Syndication is a great mechanism for passive investors who do not with to actively manage their portfolio, either because they are merely interested in the returns from the cash flow and have no interest in actually dealing with a property acquisitions and management, or they lack the time to do so.
However, there is a group of people who wish to become syndicators and run a syndication business, but don’t have the knowledge, experience or the tools make it happen. They haven’t invested in real estate before – actively or passively and want to make the shift to syndication. For this group, my suggestion would be to start investing passively alongside a syndicator first, then become syndicators.
It is extremely difficult to close a deal if you have no experience in real estate, especially now because the market is hot and there is so much money chasing deals out there. Here are three ways that being a passive investor first can help you overcome the challenges above and eventually become a syndicator. In this post, I’ll discuss the challenges a person with no experience in real estate faces, and how passive investment can help remove those challenges:
1. No real knowledge about purchasing real estate and managing it
2. Lack of track record to get a deal
3. Lack of tools and track record to raise money
No Real Knowledge About Purchasing and Managing Real Estate
The Problem: future syndicators do not know much (if anything) about real estate investing, and are hesitant to invest and raise money for a deal. Being cautious is not a bad thing in this situation. After all, how can you run a syndication business without actual knowledge about real estate investment?
How Passive Investing Can Help: There is so much you can learn by investing with a syndicator, especially how they study the market, analyze deals, and create a business plan to enhance the property’s value. When you invest with a syndicator, you can learn, first hand, what works and what doesn’t, observe how the syndicator communicate with passive investors and basically learn by observing.
No Track Record To Get the Deal
The Problem: Brokers are constantly vetting buyers and make sure that only potential buyers with a high probability to close the deal will be considered to be awarded the deal. Vetting buyers is one of the main ways brokers provide value to sellers, who want to have surety of closing for obvious reasons.
How Passive Investing Will Help: By investing with other syndicators, you are able to build a portfolio that you can present the broker, especially if you are interested in investing as a syndicator in the same market you have been investing as a passive investor. Building a passive portfolio can help you build the credibility you’ll need to be considered as a serious buyer.
No Track Record To Raise Money