The "How To" for Investing in Your First Syndication
by Christopher Levarek
“The good life is a process, not a state of being. It is a direction not a destination.”
- Carl Rogers
If you’ve ever purchased a house or actively invested into real estate, you might be fairly familiar with the process of buying a rental property. You pick a market and local neighborhood, select a property and make an offer.
However, when you are investing into a passive investment or in this case a real estate syndication, the process is most likely unfamiliar. Today, we will cover the 5 general steps of an investment into a syndication so that you can easily understand the process and what to expect.
The 5 general steps of investing in a real estate syndication :
Educate & Set Investment Goals
Find an Investment Opportunity & Sponsor
Reserve Your Spot on the Deal
Review the PPM & Sign the SA
Send in Your Funds
Step 1 : Educate & Set Investment Goals
If you are reading this post, you are already on step 1 as you are gathering information and learning. Understanding the investment model or process is a great place to start. As you start to see the various investment types and projects, you should begin to learn not only what’s available but also what you like and do not like.
At this step, you examine your short/long term investment goals and determine what is needed to qualify an investment for you. Are you investing for the maximum return possible? Or are you more interested in value-add projects with great tax depreciation benefits to the investor?
What aligns with your investment goals as far as timeline of a project? Are you looking for a timeline horizon of 3, 5 or 7 years for example? Are you investing for cashflow today on a well-performing stabilized property or are more interested in a profit-from-sale return on a development or value-add project?
Step 2 : Find an Investment Opportunity & Sponsor
Now that you’ve clarified your investment goals, you can actively look at the available opportunities to find one that suits you. You might already have a good understanding of the various types of syndications available which range from development, value-add to fully stabilized projects. The varying asset classes can include self-storage, multifamily, mobile home parks and more!
You can now pick and choose those investments that peak your interest and review the supplied “investment summary” or attend a webinar on the deal. This will give you an understanding of the market, learn about the sponsor team, review the business plan and projections.
It is important to perform your due diligence. Remember you are entering an investment partnership so be sure you are comfortable with the sponsor team and ask all the questions necessary for you. Maybe start with some of the 10 Key questions to Ask any Sponsor and ensure their underwriting is conservative to your liking.
You can also very easily review the market of the proposed deal to see if it has good indications of positive population growth, positive employment trends and more. Much can be accomplished with a simple search for “city name population growth” or using some free online Market Analysis Tools.
Step 3 : Reserve Your Spot On the Deal
One you’ve selected a sponsor team and investment opportunity you feel good about, it’s time to reserve your spot in the deal. Remember these deals fill up quickly and are offered on a first-come-first-served approach. This is why it is important to have completed steps 1 and 2 so you are ready to take action and reserve your spot when the time comes.
Typically, after reviewing the “investment summary”, you will be able to show your interest in a deal by submitting a “Soft Reserve” commitment. This simply states your interest with the sponsor team and reserves a spot but is non-binding. This can allow you to continue to vet the deal, attend a webinar on the project and still be sure you have a spot.
Step 4 : Review the PPM & Sign the SA
Now that you’ve reserved your spot, you can expect a “Hard Commit” to be requested, which is where you are confirming your interest. At this point, once you’ve officially committed to the project, the sponsor team will send the full partnership documents for signing.
The main documents to be familiar with are the “PPM” which covers the entire project in detail/terms and the SA or subscription agreement, “SA”. The PPM covers the opportunity, investment terms, risks and investor expectations.
Although these legal documents can be lengthy, they are important to review. Be sure to bring up any concerns or questions with the sponsor team as soon as possible.
The SA will be the document you sign confirming your acceptance of the terms presented and “subscribing” to an investment amount on the project.
Some terms that will be also be signed for include what type of entity you will invest as (individual, joint, LLC, etc), how you wish to receive your distributions(check or wire), etc.
Step 5 : Send in Your Funds
Once you’ve signed the investment documents and reviewed the PPM, you will be able to send in your funds. The wire information for the project will be shared either through a secure investor portal online, via email or perhaps even with the PPM documents.
It is important to always verify with the sponsor team the wire information if sent by email. This can be done by arranging a call with the Sponsor and confirming the wire info over the phone.
Once you’ve wired the funds, be sure and let the sponsor team know so they can confirm the reception of the funds.
In Final
You did it!
Hopefully at this point, the whole process of investing into a real syndication should be clearer.
Your work or due diligence up front is important for a confident and sound investment experience. However, once all the above steps are completed, you can now benefit from all that real estate syndication has to offer with very little required on your end going forward.
Although syndication can seem intimidating, our purpose is to help you understand this investment and be the guide through every step along the away in your first syndication.
Remember to sign up for the Valkere investor Club to schedule a one on one call, discuss available opportunities and formalize an investment plan based on your investment goals.