THINGS YOU SHOULD KNOW BEFORE INVESTING IN A REAL ESTATE SYNDICATION
No doubt if you have a self directed IRA or substantial investment funds, you have considered investing in real estate. However, you may lack the funds to invest on your own or the desire to deal with the hassles of property management. A viable option for you may be to invest in a real estate ‘Syndication’ (i.e., a group real estate investment) as a passive investor.
Always get a good feel of the local values are like. Finding out who the average rental rates and mortgage values in a particular area can tell you more about a home’s value than the neighborhood.
What is a Real Estate Syndication?
Look around for like-minded individuals and try to learn from them. Real estate investing is very popular field. There are a lot of people who feel the same way. If none are located in your area, there are numerous online resources to pursue. Get in the mix and learn from your peers can teach you.
In a real estate Syndication, a ‘Sponsor’ or ‘Syndicator’ (which may be an individual or an entity) will typically identify a real estate asset, such as an existing commercial or multifamily property (or vacant land for development), that will yield a sufficient return to pay themselves and their investors from cash flow during operations and/or equity on resale.
Dedicate some of time to learning about and making real estate investments. You must budget your time spent on other activities in order to make good profits consistently. Ditch the poker night or another guilty pleasure so you go to in order to become a better investor.
The Sponsor may obtain institutional financing for a portion of the purchase price and then pool funds from private investors to finance the down payment and closing costs, or they may raise all of the purchase money from private investors. The Sponsor’s job will consist of finding a suitable property, putting the group of investors together, and managing the asset on their behalf. For its efforts, the Sponsor will receive fees and/or a percentage of the ‘Distributable Cash’ (i.e., profits) left after all expenses and loan obligations have been paid.
Get to know other people who invest in the real estate market. It is important that you get pointers from others who are more experienced than you. A few friends knowledgeable about real estate investment can help you out. You can easily find many others through the Internet. Join a few forums and make an effort to meet some of the users.
What Kind of Returns Do Syndications Offer?
Problems with tenants may consume a lot of time for you.
Typical investor returns can range from 6-12% (or more) annualized, calculated against the amount of money invested. The range varies based on the type of investment and the level of risk to which an investor may be exposed. The higher the return offered, the greater the risk.
Be certain to choose regions that are in a well-known area in which potential tenants might be interested.This is vital since it increases the resale value with this type property. Try looking for properties that can be kept up easily.
For example, an investor or self directed IRA might take a position as a ‘debt partner’, in which case the returns will be calculated as interest on the amount invested. Such returns may be in the lower ranges, but the debt partnership position may be ‘preferred’ or ‘secured’ by a lien against the real estate, which is a lower-risk position.
Do not make the assumption that your property will always go up. This assumption to make when dealing with real estate market and for any one piece of property. Your best bet is to invest in things that give you a nearly immediate positive cash flow right away. Property value increases will definitely be good for your income.
Another option for investors is an ‘equity partnership’ position, where the Distributable Cash is split proportionately between the group of investors and the Sponsor, whose compensation can range from 25-50% of the Distributable Cash. In this case the investor returns may be greater, but they will be dependant on the performance of the property and the Sponsor’s ability to maximize returns by increasing income and decreasing expenses.
Land that is situated near water or in the future.
What Information Should I Get from the Syndicator?
When purchasing an investment property, it makes sense to affiliate yourself with a good handyman. If you don’t do this, costly repairs may have a negative impact on your cash flow.A reliable handyman is great for any tenant emergency that may arise during the day or night.
Prior to accepting any investor funds, the Sponsor is required by securities laws to provide a set of offering documents that explains the terms and discloses the risks of the Offering to prospective investors. Further, Sponsors typically answer to their investors by means of periodic newsletters, financial reports, and/or teleconferences. Unlike a stock investment, investors may also have some limited voting rights regarding major property decisions affecting the investment.
Have an idea of your time is worth. You may love remodeling homes; however, but is all the manual labor really the most productive use of your time? Or is it better spent searching for another great investment opportunity.It’s worth it to free some time for more important parts of the business.
Checklist: 10 Things You Should Know
Be patient when beginning. It could be a longer time than you anticipated for your first deal. Don’t get nervous and put your money into something you don’t really want. That is not a wise use your money. Wait it out until a great investment that’s great.
Before investing in a real estate syndication, you should carefully review the entire offering documents provided by the Sponsor and ask questions regarding the following things:
Think about getting with a management company to help with your properties. The property management company screens renters for you and handle any repair costs. This will help save you extra time to focus on searching for other avenues for investment.
The Sponsor’s background, education, and experience with similar investments, if any.
Location truly is the pivotal component of real estate. Think about the location and how it might be in the future.
The team members involved in acquisition and operation of the property, including attorneys, CPAs, other members of the Sponsor, property managers, and affiliates that may receive fees, etc.
Try to invest in several properties within a short distance of each other. This way you cut down on your properties. It will also allow you become more familiar with the area.
Cash distributions to investors during acquisition, operation, and disposition of the property including the proposed timing and anticipated percentage returns.
Don’t leverage yourself out all of your money on the actual purchase. You need to keep cash on reserve in case anything unexpected crops up.
Proposed Sponsor fees and cash distributions.
Begin your investing with the purchase of a single property. You might be tempted to buy multiple properties right off the bat, but don’t bite off more than you can deal with. Begin with a single property and learn as you want to use. This will benefit you in the future.
Proposed duration of the investment.
Figure out what type of building you to invest in. Buying a property is only part of real estate investment is about.You have to think about how you will maintain it well to sell it. One-story homes are easier to work on than multi-family properties. Don’t take on more than you know you can handle.
Property information, including the type and condition of the property, the purchase price, financial history, proposed ‘value add’ and exit strategies, and pro forma financial projections.
Don’t spend everything on any one deal. Anything that takes tons of your time from you isn’t an actual “deal.” It could be a sign that you are not have time for other deals on tap.
Withdrawal options for investors.
A great way to find out how worthy it is to invest in a good financial investment is by looking at the area. If you look around and see lots of empty rental properties in the area, chances are that people may not want to move in to yours either.
Dispute resolution provisions.
Be aware of whether the purchase is short or long term. This will affect the amount of money that you need available. If you are planning on holding on to the property for a while, it does not hurt to spend a bit more.
Voting rights of investors.
Think about getting an investment partner that you could trust. You tend to minimize your risk when investing with a partner. Remember that you also reduce your returns.
Provisions for removal of the Sponsor.
Build a reliable team of experts that you can provide sound advice. You must know the right kind of different people you can call on that have expertise in a variety of different fields so that experience is on your side.
Seek Professional Advice
Do not go too big when you can afford with your real estate. It is a good idea to start small than to invest to much at the process of real estate investing. You would not want to exhaust your savings to be at risk. Your first goal here is to use these types of investments as a supplement not replace your existing plans. After you have been successful, you can figure out if you want to change how you are doing things.
In addition to satisfying yourself with respect to all of the items listed above, you should seek advise of your own attorney, financial advisor or accountant regarding the investment.
Patience is key when looking to buy a property at the right price for you. You may wish to go farther afield to find better luck if you extend your search outside the area you were originally looking in.
Your attorney should determine whether the offering complies with applicable securities laws. A Sponsor that disregards the applicable laws may expose itself and the entire investment to unnecessary civil or criminal liability, or they may be unaware of their fiduciary obligations to their investors.
Don’t make the latest trends. Not all people are alike when it comes to a house.
Your CPA or financial advisor should evaluate the financial merits of the investment based on past financial statements for the property and pro forma projections provided by the Sponsor.
Where Can I Meet Syndicators?
Become a member of your local real estate investment clubs and attend their meetings on a regular basis, and attend the informational seminars offered by your self directed IRA administrator.