Mistakes Passive Investors Should Avoid in Real Estate Syndication
Passive investors who want greater cash flow can choose to take part in a real estate syndication. The beauty of it lies in the fact that people can pool their resources together in order to purchase a nice apartment complex or townhouse.
But as much as it is an easier way to build wealth passively, a real estate syndication is something you need to take seriously. A lot of research and preparation is involved, so you can’t expect things to move a little faster.
Cash flow is great, but if you can’t play your cards right, you won’t be making any positive gains for long.
So, before you go out there an form a real estate investing syndication, be sure to steer clear of these top seven rookie mistakes:
- You lack resources
Whether it’s single-family or a multifamily property, building a real estate portfolio can cost you a lot of money. On top of the value of the property itself, you also need to spend for the legal and technical cost of structuring a deal. You are looking at more than a hundred thousand dollars that your investors may not shoulder by themselves. As you build the syndication from the ground up, you will need to explore other funding sources like your Individual Retirement Account or other people’s money (OPM).
- Not engaging your investors
A syndication is, for the most part, an organization where people help each other build wealth. That being said, close collaboration is the key to a successful real estate syndication. You need to communicate with your investors on a daily basis because you need to build trust and confidence. Take out these two and the whole structure collapses.
- Ignoring the legal side of the deal
The best part of managing a real estate syndication is being able to get a big fat equity check every quarter. The worse part: legal matters. But even if it seems so tedious to first-time investors, the legal side of this business is something that needs to be handled religiously. All the paperwork involved in the structuring of your syndication may seem annoying, but they’re what separates from very hefty fines and penalties. Hiring a syndication attorney can help you and your investors enjoy your yields without any legal complications.
- Not reaching out online
If you are sponsoring a real estate syndication, you will need to attract as many equity partners as you can. Without effective marketing, you won’t be able to reach out to those who want to dive into this profitable venture. Start building your network online by joining social media groups and managing your official Facebook or LinkedIn page. You can also reach out to potential investors in places like Biggerpockets.
- Throwing transparency out the window
There’s one thing that could really destroy your relationship with your investors and that’s keeping them in the dark. It’s important to remember that your investors have certain expectations that you have to meet. You need to issue reports on time and give them a clear and precise overview of how the portfolio is performing. Give them details because the least you want is to give a good reason to bail.
- Not doing enough risk assessment
In my industry, we have something called the “first deal syndrome.” It’s when a first-time investor, after acquiring a successful deal, jumps to the next one at a snap of a finger. You can be aggressive, but in real estate syndication, every action should be calculated. So, before you acquire a commercial property, double check the fundamentals of the area. Work with brokers and local chambers of commerce to know if the property you’re acquiring can benefit you in the long run.
- Putting property management to the sidelines
Closing a multi-million dollar deal can be a good reason to pop a champagne bottle, but it’s only the start of the action. To ensure that your property is cash flowing, you have to make sure it maintains a high occupancy rate. Property management is very important in this sense because improvements to the asset is crucial to retaining tenants. With the right property management company, you can reduce vacancy rates and maintain the property’s value as well.
As a real estate syndicator, you need all the information you can get to structure great deals. There is a lot you can learn in this field, so you might want to reach out to a real estate syndication guru and get started on building your portfolio the RIGHT way!
Also Read: Making the most out of your day