Real estate is a great investing vehicle, and there are many advantages to investing with a syndicator. I previously wrote about the pros of passively investing with a syndicator in one of my articles Benefits of Investing Alongside a Syndicator. When thinking about passive real estate investing, most investors think about investing in a deal as an LP (limited partner), but there are more creative ways to invest your money in real estate.
1. Lend Syndicators Deposit Money
In today’s market, most syndicators need to write a check for a deposit, that can range anywhere between $100,000 - $500,000, depending on the market and the deal size. In more competitive markets, syndicators need to pay some or all of the deposit amount “hard,” meaning that the deposit becomes refundable, even if the deal doesn’t go through (with some exceptions, such as title or environmental issues, and sometimes financing contingencies are acceptable). A passive investor can lend the deposit money in exchange for equity or as a hard money lender, in which case s/he will receive interest for the loan.
2. Bring a Balance Sheet
Some syndicators lack an appropriate balance sheet to submit offers, since brokers and sellers often ask for a Proof of Funds (“POF”) to make sure that a syndicator has the means to make the purchase (especially since, to get a loan, one needs to have a net worth that is equal to the loan amount). A passive investor can receive a small equity stake for providing information on their balance sheet and net worth.
3. Sign the Loan
As I mentioned earlier, in order to get a commercial loan, lenders require the borrower to have a net worth that is equal to the loan amount and liquidity of 9-12 months of the loan payments. In this definition, net worth doesn’t include the value of one’s home. Most commercial loans are non-recourse loans, which means that the lender cannot collect any collateral besides the property which is subject to the loan. The only exception to that rule is a Bad Boy Carve Out; according to this exception, there is a personal liability against the principal who signed the loan upon the occurrence of certain enumerated bad acts committed by the syndicator or the principals.
A passive investor can sign the loan as a Key Principal (“KP”) for an equity stake of the General Partnership (“GP”), which is usually 5%-10% of the GP. As a passive investor, you are protected from loan default, however, in case of a fraud committed by the syndicator, you might find yourself liable for the entire loan amount. Hence, passive investors either sign on loan only if they are personally or professionally familiar with the syndicator or spend some time vetting the syndicator before deciding on becoming a KP.
In one of my previous articles, I discussed various ways you can invest in real estate without investing your own money Ways to Become A Passive Investor. Becoming a passive investor in real estate can be a smart and safe venture to explore because there is not only one way to invest; you can get creative and find many ways to accumulate wealth through real estate investing.
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