The Passive Investor Syndication Roadmap

PASSIVE INVESTOR SYNDICATION ROADMAP

Real estate syndications are one of the best kept secrets in real estate investing as a vast number of great opportunities come via private investor networks. If you are a beginner at real estate investing or you’ve never invested in a real estate syndication you may be wondering – “So how exactly does a real estate syndication work?” “What are the steps I need to follow and what should I expect at each step of a real estate syndication?”

Well, investing in real estate syndications start long before you ever hear about a great opportunity to invest in. In this article we provide a step by step detailed timeline of what it is like to invest in a real estate syndication and what you should expect each step of the way.

You should expect to go through the following steps as a passive investor looking to invest in a real estate syndication:

1. Decide

2. Prepare

3. Identify

4. Commit

5. Make It Official

6. Invest

7. Sit Back, Relax and Get Paid

DECIDE

Investing passively in a real estate syndication can be an investment of $25,000 - $50,000. Sometimes you may see investment opportunities where the minimum investment may be even higher, coming in at a total of $100,000 or more. When putting down that large amount of money into an investment, that decision isn’t a light matter and you should start thinking about investing long before that investment opportunity presents itself.

Being an investor in real estate in general should start with an understanding of your financial, personal and investment goals. Once you have gone through that period of reflection and investor goal setting it is important to decide if you prefer to be a passive investor or active investor. If you decide that you want to be an active investor, then the steps that follow would go differently. If you decide that you want to be come a passive investor, or at least start as a passive investor to get educated on syndications then transition to become an active investor, the rest of these steps would apply to you.

So, let’s assume you have gotten an introductory education about investing in real estate syndications and have decided that passive investing in syndications is for you. The next step is to start getting yourself ready to invest.

PREPARE

Real estate syndications are governed by the United States Securities and Exchange Commission (SEC). Many real estate syndications require that the investor has a pre-existing relationship with the syndication company. This “pre-existing relationship” could take about 2 months of interaction to formalize (although there is no set bright line). Even if the syndication investment opportunity you came across does not require a pre-existing relationship there is still an investor certification process that much take place to validate your accreditation status as an investor. Yes, that is right - just because you have money does not mean you will be allowed to invest in that syndicators’ investment opportunity.

Preparation to invest in a real estate syndication can be broken down into 3 steps:

• Investor qualification preparation - As an investor you need to educate yourself sufficiently such that you would be considered knowledgeable enough to invest in a real estate syndication. You don’t need to become an expert, but you should be educated enough to understand what you are investing in and the related risks. If that seems like a lot, don’t don’t worry most syndicators provide some sort of educational material and if not, there are a plethora of online resources you can use to educate yourself. Additionally, you need to identify your investor accreditation status – are you an accredited, unaccredited, or sophisticated investor? Knowing the answer to this question will let you know what type of investments are available to you and what you need to do so you can change your accreditation status if need be.

• Financial preparation – If you find out that your accreditation status is not approved to invest in the types of deals you are interested in, you can work on improving your personal balance sheet via a higher paying job, adding other sources of income, or partnering with others to help bridge the financial gap. This may take weeks or years depending on your current financial status. If you have the accreditation status that matches the deals you are interested in then you should validate whether or not you have the assets to allow you to make an investment of $25,000 or more.

• Liquidity preparation – Once you have identified your source of funds to invest, decide on the timeline of when you want to invest. Based on that timeline you should ensure that you have the liquidity to make the investment when it becomes available. That means if you are waiting on the sale of a house to get a lumpsum payment, an inheritance to be executed, transfer of funds to a self-directed IRA or a stock portfolio you are looking leverage, you need to understand how quickly you can obtain cash from these sources. You should also look to understand the tax and or legal implications of using these different sources to obtain funds to invest. Syndication opportunities usually only have about 30-60 days before closing, if you are not able to get your funds within that window of time you may miss the opportunity.

IDENTIFY

After you have decided to invest passively and prepared yourself to invest you should identify a real estate syndication group that you would like to invest with and review the opportunities that they have available. If you are having trouble finding a real estate syndication group, try attending networking events at the local real estate investment club meetup in your city. Joining an investment club is a great opportunity to educate yourself, connect with other experienced passive investors, meet syndicators and increase the amount of opportunities that are available to you.

Once you have found a syndicator you are interested in working with, you should research the company, review their company brochure, reach out to the syndicator and get on their investor list and complete whatever investor qualification procedures are necessary. You may be required to provide a letter from your accountant or third-party source verifying your accreditation status. Once you are on the investor list you will be notified of new opportunities that become available.

COMMIT

New opportunities may become available every few months. When a new syndication investment opportunity is available, the syndication group will typically send out an email to their investor list with high level details about the opportunity, expected returns, and an offering memorandum (marketing brochure detailing highlights about the deal). They will also have 1 or more investor webinars scheduled. In this webinar the syndicators will provide all the details about the investment opportunity: the story of the property, the details of the market, the business plan, the team working on the deal, the expected returns and closing timeline. This webinar will also serve as a time for question and answers about the investment offering. Hearing questions from other investors is often helpful as they may think about things you did not consider. At this time – either on their initial email announcement or after the webinar – the syndicators will start taking “Soft commitments.” This simply means that you are indicating your interest to potentially invest in the deal. It is not an official binding legal contract. The soft commitment allows the syndicator to identify the level of interest in the offering and how many slots they will be able to make available to investors.

After you have made the soft commitment there will be a time period (usually about 30 days) where you will be able to perform your own due diligence, visit the property if you desire, ask questions to the syndication group and what ever else you may need to become comfortable with making the investment.

MAKE IT OFFICIAL

Once you have done your due diligence and are ready to invest, you can make this indication to the syndicator and they will send you the legal documents to make your investment commitment official. You will receive several documents: Private Placement Memorandum (PPM), Company Operating Agreement, and Subscription Agreement.

• Private Placement Memorandum – this is the official offering for investment in the syndication opportunity. It is a lengthy legal document of over 100 pages about the investment opportunity. Some of the important sections you should check out are the related syndicator fees, business plan details, risks associated with the investment.

• Company Operating Agreement and Articles of Incorporation – this shows you the entity that is being set up for the purchase of the property and what the related rules of operation are for this entity.

• Subscription Agreement – This agreement details the “securities” or “shares” of the company you are going to buy as investment in the syndication.

You should execute all these documents and return to the syndicator. If any questions be sure to talk to your lawyer, accountant and or the syndicator as applicable.

INVEST

Once you have completed the official legal documents the next step is to invest the funds that you prepared earlier. Syndicators will ask that you transfer the investment funds from your account to an escrow account 30 – 14 days prior to the closing of the property. This will allow the syndication group to go to the closing table confident that all funds are available, and they are able to close on the purchase on time as scheduled. If you foresee any issue in having liquidity to invest (or needing liquidity in the near future for personal reasons) you should evaluate if the timing of this investment works for you.

SIT BACK, RELAX AND GET PAID

Once you have transferred your funds your work is done. Now it is time for you to sit back, relax and get paid while the active investors do the work. The syndication group will go to closing and begin on their business plan. Distributions (cash flow payments) will be made to investors as noted in the business plan. This could be as quickly as the first month of ownership or 1+ years after ownership depending on the type of deal and syndicator you are investing with. The syndication group will provide ongoing reporting during the hold period of the property that will tell you about the status of the business plan, financial performance of the property and details on expected distributions. At each year end the syndication group will also provide partnership K-1s (tax documents) that will detail the related income and expense you have in the partnership.

As the syndication group achieves their business plan, they will evaluate current market conditions and decide whether to sell or refinance the property. If the property is sold or refinanced, then there will be a return of original investment capital back to the investor. You can choose to take that returned capital to make other investments or what ever other use you desire. You have just completed a full real estate syndication cycle. Congratulations!

So, there you have it; the steps as a passive investor looking to invest in a real estate syndication:

1. Decide

2. Prepare

3. Identify

4. Commit

5. Make It Official

6. Invest

7. Sit Back, Relax and Get Paid

Now you know the steps to investing in a real estate syndication, identify where you are on the investment timeline and start acting. It can be scary making your first investment but after you have completed your first investment cycle you are guaranteed to be excited to do more. Happy investing!

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