Syndication Basics: The 3 most valuable lessons I have learnt

Last week my partners and I closed on 320 Units in Dallas, TX. This is the second institutional deal I have been involved with and once again it was a massive learning curve!

Here are the 3 most valuable investing tips when starting out using syndication investing to take down large deals:

1)Syndication Investing is a TEAM SPORT;

2)Always be raising capital for future deals;

3)Cost-of-capital to include non-accredited investors

1) Syndication Investing is a TEAM SPORT:

To be successful in real estate you need a good team of investors and partners to help you take down larger deals. Throughout the last two deals the roles and responsibilities between all the partners have been split up. This has allowed us to leverage the skill set of each partner and delegate tasks based on what people are good at:

We split up the tasks as follows:

• Partner 1: Finding deals, due diligence and underwriting
• Partner 2/3: Finding investors to fund the down payment
• Partner 4: Local Sponsor and capital sources

Other team members that were involved but aren’t general partners in the deal:

1.Mortgage broker

2.Legal council

3.Property management team

4.Third party property inspectors for due diligence

Taking down large institutional deals is near impossible without having the proper partners and team members set up around you. Relying on other peoples’ skills and abilities not only helps delegate tasks but it also reduces the work load on any one particular partner.

Takeaway: Great things can happen if you work together!

2) Always be raising capital:

Throughout the capital raising stage of the deal I was constantly having face-to-face meetings with potential investors, some of whom I had only just met.

The biggest learning curve was that fact that you can’t expect a new potential investor to invest their money with you without the proper time to build trust and credibility. Sometimes it may take a few days or weeks, but usually it will take an extended period of time to get comfortable with one another particularly when you are starting out.

Ultimately my investors that were involved with the deal have been part of my ‘investor black book’ for at least 6 months. Over that time I have been constantly checking in and updating them on what I have been achieving and the new deals on the horizon.

Some of my newer investors loved the deal but it came down to ‘lets-continue-to-date’ scenario (get to know each other better) before making a ‘capital commitment’ in the deal. I completely respect this thought process; it allows both of us the required time to vet one another. Remember, not all investors will be suited to investing in a syndication deal. 

Takeaway: Even if you don’t have a deal on the table you should always be adding investors to your database.

Action Item: Aim to meet with 5-10 new investors every month to continue to add names to your database.

3) Cost of capital by including unaccredited investors

Throughout the capital raising process most of the partners were under the impression we could raise money from unaccredited investors (sophisticated). By law, under Reg (D) 506(b), you are allowed to raise capital from up to 35 non-accredited investors. However, our legal team was unaware of our assumptions and wrote the PPM for accredited investors only.

The legal advice we received was that if unaccredited ‘sophisticated’ investors are included in the capital raise then the PPM would need to be more extensive in terms of disclosures. Furthermore, the process would also be more time consuming as we would be required to prove ‘sophisticated status’ of those investors, hence the legal fees would be greater.

We were told the typical legal costs of a real estate offering (including non-accredited investors) are in the order of $25K total; by adding non-accredited investors the legal expenses increase approximately $5,000 - $7,500. So if you’re only raising only $50,000 from non-accredited investors, that’s a very high cost of capital. However, if you’re raising $500,000 from non-accredited investors, it is a different story.

For this deal it was decided the PPM would remain unchanged which meant 6-7 of my investors were not able to participate in the investment; loosing approximately $350K in capital. Some of the other partners also lost investors; total loss of capital +$500k. 

Moving forward we are more aware of the process and we will make an assessment on the next deal whether to include ‘sophisticated investors’, or not.

Takeaway: Non-accredited investors do add some cost to the project; however you have to balance that against how much they’re going to invest.

I hope you can learn from my experiences and apply these lessons to your own real estate business.

Until next time, Happy Investing!