A multifamily syndication is a great option if you are looking to scale your real estate investment strategy.
Real estate investing takes tremendous amounts of capital. When you run out of your own money, do you stop, or try to keep going?
Vinney Chopra is an experienced deal sponsor who has purchased over 38 properties through multifamily syndication. Today, he takes us through the why, what, who, how it works.
When you run out of your own money, your ability to grow your real estate portfolio will stop. Unless, you learn how to attract other people’s money, OPM. Syndication is an investment vehicle that allows unrelated investors to pool their capital together. The combined funds allow you to purchase larger, more expensive multifamily properties than you are likely to qualify for on your own.
The syndication forms an entity that has two general groups; general partners and limited partners.
The general partners are the sponsors, or the syndicator, of the deal and are responsible for finding and actively operating the multifamily property. Additionally, the general partners attract investors. The investors are passive and join property purchasing entity as limited partners.
Because you have investors trusting you to take care of their money, the SEC requires multiple documents that make clear to all parties the risk. The documents also make clear how the entity is to operate, responsibilities of the parties, and how the money will flow.
You will need a securities attorney to prepare the Private Placement Memorandum, Operating Agreement and the Subscription Agreement for each syndication.
There are multiple vehicles for raising capital. The two most common for multifamily investing are 506b or 506c. Both allow for you to raise capital from accredited investors. The distinct difference between the two is based on whether or not you have a pre-existing relationship with the investor.
Regulation 506b requires that all investors have a pre-existing relationship, you the deal sponsor. You can also have up to 35 “sophisticated investors” participate in this structure.
Regulation 506c requires no pre-existing relationship. Additionally, you can advertise far and wide and attract any accredited investor to participate in your deal.
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To be successful in real estate investing, you will need to look for ways for acquiring capital. If you are syndicating, you should be able to look for potential investors for your LLC. For this, you will need to focus on getting capital from your circle of influence.
The easiest money usually comes from those who are closest to you. These people know you and most likely will support you if they believe in the opportunity you are presenting. Remember: Chemistry and trust help build strong bonds.
The next closest group of eligible investors will be your acquaintances. Again, these people know you and are likely to support you.
Now, that you have introduced your investment opportunity to your closest circle, it’s about time to check with your business associates. These are the professionals you know that have a retirement account and will likely to invest these funds for passive income. Being able to pitch your syndication idea to them can help you form a solid syndication of eager investors.
The key to attracting capital is by communicating the opportunity to your potential investors. You can easily do this with a “credibility kit”.
This is where you share with potential investors the knowledge you have acquired. You should be able to introduce your investment team, and the criteria you will use for selecting a property. The goal is to convey to the investors that they will not lose on their investment.
You will also need to educate investors on why investing in an emerging market is a sound decision. For that, explain what you know about the growing demand for multifamily, job growth and the opportunity to increase rents.
You can never start early. Investors might pull out at the last minute. You need to have a long list of potential investors that can fill up the space at any time. A deal is not a deal if you don’t have the funds to close.
Vinney has overcome the issues of investors backing out or not having enough money to close. He does this by offering investors 2% of their funds on the start date of their deposit until the asset is acquired. This guarantees closing and provides the lenders assurance that the down payment is available.
Another important rule is to keep records. Vinney recommends a spreadsheet wherein you can identify the goals and dreams of the investors and record the dates and what you’ve discussed.
Your ability to close deals will raise your stature with the real estate brokers in the market. The more deals you close, the more deals you will be presented.
COMMUNICATING WITH INVESTORS
Vinney recommends regular, constant communication with investors. He leverages technology with VoIP calls, webinars, videos, emails, etc. As a result, only five investors were able to visit their investment properties throughout a 12-year period.
When you have constant communication with your investors, they’ll feel comfortable and there’s a big possibility that they’ll share with their friends about the good job that you are doing. This opens up new opportunities for you in the near future.
As a real estate investor, you need to make sure that you get the most out of your money. This means you have to look for deals that can actually translate to a good cash flow. However, you will also encounter bad deals along the way.
Obviously, the best course of action when you meet a bad deal is to step away from it. In some cases, it will take a long time before you realize you have accepted a deal that’s disadvantageous from the very beginning.
For me, the best way to handle a bad deal is to identify one from the get-go. We are always told by doctors that “prevention is better than a cure.” In the multifamily sector where every cent you invest should secure high returns, in the long run, you should be able to approach a proposal with extra care and vigilance. Doing so will allow you to close a deal that’s highly beneficial to your bottom line.
You don’t have to be a psychic or a fortune teller to know if an investment proposal will result in a bad deal. All it takes is to apply the right skills.
A good investor deals with a lot of data. Numbers are important because they guide us in making the best possible decisions. If you want to take part in a multifamily syndication, you need to make sure that the properties you are going to purchase are located in growing communities. We call these emerging markets because they are characterized by high job growth, improving lifestyles and availability of basic utilities. You can partner up with local brokers and chambers of commerce to find highly lucrative markets. This way, you can find locations that offer the best possible deals.
If you are a syndicator, one important factor that should help you decide on a property acquisition is its comparison with other properties in the area. The amount you are going to shell out can determine how strong your cash flow will be and how the acquired properties will appreciate over time.
I am going to use a real-life example for this. I was set to acquire a large Apartment Complex in Georgia. Before making the purchase, I had my brokers work on the comps. To my surprise, the effective rent for these units was $646, way below the average for the area which was $872. It turns out that the property was not managed well, resulting in its depreciation. This pushed me to make the purchase right away. I could push the rents up by $200 and they would still be low by comparison. In two years’ time, I will have increased the value of the property to an amount higher than what I paid for.
As you can see, making market comparisons can provide you with a lot of valuable insights into finding a great deal.
Before acquiring a multifamily property, due diligence must be conducted. For many investors, this basically means determining the specifics of a property and making sure it will be a good investment across the board. Inspections of the sewer lines, boiler, roof, foundation and the overall condition of the buildings must be foremost.
Different investors have their own style when it comes to conducting due diligence. If your main focus is to know whether the property can secure a steady income, you need to take a look at the financial statements of the previous owner. You also need to look at the community itself and check whether it’s a good place for tenants.
Another important consideration is the studies you are going to conduct. A thorough inspection of EACH AND EVERY property is important. Inspecting a few units out of a total of 100 will create a difficult problem later on. What if 25 percent of the units are not good in condition at all? It’s important to protect your investments by making sure everything is in order before closing. Otherwise, you will be left with a lot of units that are unsellable.
Keep these tips in mind before making a purchase, and you will find a deal that delivers more than it can promise.