Real estate can be a risky and expensive business to start. You may choose to start small, but this will take you ages to achieve your dream. Today, you don’t have to wait to gain financial momentum; a potential solution is real estate syndication.
What Is A Real Estate Syndication?
Real estate syndication allows you to team up with other investors, pool your resources, and finance a property investment. Your team can range from two people to even hundreds.
Essentially, a real estate syndication has two major players: the real estate investor and the sponsor. The sponsor is the most critical person in the investment because the rest of the investment team depends on them. But aside from scouting and managing real estate properties, there are also legal considerations involved, and this is where enlisting the help of a syndication law firm comes in.
Suppose you’re looking to explore syndication for your real estate ventures. Here’s a quick guide on the real estate syndication phases:
- Origination Phase
In this first stage, you’re laying the foundation of the real estate venture to ensure it’s a smart investment and it generates wealth in the long run.
During this phase, you do the following:
- Do Your Due Diligence
This is where you plan yourself and find out about the market. As you do your due diligence, you must immerse yourself in your local real estate market to learn more about it. If you’re new to the area, call your networks in the industry to help you find property options that fit your team’s flexibility.
During your due diligence, find a sizable property that has good local development plans and fits your set budget. Ensure you also physically check the property you’re about to acquire and get data that’ll make your operational phase smooth.
Remember, how well you do your due diligence reflects how you’ll be able to build your business case and attract investors to your project.
Once you’ve identified the asset, you need to market the deal. Talk to your friends, family, and people in your network, and rally a dedicated group of people to join your investment. Consider people with skill sets, like a lawyer and a real estate agent who can help you with the project.
- Get Financing
The team you come up with needs to chip in a percentage of the investment. During this phase, you can also start writing your investment’s by-laws. Next, develop a memorandum detailing the risks and returns of each party that you’ll submit to the government. And finally, hire an auditor to help you with your financial record to be on the right side of the law.
- Close The Deal
Now you need to negotiate the deal on behalf of your partners. Here, you need to speak with the seller and get a good deal on the property. Validate the title deed you’re given, solve any pending issues, and get the deal closed.
- Execution Phase
The execution phase is where you use your logistics and managerial skills. The following are the key things you do during this phase:
- Syndicate management
The syndicate relationship you formed with your partners needs to be managed. You should keep them updated on every step of the operation. You must set meeting dates and ensure everyone attends so they can actively participate. The meetings can be every quarter so you can keep them updated and assured of their investment.
- Property management
As the sponsor, you actively get involved in the daily property operations. The scope of your work isn’t limited, and you should be ready to handle it. It could range from rent collection to property maintenance and repairs.
- Liquidation Phase
During this phase, the investment has turned a profit and has had a “liquidity event” that returns the capital used to the investors. A liquidity event can either be selling the real estate asset or refinancing. If the liquidity is by refinancing, your responsibility includes:
- Shopping for lenders
- Loan application
- Finding a loan guarantor
- Closing the loan deal
- Distributing the proceeds of the loan
During the sale of asset stage, your responsibility as a sponsor is as follows:
- Preparing the financial records for inspection
- Upgrading or repairing the asset to make it presentable to buyers
- Conducting buyer tours
- Marketing the asset
- Reviewing the purchase offers
- Negotiating the contract with the buyer
- Closing escrow and paying investors their proceeds
- Preparing the tax returns
Once you’ve refinanced the project, it goes back to its operational phase until another liquidation event occurs or you sell the property.
Venturing into real estate properties can be a fantastic investment opportunity to grow your wealth. And of the ways to finance this is through real estate syndication. To help you navigate this journey, the insights above can be a good start in understanding how real estate syndication works and how you can go about it. But most importantly, consult professionals with a firm grasp of the dynamics of real estate syndication to avoid falling into typical traps.