5 Hurdles To Overcome Before Investing In Your First Syndication Deal
You’ve just heard about syndications and you are pumped up and ready to invest. What’s the next steps? As an active investor and passive investor, you will find out that before you can break into the syndication investment space there are a few barriers to overcome. In this article we break down the 5 hurdles you will need to clear before making your first investment.
Finding the deal/investment opportunity
If you are an active investor you will need to develop broker relationships or relationships with sellers to help create a pipeline of deals for you to review. The reality is that not every investment opportunity you look at will be a good one. If you have a developed investment philosophy and goal you will likely reject more deals than the quantity of which you make an offer on.
Passive investors are not constantly on the hunt for the next deal to purchase but rather are looking for deal providers (i.e. syndication deal sponsors) that will provide investment opportunities. Like the active investors not every investment opportunity that is put in front of you will be an opportunity that fits your investment goals. Having a clear understanding of your investment goals will help create a guiding compass so you can appropriately filter what opportunities you want to invest in and which you should reject.
Building trust with the broker/seller
This hurdle primarily applies to active investors. As an active investor you need to secure deals to bring to your passive investor network. Finding the deal is not the end of the road, however. Once you find a deal that you are interested in purchasing you must present yourself in such a way that the broker/seller takes your offer. The highest price does not always get the deal done. Sellers will look at track record, financial standing and deal terms amongst other metrics to help identify which offer they should select.
For example, if you offer $5M on an apartment complex however someone else offers $4.5Mn with a $1Mn nonrefundable deposit the seller may see the offer with the nonrefundable deposit as a better offer. As the buyer is so confident that they are going to close they are willing to make a $1Mn non-refundable deposit. Brokers and Sellers are interested in certainty of closing so you should put your best foot forward in displaying that you are a serious candidate.
If you are an advanced passive investor or someone that straddles the line between active and passive investments, then having a relationship with brokers and sellers may be helpful as a source of investment opportunities. This is not necessary however so you can prioritize your time building relationships with deal sponsors.
Securing the money to make the investment
Money for investing in real estate syndications can come from multiple places. As a passive investor you may have more options to choose from than you realize. As an active investor you will be focused on filling out your capital stack. Money for the investment will come from two main sources – debt and equity. To get equity you will need to build relationships with passive investors and to get debt you will need to build relationships with lenders and meet their qualifying requirements.