Real Estate Syndication for Beginners!!

We have been eyeing Real Estate Syndications for a while now and it’s been an interesting very complex world, and in this blogpost I’m going to try and explain it as best as possible, with a little help of Mr Carlos Zapata, the general manager of our company, and a starting syndicator, who in the last week was able to go to a Real Estate Syndication course with the biggest names in the business, and who learned the right of information of this business to help those who are thinking in joining in (like us!) to be able to see it as easy as it can be for a passive income and how fun it can be for those looking for a challenge on this fantastic business!

Check out this quick video he did before going into the training!

So in this blog posts we are going to go step by step on how you do a syndication, and we’re going to explain everyone’s roles in it, and exactly how will you benefit from these type of deals, obviously this changes from syndication to syndication, depending on how the profit is divided between them all! But first, let’s begin with definitions, shall we?!

What exactly is a Real Estate Syndication?

Basically is when a bunch of investors pool their money to purchase a big commercial properties, such as apartment buildings, mobile home parks, office buildings, etcetera, you get the drill, big bulky deals that require a ton of money to actually purchase them, and require a ton of time to keep them running and bringing in the cash, so a few investors or limited partners come around with what’s called a syndicator, sponsor or general partners, and they unite their money in order to purchase a property larger than the ones any of them could individually purchase.

Now, there’s a reason why there’s a general partner and a limited partner, the main reason is the work put into the deal, and usually the general partner or sponsor, is the one assuming all the risk in the property, making the first investment to reassure the purchase of the property such as the earnest money deposit, finding the right property, and making all the legal work previous to the purchase, while the investors only come in when everything is ready to go, only to put the money in and wait for their cash flow, that’s why they are limited partners.

There’s obviously a ton of work being done to be able to move these type of deals, and most of this work is very centered in the sponsor, who is responsible of making it work and have great results for the investors, who passively wait for it to create returns while dedicating themselves to something else. For this to work, there has to be a big structure previous to anything being done, and this has to be done with the investors and the sponsor, because while the sponsor puts up the work, they also deserves and expects a return on his investment, that sometimes might not be very large money wise, but it’s far more precious, because is their time and energy, and this is done by previous agreements, that allow this type of deal to run smoothly.

So what is the structure? Or what can it be? We’ve got the answer, sort of…

This will change from deal to deal, as you could literally use only one part of this or all of them at the same time, so this means it will be discussed in your previous agreements! But, the basics are:

• The return of investor capital, which basically means that the investors get paid back first, and this guarantees this to happen!
• The preferred return, this is one of the optional ones, as not all deals have it! It’s percentage of the part of their deal! It’s the first portion the investor gets way before the general partners, it is optional because it takes away from the carried interest, which is where the magic happens!
• The catch-up, this is also very much optional for many deals, it is a great idea if you want to benefit the sponsor, basically, it’s a period after the preferred return in which the sponsor gets all the profits up until the final split is met!
• The final split or carried interest, oh the beauty of this part of the business! This is the part in which the split of the profit is done, this will also vary from deal to deal, but it can be anywhere from 90/10, to 50/50, in which the less percentage will go to the sponsor and the high percentage will go to the investors! It will ultimately depend on the agreements previously done between them all!

Now that you know the structure, you may be wondering, exactly how fast is this? Well…

Not so fast! These type of investment usually take up a long time before they are profitable, and that usually has to do with how good the deal is, and this will ultimately fall down on the shoulders of the sponsor, because it's up to them to have this property up, running and gaining so that everyone involved in the deal wins back their money! So it can take up to a year for this to actually work the way they intend it, so if this is your first time working with a syndication, you have to be veeery patient to be able to see the return, and trust us, the return is going to be wonderful once you’re able to get it, and it’s going to be worth your while, so much that you might even consider investing that return to another syndication and so on and so forth, until you have made a massive empire around yourself!

But, can you protect yourself?

Absolutely! A 100%, because if you do the right thing and work along with a lawyer whose expertise is in syndication, he will guide you and protect all parties involved in the deal towards having a safety net if everything comes crashing down upon them, which ultimately is the key to success in this type of deal! Also there are some good ideas you can get from them, such as learning to get the right property along with the exit strategy which every Real Estate deal must have, and because of that exit strategy, you can actually figure out which deal will work out best for you and your team when it actually comes along!

Also, the training Mr Carlos did was brought in by the amazing Real Estate genius of the Real Estate Guys, they have a fantastic podcast where you can get more and more information about this very interesting topic, so go over to their website and see exactly what you've been missing! 

Here's another clip of Mr Carlos before the training, inviting you to learn and expand your knowledge furthermore!

What do you guys think? Is this the new way of investing? Granted this has been around for years, but thanks to the internet is getting easier and easier every time to actually get involved in one, and the benefits definitely outweigh the risks, but I would love to hear your feedback, let me know if you have ever done this, and if so, how did it turn out?!