How Syndications Can Be Like Fight Club
How You Can Own Big Apartments
Did you know you could be a partial owner of a large apartment complex with a relatively modest amount of money? Think about all of the apartment buildings you see on your daily travels. Who owns them? Some may be corporations but many are owned by syndications. This is essentially where a syndicator (deal finder) puts a property under contract and then pools money from other investors for the capital needed for downpayment and reserves and potentially a repositioning budget. These investors are not going to fund the entire purchase. There will still be a loan for the majority of the purchase price but the investors will be equity partners in this deal. Their risk is generally limited to the amount of money they choose to invest. The risk to the syndicator may be limited too if they secure non-recourse debt. Non recourse debt is available in the commercial space much more readily than in single family. This is one of the advantages to multi-family investing. Another is that at meetups, the guys who have 30k passively invested in a syndication introduce themselves as owners of a 50 unit building. They certainly aren’t lying but they are getting some extra street cred for their modest investment. They are apartment owners and that sounds way cooler than “I own four houses”. Which of these is a better investment is a much longer discussion.
Get Out and Meet Your Local Syndicators
Now that was a lot to throw out at once and I am not experienced in this area but I did stay at a Holiday Inn Express last night. Just kidding. I lean on my friends who specialize in this area of investing. In my network I know two partners who do just this. They started in single family wholesaling and then scaled up to syndication deals. Mauricio Ramos and Adrian Salazar formed a company called de Medici group. They pool funds from other investors and secure debt to purchase apartment buildings. They offer good returns on investor dollars and they do all of the heavy lifting of finding the deals and structuring the deals. This allows their equity partners to be very passive in their investment. In a typical deal there are general partners and limited partners. The general partner (or sponsor) does all of the work and sometimes also invests in the deal and the limited partners invest their funds but don’t actively manage the project. The returns may be structured in any number of ways to include cash flow on a monthly basis as well as a potential payout at the end of the investment term. There are some very complicated structures and some very simple ones as well.
If this interests you from the perspective of becoming a sponsor or a limited partner, I suggest you read more on the subject from one of the experts. As you read more you will see terms like “Accredited Investor” and “Sophisticated Investor”. Don’t let these terms scare you off. Syndicators have to follow a lot of rules set forth by the SEC (Securities and Exchange Commission). They have requirements regarding the financial status of those allowed to participate in these types of deals. Accredited Investors are basically millionaires or very high income earners (avoiding getting too far into the weeds). But this doesn’t mean that non-accredited investors are left out. In fact many syndications are created of all non-accredited investors. They may be required to be “sophisticated” investors which is a much lower bar and many people can qualify for this designation.
Here is the interesting thing about syndications. In some cases the syndicator can’t come ask you to participate. Remember the movie Fight Club? “The first rule of Fight Club is: you do not talk about Fight Club.” It kind of reminds me of this. Depending on the type of structure the syndication will be using, and the SEC guidelines, the syndicator may not be able to advertise this opportunity. Weird, huh? The big Wall Street funds and brokerages can advertise all over the place but these syndicators have a different set of rules they have to play by. Fair? Maybe, maybe not, but these are the rules and the good syndicators learn how to play by them. Some of the rules require multiple contacts with a passive investor before a syndicator can even offer an investment opportunity to the investor. This establishes a required “pre-existing relationship.” I find it all a bit silly. So how do you get invited to participate? By using the one thing I have touted constantly; and always will-NETWORKING!
Find Syndicators You Trust
We met Mauricio and Adrian when they were wholesaling single family deals. In fact we bought three of our favorite units from them. They were honest and hard-working and we liked the way they did business. When they moved up to multi-family we attended a meetup they hosted. The relationship goes on and on but we certainly are past the “pre-existing relationship” status. So do you think we’ll know when they are putting together a syndication deal that they can only share with pre-existing relations? I guarantee we will. This is how it works. So by attending a meetup and learning these topics, often for free, you also are building very valuable relationships. So if you want to be invited to play with the deal maker, you need to present and get to know them.
Maybe You Want to Be The Syndicator
Now perhaps you want to be the deal maker yourself. There is an opportunity to do this but in this world there are way more rules and regulations than in single family investing. I can barely spell “SEC” but you will need to become familiar with all of the regulations that the SEC sets forth before starting to syndicate so that you play by the rules. There are plenty of trainers out there that teach all of this for a fee. Several get very good reviews too. It would probably be tuition well-spent. You could also find a deal and then partner with people who know the ropes. If I ever stumble across an apartment building that I think has potential, what do you think I’ll do? I’ll go to my pals in the business and get their opinion. If it has potential, I’ll probably ask them to partner on it with me so that I avoid landmines and we can share on the upside. Do you see how this networking thing can work? If you get nothing else from my writing, let it be this: go network!
Now this article is just scratching the surface but I hope it has opened your eyes to a new way of investing that you may not have been aware of (partly because no one can talk about it). No decent investment is without risk so get to know the syndicators. Or become the syndicator. You may not have 25 or 50K laying around but remember from last week how we talked about Self-directed IRAs? You can even invest retirement funds in some of these syndications. I obviously find all of this stuff fascinating. Who knows, one day maybe I’ll be putting together one of these big home run deals. But until then I will continue with my “base hit” single family deals. I’ll be writing about our last base hit soon and I think it may end up more like a triple (or very good deal for you non-baseball fans out there).
This business is vast and offers so many different ways to participate. I want to get you excited about the potential. Resources abound on any of these topics that I write about to get more information. One place to start is www.biggerpockets.com. Let me know if I can help you find a good book or resource. In keeping with my sign-off I have strictly limited my social media use lately so please be patient if I am slow to reply on social channels. For what it’s worth, it has absolutely helped me “Keep the main thing the main thing”!