All Forum Posts by: John Corey

For the others reading the thread, do not think of Buffett as a passive buyers of shares. He buys companies. And he wants to buy companies with great management. In other words, his model is pretty close to how people should pick sponsors (GP) for syndications.  

 Remember, you can not pay people to bring cash to a deal if they are not a registered broker dealer. They can be a GP if they have a real reason to be part of the management beyond the fund raising.

Another way to understand the issue is what can you survive when you get it wrong? Mistakes happen. More so when you are doing something where you lack experience. So, recoverable mistakes is the key. If you can deal with a 100 unit blow out, fine. If you lack the ability to recover if you bought a duplex, dial it back.

One issue is the funding. If you start with something larger than you can afford to fund, you will quickly run into issues with legally raising funding. Everything can be mastered once you know what it is you are required to do. If you stumble too much you will not build momentum. 

Remember, you do not need to retire off the first deal. No one at the top of their game only did 1 deal. Focus on the long term but do not be a rush to get there is one giant leap.

You need to chill a bit. You have done a lot already and are about to become a dad. Your time will get soaked up.

The CCIM is a winner. Serious commercial agents are CCIM.

Ignore the investing remotely for the short term. Build your network of wealthy investors. Focus on figuring out who has a portfolio locally. You want a large network when it comes time to funding your own deals. Figure out what you can offer the investors in terms of services. You can learn more about the business while stabilising on the family front.

The CCIM educational sequence could be a really good path initially. And it will plug you into more serious commercial agents and investors.

Before going to far with the conversations, understand that promotion of a passive investment can be a regulated activity. Check out this link for a summary of the legal issues. https://www.investopedia.com/terms/h/howey-test.asp

Once you know how to legally build a network of possible investors and when to stop before getting a securities lawyer involved, you are good to go. Understand that the wealthy who are savvy investors will now what you should be doing. If you are unknowingly breaking the SEC or state laws, the smart money will avoid your deals. Your actions could put them at risk of a loss because of the possible legal action involving the investment.

The devil is in the detail. You can scale up. It just takes a bit of time to understand the rules of the game. There are lots of funds out there for people who know the game.

First, an LLC with shareholders could still be a syndication. The fact that you did not pay a securities lawyer to file the right documentation does not keep the cost down. It just makes it easier for the state and SEC to shut you down. So, be careful about the suggested ideas that a LLC will let you avoid compliance.

Read up on the Howey Test to understand the core issue. In the extreme, 1 investor in the deal with you could trigger the need to file the registration documents. 

https://www.investopedia.com/terms/h/howey-test.asp

Otherwise, I love that you want to push forward. You just need to be sensitive to where the minefields are when raising funds. A JV where the other investors are active in the management of the property may be a good solution. The issue there will be how well you can work together. The more they are passive, the more you are back into the world of securities.

There are lawyers who post on this here in BP. You can find multiple threads on the topic. Reach out if you need help finding them or the threads. I can even recommend some recordings on YouTube which goes into the topic. Form the same lawyer or two who post in BP. 

Ben, 

Read the content at the following link. It will explain the Howey Test. https://www.investopedia.com/terms/h/howey-test.asp

So, a syndication is a way to legally pool funds if you follow the state and SEC regulations. You either register or are exempt from registration. There are specific things you can and can not do. For the most part, you can not raise funds from others without running into the laws around securities. Syndications are one solution which can stay compliant. 

Markus,

Well done on making progress and educating yourself. When reaching out to other investors, be careful

The conversations you are having could be tainting the waters. Less likely when you do not have a deal into which they can invest now. If you are over the line, you might have to avoid any investments with the individuals until some time has passed. To demonstrate that you did not take part in an illegal solicitation.

Second, if they are not accredited, you may be looking at dead-ends. Working with investors are not accredited requires things you do not presently have. SEC filings, etc.

Third, some might call it a JV. A JV can very easily be a securities offering even though you spelled it JV. More so if you expect more than 1 investor to passively invest (pooling funds). While people think you can avoid syndication by labelling stuff a JV, it could still be a crime. Ignorance of the law is not a valid defence.

Lawyers who contribute here on BP will reference the Howey Test. See below.

Howey Test: https://www.investopedia.com/terms/h/howey-test.asp
The Howey Test determines that a transaction represents an investment contract if "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party,"

The link goes to a longer explanation. Investopedia is like Wikipedia for investors.

I can not tell if you understand MFR and cap rates.

As someone else said, the cap rate is something the market sets. There is no magic number. It is the prevailing rate for a market and for a specific asset class. While it is tied to the zero risk USA government debt (the floor for all income valuation models), a cap rate is very sensitive to the local market dynamics.

Ring around some commercial brokers. See who is actually selling MFR in the area. What cap rate are they seeing for closed transactions. It is not a secret so they should be open to telling you what they know. The fact that you are a buyer should be of interest to them. They might have other deals they want to get in front of you.

I suspect you will not find a business plan that works. While we might be in the real estate business, deals, tend to be funded deal at a time. People do not invest in the business. They invest in a deal.

What have you found for evaluating individual deals? In days gone buy, RealData.com used to have sample reports. They are designed to highlight the merits of a deal. There will be other packages which have similar reports.