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177: Syndication – Friday Fundamentals

The life cycle of a real estate investor looks something like this: save up your money, buy an investment property, and repeat. Building a real estate portfolio on your own is certainly possible. You can save your money, put that money towards investment properties, and repeat that process as quickly as you are able to. What many real estate investors quickly realize is they have limited resources, whether that’s time, money, experience, or deals. Having limited resources slows your growth. It takes you longer to find that next deal, or save up the capital to invest in that next deal, or find the time in your busy schedule to look for deals to invest in.

No matter how much money, time, experience, or deal flow you might have, you’ll eventually hit a ceiling if you are active enough. You’ll eventually run out of your own capital if you are doing lots of deals. You’ll eventually run out of time. You’ll eventually run out of deals, and you’ll inevitably come across something you don’t quite have experience with. This is just the nature of the business.

So here you are, as an active real estate investor and you’ve hit this wall. What are you to do? You could slow down and wait until you personally have the resources to grow, OR you could look to pool together those resources you need. This is called syndication.

Syndication is a fancy term for pooling together resources. It’s actually quite common, but you may not realize it. When you buy a ticket on an airline to go on vacation, you are participating in a syndication. You and 100 other passengers are pooling together money in the form of air fares to travel to the same destination. Without this syndication, you would have to save up capital to afford the entire costs of travelling alone.

Syndication works the same way with real estate investing. You can syndicate not only capital, but experience, time, deals, and almost anything else that will provide value to the goal or project.

Syndicating capital, experience, deals, time or any other resource allows you to grow and scale by removing these bottleneck of these resources. You can tap into an almost unlimited supply of resources.  The role of a synidcator is to organize and pool together resources. Real estate syndicators will pool together capital for a deal, manage the project, communicate with the group, and be the general sponsor of the deal. In exchange for being the sponsor, they will receive a piece of the equity typically.

When you syndicate resources for a project, you aren’t doing so only for your own benefit. You are also providing value for others. The investors in a syndication have the opportunity to be involved in a deal they otherwise wouldn’t likely have. For example, you as a real estate investor, have found a great opportunity in a value-add 50 unit apartment community. But, you have limited capital and can’t take on the project alone. This is where syndication can be a beneficial strategy. You could raise the capital required for the down payment from investors. In return, the investors will be given an equity stake in the property. If you, as the sponsor, never syndicated this deal, then likely no one would have had the opportunity to invest in this deal alone.  This group benefit is just one of the many advantages of syndication.

As a syndicator, you are being a steward of other people’s money. This is a huge responsibility, and not one to be taken lightly. You must be diligent in preserving investors’ capital, while making sound judgments on how to best maximize returns and mitigate risks. This is a tall order. When you are handling other people’s money, there are laws that you must follow. The Securities and Exchange Commission is the governing body that regulates these partnerships and transactions. It’s vitally important that you consult with an SEC experienced attorney before syndicating deals.

Some great resources I’ve found around the topics of raising capital, syndicating deals, and following and the rules and regulations include:

  1. Best Ever Apartment Syndication Book by Joe Fairless and Theo Hicks
  2. Raising Private Capital by Matt Faircloth
  3. The Art of Raising Capital by Darren Weeks
  4. It’s a Whole New Business! by Gene Trowbridge

Syndication can be a great strategy growing and scaling your real estate empire. Done right, it can yield great results, and ones that you might not be able to acheive without the benefit of working with a group of people.

There’s no right or wrong way by either investing alone, or investing with other people. Find whichever is right for you and fits your goals, and that’s the right one for you. Remember, real estate investing isn’t a a way to get rich quick. Real estate investing is a way to build wealth and achieve financial freedom over the long-term. Scale and grow your portfolio at your own pace, as fast or slow as you want. Eventually you will have built a real estate empire and achieved financial milestones you only once dreamed of.

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