12% return, then 60% until reaching a 15% return, then 50% thereafter.

If you want to know how to make a lot of money syndicating deals, it's simple.  Perform for your investors--in fact, knock it out of the park, and you'll do really well.  If you focus on your own income first and your investors second and you'll fall flat.  In fact, probably never do a deal, or maybe just one.

So you want to know how to build wealth by syndicating deals?  You don't.  This is not a wealth building strategy.  It's a business.  Develop a stellar track record, grow your business, achieve scale and, just like any other well-run business, if you do it right, that business will eventually translate to wealth.

Brian Burke · Answer

@Yaya Y. the minimum size of a syndication depends on your situation. Everyone has to start somewhere. My first experience raising capital I took as little as $5K from friends and former co-workers and raised $500K for a flipping fund. But these days my average capital raise is somewhere above $5 million.

Just the process of putting a syndication together costs money, so small deals are difficult because of the cost. Larger ones get better economy of scale but newer syndicators can’t expect to start with big deals. If they can survive the small ones and still get a good return for their investors they’ll earn their wings.

With waterfalls including a preferred return, meaning that the sponsor isn’t sharing in any cash flow (at least for the early years and perhaps not at all during the hold period), the sponsor is only earning fees. So it’s a fee-based business just like any other service business. It’s not going to make you rich or build significant wealth.

But over time, you’ll build a track record, grow your investor base, enlarge your assets under management and ultimately have a substantial business. That business builds wealth because now you’ve built something valuable. Fee income grows, you start collecting promotes, you invest in your own deals, etc.  but this takes time. Took me over 20 years.

So how do you earn a living in the early years?  You still work a job, or have other profitable businesses, or other investments. I survived by flipping houses. You do what you’ve got to do to survive and grow your business.

I see a lot of people on BP seeing syndication as a direct route to riches and it’s just not.  It’s important to set proper expectations.  I think that improper expectations are a key reason why so many try and then give up.

When I was in high school I thought I was going to be an airline pilot. When you think of an airline pilot you think of being a captain of a triple seven flying back and forth to Paris while banking a few hundred grand a year. But most airline pilots start out flying single-engine Caravans full of cargo in the middle of the night and can barely afford food. The life of a syndicator follows a similar progression.

Kim Lisa Taylor · Answer

@Brian Burke provides some excellent insight from a Syndicator's perspective. My perspective, as an attorney who drafts Syndication documents for clients, is that you really need to be raising $500k or more to make Syndication worthwhile as otherwise the legal fees will be disproportionate to the raise. For smaller raises, you will want to try to find another way to fund the deal, such as a joint venture (where all investors stay in control of making their own profit through active participation in all decisions); or try to raise money for multiple properties under a single offering so the raise amount is higher.

Alternatives for keeping costs low if you must have passive investors in small deals are:

• Make sure all are accredited so that you aren't required to have a disclosure document (e.g., a Private Placement Memorandum); or 
• Keep everything (investors, you, and the property) all in one state as you may be able to follow an "intrastate" securities exemption, whose rules may be less onerous than the federal exemption requirements under Regulation D, Rule 506; and 
• Don't even think about advertising - only make offers to people with whom you have established substantive, pre-existing relationships.

Syndication is truly a situation where it is easier to go big than it is to stay small. While small deals may seem easier to find, they may also be harder to finance and harder to sell (for the same reason), and are definitely more labor-intensive to manage as it is hard to keep a good property manager for a part-time gig.

Todd Dexheimer · Answer

I agree with the above. If you cannot make $30k+ minimum/year plus a front end fee and back end profit at the sale you should not consider doing a syndication. My suggestion would be to only syndicate on deals that are closer to $1mm or more of a raise. You can get by with slightly smaller raises, but much less will be hard to justify doing the deal for the sponsor.

Caleb Heimsoth · Answer

@Yaya Y. first I want to say you don’t want to be raising money with the intent to make a lot of money.. you want to have the intention that you are the steward of the investors money and you want them to make money before you do, even if you don’t make any money.

I would be referring to ROI so if I invest 100k, and it’s 8 percent That’s 8k go that investor before I make any money

Jillian Sidoti · Answer

@Yaya Y. (and anyone else reading this) - to answer questions like these, I have been providing those who email me two things: 1. A sample fee chart of how to make money and 2. a sample distributions section. My email is in my signature. Just use the subject "SAMPLES PLEASE" and I will send to you right away.

Thanks.

Yaya Y. · Answer

Brian - this was exactly the answer I was looking for. Your expertise and experience is truly helpful. I now have a totally better understanding of what is needed and expected when starting a syndication.

Again, thank you for your help! Looking forward to speaking soon.

How do you make money from a syndication?

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