Putting together a syndication - Fair to investors and sponsor

[Luc Boiron]

Hi all,

I have been renting SFH, houses by the room, and duplexes part time since I started in 2007. Now, instead of practicing law, I decided to go into real estate full time.

I have been flipping, and have been making good returns so far on my flips. I have investors who will be investing in my future flips, with a simply split of 50% of profits to the investor who puts up the equity.

One of my investors and best friends has told me he has a group of friends who would be interested in investing with me, but are looking for long term rentals. My dilemma now is what a fair split is.

The strategy would be to buy multi family. In Toronto, prices are crazy and cash flow is very limited. Outside the city, within 1.5 hours would be where I would look. Cap rates are usually 5-7% in these areas. The plan would be to find properties that are either at under market rents and can be improved to increase rents, or properties that are in good shape and running well, where the seller is willing to take a partial 2nd VTB mortgage to allow us to buy a larger property with less capital.

I would have a 3rd party do the actual property management. The investors would be silent partners, completely hands-off. I would put about 10% of the equity in so investors can see I have skin in the game. I imagine the total equity in this deal might be $200-$400,000.

My suggestion is to not take an acquisition fee or a management fee, or any fees. All cash flow from the property would go to investors first, until they have fully received their capital back. After that, I am thinking of a split of 65% to the investors, and 35% to the sponsor (me).

What do you think of the set up and the split? It is still early with these investors, but I want to get started as it is only a matter of time before I start doing syndicated deals.

Any advice or suggestions BP?

[Kyle Critchnau]

Others are going to probably have better insight than I (and feel free to correct me if I'm wrong), but here's a few thoughts based on what you said:

1. If you don't take any split until after all investors have their money back, and don't intend to take any sort of fees, you may not actually make any money yourself until after the property is sold, especially if you're looking at 5-7% cap rates. Most I've seen do one of two things: they either pay a preferred return (say 8%) and split everything above that, OR, they pay the greater of 8% or the split amount.

2. I'd highly recommend speaking to a securities attorney, I don't know how Canadian law applies to syndications but at least here in the US (and if you ever plan to do properties or have investors from the US) the SEC has a lot of regulations to make sure investors are protected. In order to pool money together with you having sole control, there's a lot of hoops to jump through. Again Canada might be different (probably not by much, but I could be wrong) but you, as an attorney, probably know better than anyone the pitfalls of operating without knowing pertinent regulations. Them coming to you (as opposed to you soliciting them) may remove you from some of the considerations, but probably not all of them if any.

3. In order to find a decent return for your investors, you probably need to look for other properties in other areas. 5-7% cap rate is for institutional investors (insurance companies, employee pensions, etc) that just need somewhere to park their money as a hedge against inflation. You'll probably want at least 8% on actual financials (that's another thing, that 5-7% is probably a pro forma cap rate) if not higher. Form a relationship with one or two brokers, and see if you can get the listings they may not advertise. Case in point: I spoke to a broker the other day with a property that they're not even advertising, not even putting together an offering memorandum for, they're just calling potential buyers that they know are looking for that kind of property, and I just happened to be on the list. That's where you want to be.

All in all, multifamily/commercial is a completely different ball game from residential, I'm a wholesaler working my way into multifamily syndications, and though there may be a lot to learn, it's completely worth it so far.