What is real estate syndication, how does it work and why is it such a powerful tool for real estate investing? In this episode, we go into all these essential details so you can fully understand syndication and why it can lead to real success in your investing career. This episode is packed full of free information that can increase your wealth... don't miss it!
What is real estate syndication, how does it work and why is it such a powerful tool for real estate investing? In this episode, we go into all these essential details so you can fully understand syndication and why it can lead to real success in your investing career. This episode is packed full of free information that can increase your wealth... don't miss it!
KEY TAKEAWAYS
Resources
The Passive Investing Playbook - https://theinvestormindset.com/passive
Learn more about investing with Steven at https://theinvestormindset.com/invest
Steven Pesavento 00:00
Welcome back. And today what we're diving into is how do syndications work and why are they a powerful vehicle for real estate investing. So you can start making decisions on if syndication is something that is going to be a part of your real estate portfolio, you're not going to want to miss it. So let's get right into it.
Steven Pesavento 00:23
This is the Investor Mindset podcast and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven Pesavento 00:45
Investors have you grabbed your copy of the passive investor playbook yet? if you haven't, I recommend you go pick up the ultimate guide to passive real estate investing at the investor mindset.com/passive You can grab that in the show notes right down below. As we've interviewed tons of the top experts and brought together all of the knowledge that we have on passive investing so that you can lay a foundation for yourself to make sure you're making the right decisions in your investing career, you can grab that guide at the investor mindset.com/passive I hope you'll take advantage of it. Let's get back to it.
Steven Pesavento 01:33
Welcome back to this week's mindset minutes episode with the Investor Mindset. I am your host Stephen Pesavento. And each week I share mindset tips and investing strategies to help take your business and investing career to the next level. And this week, I'll be focusing on how syndications work and why they can be a powerful tool for you to invest within to really diversify and grow your investing portfolio your real estate portfolio. And join us each week as we share more mindset tips and investing strategies to help you reach true financial freedom through real estate by hitting that subscribe button and never missing another episode. And as a reminder, make sure you grab the full passive investor playbook The Ultimate Guide on passive investing, where we dive deep into the topics that we're talking about today, and many others that are going to help you lay the right foundation to make decisions in your real estate investing career that can really set yourself up to really be able to reach financial freedom and really take your life and business and financial goals to a whole nother level. You can find that right at the investor mindset calm slash passive, the investor mindset calm slash passive, which is available down in the show notes below. So let's get right into it. So what is a real estate syndication? And why is this such a powerful tool? Real Estate syndication is just a fancy term for a group investment in real estate. Right? So we've got our active sponsors or our operators or general partners, GPS sometimes are called who are responsible for managing the investment, and that making those day to day decisions. And then we've got our passive investors, which are also called the limited partners, limited partners have limited liability, they invest their capital alongside the general partners, and they pull the resources together to go and buy larger real estate assets. Right? So syndication allows you to partner with operators invest your money in real estate, together with absolute experts, people who are the best of the best in their field, they absolutely no, and have already executed this business plan over and over and over again.
Steven Pesavento 03:40
So that you know, most likely they're gonna be able to do it again and again and again. And that you're gonna be able to participate in that, of course, the past does not equal the present or the future. However, when somebody has gone through something multiple times they've had that experience. They've applied that multiple times when you're investing with an operation team that have members that are phenomenally good at what they do, and they've got a track record to represent it. It's a great place to invest. And one of the keys to understand is that a real estate syndication is is oversight, and is regulated by the SEC. So a syndication is a security and a security is a tradable financial instrument. And so what that really means is that the SEC, this governing body says hey, we want to protect investors, we want to make sure they're making they're investing in assets are in classes with operators that are following a certain set of guidelines. And so they've provided those guidelines, and we're able to file under an exemption that where we've got a very specific set of criteria that we need to fall within and how we can set up these investments. And so then real estate investor is able to then invest within that entity. And as a reminder, I'm not an attorney, so you've always got to consult one and nothing that I say is legal advice, however, but just understanding how this is structured is really important. And one of the key things that makes this a security versus, you know, other types of real estate is that we've got a managing partner, and we've got a limited partner, and that managing partner is gonna make all the day to day decisions, and the limiting partner is gonna invest their capital. And what makes it a security is that the limiting partner doesn't have any control, or say they don't operate the day to day make those decisions. And as a result, they're also they have limited liability, meaning they're not liable for the decisions that are made in that property. So it's a nice setup for folks.
Steven Pesavento 05:34
And it's important to understand why would I want to invest in a property where I have limited decision making power. And the reason is because you're trusting that operator, you're trusting their expertise and their experience to invest alongside them and have an opportunity to receive some of that benefit. And you wouldn't want some other passive investor in the deal making decisions, who maybe isn't that expert, deciding or pushing the operator to making the wrong call, we want to really rely on the person who's in that operator seat to make that decision. So that's the reason why operators set it up in a way that creates it as a security. That's the reason why passive investors or limited partners are happy to invest alongside. So let's kind of go through a little bit of an example here, so that you can understand how one of these deals might work. Right. So if I've got a deal under contract, and I'm an operator, I'm gonna pay $12 million for that property, you know, I might need $3 million dollars to close and I might need another one and a half million dollars to renovate the property to upgrade it to achieve the business plan that we have in, you know, in place for this property. So in total, I would need four and a half million dollars. And as the operator, you know, we could invest 100% of our own capital going buy this property ourselves, and be into the deal without sharing any of the upside within our investors. However, the reason that we do this, the reason why we don't go down the path of doing direct investment without going the syndication route, is that this would be the only property we'd be able to buy, maybe we'd be out of capital, but rather by going out and partnering with, with our limited partners, we're able to then go buy multiple properties, we're able to put our capital across multiple deals, we get diversification within our portfolio, and within all of theirs, they're able to experience that upside. And we're also able to all benefit from the economies of scale by buying more than one property and really be able to manage that effectively. So this leads to diversification, which is really, really important. It's something that is often overlooked, when people are new to real estate investing, right.
Steven Pesavento 07:41
So if I can have investors invest 150 $200,000, each in this deal, and they can do it again, in this deal in this deal in this deal on this deal on this deal, then over time, they're gonna have a much better blended return. Because let's say for example, something doesn't go quite as planned the returns a little bit lower here, but it's higher over here, you're able to spread out that risk in a much, much smarter way by by going and diversifying. So the way that this is works is that each passive investor is going to invest their capital into this deal, they're each going to buy shares into the property right into the security. So you're gonna invest 100,000, and then another investor is going to commit 50,000. And another investor is going to commit 200,000, and so on, and so forth until we reach the four and a half million. And so it happens pretty quickly, because the seats, you know, the the available shares end up filling up, because people see the value in the benefit of investing in these assets. So the group would then engage with the operator engage with a syndication attorney, and they put together a private placement memorandum. So this is a document that essentially says, here's all the risk, here's how we're going to operate this business, the operating agreement as well. And here's how we're going to operate it. And this is how things are going to get paid out. It's got all of the rules and all the the decision making power and how everything's going to work. It's all built into that ppm, and what the expectations are, and most importantly, what are the risks in the deal. And so we put together that ppm, and then we go out and we, you know, finish purchasing the property, then operate it. And so typically on a syndication team, you're going to see the general partners, which are aka the sponsors, this is going to include people who are going to be the K p, the key principal, the loan guarantor, the person who's going to sign on the loan, or the multiple people are going to sign on the loan, they've got to have a certain amount of net worth in order to sign on that loan, because they are liable for the decisions that are made in this property. Remember, as a limited partner, you're not liable, but as a general partner, you are liable. It's gonna include the asset manager, it's gonna include investor relations, and maybe, you know, acquisitions, and maybe these are all played by the same person or people. Maybe they're played by different roles on the team, you know, Along with those general partners or sponsors, you're also going to see property managers, you're going to see, you know, mortgage broker, you're going to see real estate attorneys, you're going to see syndication attorneys, you're going to see consultants, tax consultants, all these different team members are going to bring their expertise together in order to execute and make sure that this is a great deal. And then of course, we've got the limited partners that are going to bring the capital and then benefit from the rewards that come from it.
Steven Pesavento 10:25
And so the sponsor team then goes out and purchases the asset, they execute the business plan, they handles all the they handle all the act of day to day management at the end of the investing timeline, then the sponsorship team sells the asset. And the initial investment is returned to investors with a share of the return, right. And so in some deals, people are going to be receiving cash flow and some deals if you're just focused on appreciation, and that's where that's going to be. But one of the reasons why syndication is such a powerful tool is because investors are able to invest right alongside experts. So if the expert operators decided, hey, we just want to do everything ourselves, we want to do less, but we want to put all of our own capital in, then they won't get that benefit. And the operator instead, like I said, is really looking to how can they have economies of scale? How can they acquire more deals? How can they diversify their own portfolio, and then how can they provide a phenomenal return for investors and in reality ends up flipping on its head because we know that we've got to provide a phenomenal return for investors in order to do all of those, those pieces along the way. And the reason why this is important for passive investors. And the reason why a lot of passive investors like these types of deals is they're able to invest in institutional style real estate assets, that are much, much stronger than many of the smaller residential type assets, without needing to have the experience or capital to go and do it on their own. You know, if you were to just go out and want to buy a $10 million building, and you didn't have any experience, even if you had the downpayment, Fannie Mae or Freddie Mac, or any of these other lenders out there, you'd have a hard time signing on the loan, you'd have a hard time not having that experience, they're not going to want to take the risk as your partner because, you know, essentially, the, the the mortgage company, the the lender is your partner in this deal, they're going to be putting up a majority of the capital. And so you're able to, and the passive investors are able to invest in these institutional style deals, and they're able to become direct owners and benefit from the equity. And typically, if you look at historical numbers, these private syndications perform better than public real estate offerings for private investors. And one of the big reasons is there's lower fees, and there's less overhead, and you're more directly connected to the operator that's making those decisions every single day. And so when I began my real estate investing journey, like I said, Before, I, you know, I started out, you know, being a direct manager I was managing Airbnb is, and I put a manager in place and totally failed on that. But I started flipping houses, you know, there's some some great lessons in there. But when I decided that cash flow and spreading out, my return was really, really important to make sure that I could have consistent income from my assets, I started buying single family homes.
Steven Pesavento 13:22
And what really, really blew my mind was, it wasn't until I was into multiple properties, that I realized there was a huge incentive alignment, it quickly made me want to change directions. And, and this incentive alignment with single family homes is, is huge for property managers, if you look at this example, $100,000 property with which you know, is maybe charging $1,000 per month, that's a pretty good return, the property manager is typically only making 6% management fee for that deal, right. And so they're only earning $60 a month to oversee my $100,000 property. And to me, the $100,000 that I've got this is a this is big, right? Even if I've got 100 or 10 of them. Each of those $100,000 properties is really important to me, however, the incentive isn't in alignment for them to work as hard as I'd want them to work for that $60 a month. And of course, you can find great property managers, you can find great things, but there's a disincentive alignment for them to focus as much energy and effort into saving expenses into finding the right tenants making sure that every dollar is, you know, saved and accounted for to really operate that property at peak performance. So I'm curious if somebody is only getting paid $60 a month to manage $100,000 property, are you seeing a little bit of a incentive disalignment here, but on the other hand, an operator in a syndication, you know, they are typically financially invested in the deal. You know, and furthermore, they have signed on the loan, so they're taking on a huge liability there, because they're there financially liable, they're legally liable. And there's nothing that I think is more motivating than the fear of losing money. Right. So
Steven Pesavento 15:09
people will work way harder to stop from losing money than they'll, they'll work to make money, right. And we're real estate investors, so we want to work to make money. But the operator in this case, there are financially aligned, because they make money only based on the results of the deal. Typically, you know, maybe a little bit of fees here and there, but the incentive alignment is so much stronger from a syndication standpoint than with just a property manager, for them to make sure that this deal is really really operating the way that you want it to. And if you've invested in single family homes, you know that no matter if you put a property manager in place or not, you're gonna have to manage them. And that it's actually a lot more time, effort and energy than you really would ever expect that it would be. So these are some key reasons why syndication makes a lot of sense to me and makes a lot of sense to a lot of other folks. That's the reason why so many people are invested in syndications. And a little bit of an overview of how it works, right, you're essentially investing, pooling your capital together into, you know, into an investment with an expert operator, that person or operating team is going to make those decisions and, and really find a way to lead to the biggest return, that operator is going to be paid typically based on on on the rewards only after hitting a certain investment hurdle after hitting a certain level of return that they're promising to investors, or they're projecting to investors. And the incentives are aligned to make sure that that operator is going to put everything they have into making sure that not only are you going to be able to have your money returned, but you're also going to make a good return on your money. And so it's one of the reasons why I invest in syndications. Why I'm an active syndicator because I see the benefit from both sides. And so if you guys have any questions about this, please feel free to reach out to me on Instagram, Twitter, LinkedIn, Facebook, or via email and shoot me your questions over I'm happy to answer I'm happy to answer them in a future mindset minutes episode.
Steven Pesavento 17:06
And as a reminder, go and grab the full guide because we've put a lot of effort into over 10,000 words diving deep into the passive investing playbook, The Ultimate Guide for passive real estate investing, where you're going to be able to learn how to lay the foundation so you can be confident to make the right decisions for your investing career do you need to go active or should you be in the passive side, you know, is syndication the right fit or is you know, maybe there another route, you're gonna learn a lot of these things and more. If you haven't caught the rest of these episodes that are diving into some of these key pieces, the passive investing front, please head back and head forward and listen to them because they're really going to make a difference. And as a reminder, a levy as I always leave you to live a life with inspiring others. And you can do so today by going out and applying what we learned here today by going out and understanding more about this type of investment understanding of this as the right investment for you. And most importantly making a decision to go out and invest in this way or when whatever way ends up fitting you the best so that you can start building that war chest towards financial freedom to live the life that you dream of that you desire. And that you know is possible and you're capable of living. So without further ado, I will leave you guys and I'll leave you with a big, big thank you. Thank you for all the support. And as a reminder, one last reminder, if you've been listening for any amount of time, please go drop us a review on iTunes that really helps us reach more people. Share this with your friends so that they can start having some of those same realizations and I'll see you guys on the next episode.
Steven Pesavento 18:44
Thank you for listening to the Investor Mindset podcast. If you like what you heard, make sure to rate review, subscribe and share with a friend. Head over to the investormindset.com to join the insider club where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.