How to Overcome Lack of Experience When Syndicating Your First Deal
If you’ve participated in a real estate deal as a passive investor, you’ve had the opportunity to gain a first-hand look at how a syndicator, or lead investor, works. They’re the ones who solicit investments from others, research investment opportunities in diverse markets across the U.S., package the deal, acquire financing and manage the property (many times through a property management company).
To become a syndicator, you’ll need to get experience because you’ll find it hard to get deals or raise capital without prior experience, but you will need an investment and capital to get the first deal completed. Basically, you’re dealing here with the “chicken and the egg problem,” and which comes first. However, there are several creative ways to bypass the experience issue.
What is A Syndicator?
The syndicator is the lead investor in a deal. He or she is also often the General Partner in a real estate deal and they bring an investment opportunity to a group of passive investors, which are also called Limited Partners. Syndicators do most of the heavy lifting, as mentioned at the beginning of the article. In exchange for all the hard work and the knowledge that went into the deal, syndicators are being compensated by fees and part of the equity in the deal.
In the most typical syndication deals, the syndicator works out an equity allocation with the limited partners, often 80-20 or 70-30 split. Investors end up earning a preferred return that ranges from 5-10%, with an average return of 8%. Most investors earn money through rental income and property appreciation. A syndicator also earns an average acquisition fee of 2% at the time of closing and 2% of the income per year.
Why Experience Really Matters
The cornerstone of any real estate syndication is money. Without investors coming up with funds, you can’t go to bank or other lender and ask for $10- or $20-million. And without experience, it’s hard to go to potential investors and ask them to help fund your real estate syndication.
Experience is key in finding the right property, in the right market, with the right numbers to justify borrowing large sums of money from a lender. Without experience in knowing how to identify those markets, along with extensive experience in knowing how to evaluate properties, you pretty much are playing a guessing game. And you’re proposing to do it with other people’s money.
It takes both knowledge and experience to look at a property and tell whether or not it can be acquired at a price that will allow it to be renovated or repositioned and turned into a profitable venture. It takes a lot more than looking at a balance sheet and crunching numbers.
You have to understand the market where the property is located, along with the area around the property, whether or not the population is expanding enough to avoid high vacancy rates as well as (hopefully) higher rents once the upgrades to the property are completed. Seasoned syndicators have a track record to fall back on for this knowledge and expertise.
Here’s something else to think about: it’s not only the lenders who want an experienced syndicator heading up the investment. It’s also the limited partners. Without experience, it’s going to be pretty hard to get anyone to invest in your project - and that includes your friends and family as well.
First Option: Passive Investing
Passive investing is a great way of getting in the game and paving the path to become a syndicator. When you become a passive investor, you’re going to get a ringside seat next to an experienced syndicator so you can watch and learn what they do, and how they go about doing it. You’ll be able to see firsthand why they chose a particular geographic location, why they think the market can handle an upgraded property and learn how all the numbers come together to make an enticing investment that will provide an equitable return.
As a passive investor, you’re going to learn all you want to learn about syndicating a real estate investment deal. Not every investor wants to do this; after all, that’s why they’re called “passive” investors. But because you want to grow and become the syndicator at some point, you’re going to soak up the knowledge available to you.
When you come to the table as a passive investor, you don’t want to work with just any syndicator. You want to work with and learn from the best, because their knowledge and successful track record will provide you with the right approach to emulate once you begin syndicating on your own. You can find one of the top syndicators if you know where to look.
Second Option: Partnering Up with an Experienced Syndicator
The adage that “experience is the best teacher” couldn’t be more true if you’re exploring the option of learning syndication by partnering with an experienced syndicator. Doing so will provide you with the opportunity to watch first hand how a syndicator talks to his investors and solicits money to invest in a proposed property deal.
Just remember that you can’t solicit deals due to SEC rule, as you have to be General Partner in order to sell securities for other syndicators. By partnering you’ll gain the benefit of their experience, and you’ll begin to build your own track record. After you build up a track record, you’ll be able to tell other investors that you know how to select the right properties in the right markets, and use your experience to become a syndicator.
Start by soliciting your family and friends when you’re looking for passive investors to participate in your own deals. Other potential investors include business associates, investment property owners, and professional acquaintances including doctors, accountants and lawyers. You’ll gain valuable experience talking to investors as you begin syndicating your own deals.
Third Option: Hire A Mentor
I’ve discussed two options you can take to become a syndicator; starting as a passive investor and partnering with an experience syndicator. Another option is to hire a mentor who can help and guide you to become a syndicator.
Why a mentor?
You need personalized attention, handholding and guidance from somebody who has been running a successful syndication business. This is not about hiring a life coach or career guidance (though cannot hurt); it’s about learning the intricacies of multifamily property syndication.
Mentors can teach you how to screen deals, market them and structure deals with investors, so that the profit potential is maximized, which is a critical part of the process. But how do you find a mentor that has the credentials you’re looking for? One who can be trusted and one can impart the knowledge you need?
There are a variety of ways to find a qualified mentor. Forget mentors who offer, “free mentoring,” as they’re simply looking for free assistance on their projects. I’m of the opinion that in order to get a dedicated mentor, you are most likely going to pay if you want quality education, and it’s well worth the investment.
You can start by asking friends and business associates if they know of a syndicator who provides mentoring. You want to be sure they have a successful track record in multifamily syndication. Get references. You can also attend meet-ups in various areas of the country. That’s where you’ll meet other syndicators and investors who can provide information and referrals to successful mentors.
If you’re participating in syndications, ask the syndicator who they would recommend. Listen to podcasts from real estate syndicators and see if their investment philosophy and style match what you’re looking for. Follow successful syndicators on Twitter and other social media and read what they publish. If you do your homework, you’ll find a qualified mentor.
The bottom line is that not having any experience as a real estate syndicator shouldn’t hold you back from realizing your dream. Chart a path to moving from investor to syndicator and follow it, using the steps outlined in this post. Gain your knowledge and experience along the way, and you’ll be successful in achieving your dream.
To get your FREE copy of The Ultimate Guide for the Passive Investor, visit www.ellieperlman.com
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About the author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie", a podcast that brings the true stories behind the deals, from the most successful real estate investors around the globe. Ellie started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.