Syndication as an Avenue Towards Raising Money for Real Estate Investments

CEO of Bullseye Capital Fund and founder of the National Association of Syndicators, Joel began his career as a CPA with the prestigious firm of Price Waterhouse. During his time with the company’s Entrepreneurial Services Group, Joel immersed himself in the real estate syndication business. After reviewing hundreds of partnership agreements and preparing as many tax returns, he left Price Waterhouse in 1986 to start his own syndication firm. By 1990, Joel had built a property management firm of more than 40 employees with a portfolio exceeding $100 million. Joel continues to syndicate real estate and other assets, as well as counseling other promoters on successful syndication strategies. Joel is a real world, 25+ year veteran of the venture capital, private equity, and Hedge Fund world who addresses audiences from Silicon Valley venture firms to Wall Street bankers on matters of capital formation and most recently, on Investment CrowdFunding. Twice each year, Joel hosts and headlines the standard-setting Real Estate Syndication and Hedge Fund Symposium program, educating and advising CPAs, attorneys, investment bankers and asset class specialists on organizing and running investment pools.

What you’ll learn in this episode:

*Joel’s basic definition of “syndication” as it applies to real estate investing. It’s the ability to put a lot of money from multiple investors into a single bank account, where each person owns a certain portion of that. It’s very similar to the way Wall Street works. The way you get bigger money for larger-scale investments is by putting people’s money into a pool. Everyone is free to put in the amount they choose. He compares the process to dividing a loaf of bread.

*One of the broad uses of syndication is having a large fund to draw from to, for example, work on rehabbing three houses at a time. The profit from each flipped house goes back into the fund. This process can also apply to larger investments like apartment buildings and shopping centers. He makes another comparison, this time to the venture capital business. It’s the same process that is used for starting up a business with multiple investors or making a film. “Anything where you’re raising money is a form of syndication.”

*Joel says that people would get “better economies of scale” and have a better business if they could have three or four house rehabs going on at the same time. You could have a crew working for them all the time. The only thing that prevents this is a shortage of capital. “As you mature in your business, your money matures and your life’s going to get better but you have to be good at picking the properties and managing the rehabs.”

*Joel offers a comparative example of different ways of investing and making profits. He uses an example of a $500,000 house flipped for $600,000. That kind of margin is more likely when you syndicate the deal. You could potentially make $100,000 profit every six months. If you’re licensed and are the property manager, you take all the fees related to the transaction. “Instead of flipping the thing and making one hundred just the brokerage commission on the front end alone might be half of that amount and then you end up keeping that thing in your portfolio and you’d end up making literally between 5, 10 and 15 to 1 on how much you would make by wholesaling it over a couple of years. . .The reason people make a lot of money is because they have their money under control.”

*Joel discusses the concept of a “readiness premium,” which is a bonus you get for being ready with the money to invest when you approach a seller, as opposed to having to spend the next six months raising it. He ties this in with a discussion of “better money,” which comes when investors are ready to take their game to the next level. The key to understanding “better money” is thinking outside the box and not relying solely on hard money lenders. Outgrowing those lenders, your ability to make your own decisions goes up.  “When you have the equity portion of your deal, which is the part you syndicate, organized, everything else starts to fall in order.”

*There are no requirements to become a syndicator, and you don’t have to be licensed. “You have to be able to get investors to say yes and give you their money.” The government puts restrictions, however, on who can put money into these deals; they don’t like regular people getting involved in transactions that could be risky. They set up rules that designate wealthy people as “accredited investors” – typically people who make several hundred thousand a year or who have a million dollars net worth. The government wants to protect non-accredited people. It’s best to seek investment money from more accredited than non-accredited people.

*Joel says, “The most important thing you need to know is that we operate exempt from the rules.” Companies that are on the stock market exchange have to register with the Security Exchange Commission and do regular reporting. But if you operate exempt, you don’t have to tell the government what you’re doing or do an annual report – just an initial report telling them what you just did. The exemption from securities is called Reg D. Under this, you cannot do “general solicitation” but “you’re allowed to take these wealthier people and a few of the non-accredited into your deal.”

*Joel explains there are some new rules in this arena that allow those seeking investors to advertise on TV and radio and do seminars – but the tradeoff is that you can’t take non-accredited investors. If you take non-accredited, then you can’t advertise.

*Joel explains that one way to get into syndication is to work with a specialized securities attorney. But attorneys aren’t going to be able to offer business advice. Many of the decisions you need to make are not legal questions. Joel discusses the limitations of working with attorneys to lead up to an offer to come to his symposium, where they will learn how the business works.

*The private placement business, the sales of securities, is something of a “secret” area that most people have never heard of because it really only applies to the top 3% of Americans, about 10 million people. The market for the sales of these securities is bigger than the entire U.S. stock market. It’s bigger because all the real estate holdings by wealthy people.

*Joel says, if you want to follow the industry standard in real estate investing, make sure you get good business and legal advice, get everything well organized. When you do a good job, everything will start going your way.

*Joel gives details on his symposium: the Syndication Hedge Fund Symposium in Las Vegas October 27-30. To get a sense of how syndication works, they release two videos a week, and there are over 100 clips in their library. To access them, text the word “ASSET” to the number 72000.

*Depending on the attorney you work with or how long it takes to answer some very deep upfront questions, it can take a few months to put all the paperwork together to create a syndication. Some of the questions include “How do you want to take your fees?” “How do you want to get paid?” “How much return do you want to give the investors and how much do you want to keep?”

*Joel discusses the potential mistakes that can happen when you get involved in syndication without the assistance of companies like his. You may end up with deal terms that are unfriendly. “You need to advocate for the deal because if you write terms that are too ridiculous and one sided, investors are not going to give you their money.” You have to be careful to create investor friendly terms.

*Asked why many people hold back from pursuing syndication, Joel explains that one of the largest misconceptions is that they can get the money cheaper some other way. It’s not about the interest rate, it’s about the quality of the capital. You get paid two different ways in these deals. First, you get paid by being smart, by picking a property that has good value on the back end. But you also want to get paid for your time because you’re investing a lot of energy on these deals. If you deal with a hard money or primary lender, they’re not going to let you take money off the top for your time.

*Joel adds a bombshell: “You’ve got to remember, a lot of hard money loans are made with the intention of you going bankrupt when they underwrite those properties. They’re thinking to themselves there’s a good chance I may get this property back. Do I want the property in a syndication environment?” He adds that people in the syndication world are not rooting for your to fail like they are in a hard money environment.”

*Responding to a question from a listener, Joel says getting involved in syndication has nothing to do with credit. Investors are looking for your ability to deliver on what you promise. Do you have the ability to sell the property and get the money back. Do you have the ability to keep some records so that we all get what we’re supposed to get. That’s what they’re looking- they’re looking at business issues. This is a business transaction. It’s not a financial transaction like when you’re borrowing money from a bank.

*Joel offers advice on how to find investors to syndicate with. It’s not just about looking for rich people, it’s about active people looking for passive people “sitting around wanting to make their money work as hard as they do all day long.” He says they’re potentially everywhere. A wealthy person is going to perk up if you start talking about putting together a fund to buy a bunch of real estate; he/she will want to know what exactly are you buying.

*Joel invites anyone who is interested in exploring syndication to come to the symposium and meet other people who are syndicating and some alumni that have had success in syndication. “You’ve got to get yourself in the mix. You’ve got to get in the flow. You have to be around people who were doing the same thing and then you start to become like those people.”

*Joel’s parting advice: “If you really want to turn your real estate investing into a business then you have to take your money to the next level and put it like this. This is something that a lot of people don’t really understand and that is that the money in real estate is not made in the real estate. The profit doesn’t come from the real estate, it comes from the money. When you control the money, you can buy all the real estate you want generate all the profit that you want. So the more capital you control the more deals you can do and the more steps you can make happen.”

*Joel mentions that he has had about 1,000 people come through his symposium, and probably spawned 75 funds, and 150 or more syndications, many from people who didn’t realize they would ever be able to sell.


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