Tag: invesment

Once you decide to invest outside your local area, the possibilities are limitless. This can be exhilarating and overwhelming at the same time.

A tidal wave of thoughts may come flooding in immediately. Should you consider a bustling city or a metro area? You may reminisce about a vacation you enjoyed and the gorgeous buildings you saw there.

You could dive down every possible rabbit hole, cross-referencing “best real estate market” lists, trying to make sense of current population trends, and even looking up news local to areas you’d be interested in. Honestly, this won’t really help you draw any conclusions, plus you’ll waste a ton of time and energy.

Instead, begin by assessing your personal investing goals. Maybe you want to invest in a growing market that also provides decent cash flow. Using that basic framework, this research checklist will help narrow things down:

• Job Growth
• Population Growth
• Job Diversity
• Landlord/Tenant Laws
• Taxes
• Geographical Features
• Cost of Living
• Local News
• Local Government
• Whether You Have an Unfair Advantage

 

Job Growth

Since steady job growth is indicative of a healthy local economy that’s likely attractive to new businesses, developers, and residents to the area, this is the most important metric to evaluate in each market.

Job growth is a leading indicator of population growth. The more jobs, the more residents, the more likely the area will maintain a strong tenant base. When more people are attracted to an area, the demand for housing increases, which drives up rent and real estate prices.

Population Growth

Since the population in a certain area could be affected by natural disasters, migration patterns, and more, you always want to research it after job growth.

Finding an area with long-term upward population growth trends (not a temporary bump) is key, and a major factor supporting that trend is job growth in the area.

These two metrics provide a full picture of the health and future of a given market.

 

Job Diversity

You want to find an area with a variety of industries supporting the local economy. Strong job growth is much less enticing if you discover that most of the jobs in the area are, say, in the tourism industry.

A recession or a negative news story could largely impact the number of tourists, and therefore the job growth and the population trend. A diversified job market is much more attractive since a hiccup in any single industry likely wouldn’t affect the area as a whole.

 

Landlord/Tenant Laws

Beyond the top 3 factors – Job Growth, Population Growth, and Job Diversity, the next best factor to learn about has to do with the laws governing rental properties.

Rent control, for example, is great for tenants but makes it incredibly challenging for landlords to make a return on an investment in an area where costs for contractors, pest control, and property management are skyrocketing.

As an investor, you want some insight from local property managers who are intimately familiar with these laws, so you can find landlord-friendly areas.

 

Taxes

While usually the last thing on investors’ minds, taxes can make a huge difference on the bottom line.

State income taxes and property taxes will both impact your operating budget thus, your overall return. Each state has a different tax structure and it’s good to understand what you’d potentially be getting into so you won’t be surprised later.

 

Geographic Features

Use Google Maps to check out the actual, physical landscape of the area. Look for physical barriers like a body of water, a mountain range, or any other geographical features that could inhibit the physical development of the area.

As an example, coastal cities are limited by the ocean. Development can only get so close to the water, which forces them to build upward or expand into the suburbs. This drives up the value of centralized real estate, especially in a time of job and population growth.

 

Cost of Living

By seeking out an area where the cost of living is low, especially in comparison to the median income in the area, you’re more likely to experience growth. If people can afford to live in the area easily, there is room for the cost of living (i.e., rent) to rise as more jobs and people move into the area.

 

Local News

While the other, previously listed factors are much more important, once you’re pretty “sold” on a certain area, you may want to track a few local news stories.

It would be great to have some heads-up about new companies moving to (or away from) the area, local announcements, community developments, and anything else that would allow a sense of understanding of the local economy and potential future of that market.

 

Local Government

Just as with the local news, the local government is indicative of the area’s future standings. It’s a good idea to invest in areas with strong local leaders who support new initiatives, an expanding local economy, and who’s vision includes making the market vibrant and welcoming.

Strong leadership from the local government is attractive to corporations, which means that job growth will continue.

 

Whether You Have an Unfair Advantage

There’s always the chance that you have greater insight into a certain area, more so than other investors. Maybe you have a close cousin or best friend who lives there, maybe you went to college there, or you grew up there.

Any time you possess an unfair advantage, more weight should be given to that market. Local connections or a little history with a particular area can put you leaps and bounds ahead of other investors.

 

What About Investing Passively In a Real Estate Syndication?

As a passive investor, you’ll focus on finding a strong sponsor first. Once they let you know about potential deals, you can use these 10 factors, in combination with your personal criteria and goals, to conduct your own thorough research while avoiding overwhelm.

Any time a potential investor is reviewing real estate syndication investment opportunities, they’ll likely come across the term “equity multiple”. Even if they’ve purchased a primary home or a residential rental property before, it’s unlikely they’ve heard of equity multiples.

When it comes to passively investing in real estate syndications, however, it’s an important phrase to know and understand.

What “Equity Multiple” Means for Investors Interested in Real Estate Syndications

As a new or seasoned real estate investor, it’s important to know what you’re getting yourself into. Part of that awareness comes from understanding the metrics presented in the investment summary prior to agreeing to the deal.

As passive investors review potential real estate syndication deals, the term “equity multiple” might seem confusing or even daunting if no one’s ever explained what exactly that means.

Alternately, our investors have shared with us that, after they grasp the concept of equity multiples, they are able to more confidently compare projected returns and make wiser investment decisions.

Defining “Equity Multiple”

The initial amount invested into a deal is an investor’s capital. That capital equals the amount of equity an investor has in the passive investment. Thus, the term Equity Multiple simply means the amount your capital (or equity) will be multiplied by the end of the deal.

If a real estate syndication deal has an equity multiple of 2x and a projected hold time of 5 years, that means investors can expect to double their capital (original investment) in that 5 year period.

The equity multiple is the total of the cash flow distributions plus the returns after the sale of the asset.

A Little Math to Help Demonstrate

How about we explore an example deal with a 2x equity multiple?

The investment (capital, also referred to as equity) is $100,000 and this deal has a projected annual rate of return of 8% with a 5 year hold period. This means the investor may receive about $8,000 per year for 5 years.

In other words, over a 5 year period, the investor will have received a total of $40,000 in cash flow distributions. Then, when the asset is sold, investors receive their initial $100,000 back, plus another, say, $60,000 in profit from the sale.

When the $40,000 in cash flow distributions and the $60,000 from the sale are added up, that’s $100,000 in total returns. The investor began with $100,000 and, not only got that back but also earned an additional $100,000 cash.

In this example, the investor has doubled their money, which is what it means to have an equity multiple of 2x.

How Passive Investors Might Look at Equity Multiples

In real estate syndication deals, it’s actually quite reasonable to expect to double your investment over the course of 5 years, but that doesn’t mean these deals are easily found. Here at New Level Investments we aim to present our investors with a 2x equity multiplier over a 5 year hold period.

Remember, the equity multiple, just like any other projected return or rate, is projected. That means it’s estimated using formulas, algorithms, and expectations of the market, and it’s not guaranteed. The actual returns may be below the projections shown on the investment summary, or they may far exceed what was thought possible.

All in all, investors should be reviewing the details of any presented deal with a discerning eye and ask any and all questions that come to mind until they feel comfortable with the information presented and confident that they are ready to move forward.

Now that you fully understand equity multiples, you can approach the next deal with confidence around that term.

Imagine spotting an old bookshelf sitting out on the curb. You pull over to check it out, and since it’s in good shape, you proceed to lug it home and give it a fresh coat of paint.

A few years later, you sell the shelf to someone else who claims to have the perfect spot for it.

You took something that had been overlooked, committed some sweat equity, and breathed new life into it. This is the essence of value-add, and it’s a commonly used strategy in real estate investing.

The Basics of Value-Add Real Estate

In the case of single-family homes, the process of buying a run-down property, remodeling it, and then selling it for profit, is commonly referred to as fix-and-flip. Your sweat equity and ability to see a diamond in the rough is rewarded monetarily, and the new owner gets an updated, move-in ready home.

Value-add multifamily real estate deals follow a similar model, but on a massive scale. Hundreds of units get renovated over years at a time instead of just one single-family home over a few months.

A great value-add property may have peeling paint, outdated appliances, or overgrown landscaping, which all affect the curb appeal and the initial impression that a potential renter will form. Simple, cosmetic upgrades can attract more qualified renters and increase the income the property produces.

In value-add properties, improvements have two goals:

• To improve the unit and the community (positively impact tenants)
• To increase the bottom line (positively impact the investors)

Value-Add Examples

Common value-add renovations can include individual unit upgrades, such as:

• Fresh paint
• New cabinets
• New countertops
• New appliances
• New flooring
• Upgraded fixtures

In addition, adding value to exteriors and shared spaces often helps to increase the sense of community:

• Fresh paint on building exteriors
• New signage
• Landscaping
• Dog parks
• Gyms
• Pools
• Clubhouse
• Playgrounds
• Covered parking
• Shared spaces (BBQ pit, picnic area, etc.)

On top of all that, adding value can also take the form of increasing efficiencies:

• Green initiatives to decrease utility costs
• Shared cable and internet
• Reducing expenses

The Logistics of a Multifamily Value-Add

The basic fix-and-flip of single-family homes is pretty familiar to most people, but when it comes to hundreds of units at once, the renovation schedule and logistics aren’t as intuitive. Questions arise around how to renovate property while people are living there and how many units can be improved at a time.

When renovating a multifamily property, the vacant units are first. In a 100-unit complex, a 5% vacancy rate means there are five empty units, which is where renovations will begin.

Once those five units are complete and as each existing tenant’s lease comes due for renewal, they are offered the opportunity to move into a freshly renovated unit.  Usually, tenants are more than happy with the upgraded space and happy to pay a little extra.

Once tenants vacate their old units, renovations ensue, and the process continues to repeat until most or all of the units have been updated.

During this process, some tenants do move away, and it’s important for projects to account for a temporary increase in vacancy rates due to turnover and new leases.

Why We Love Investing in Value-Add Properties

When done well, value-add strategies benefit all parties involved. Through renovations, we provide tenants a more aesthetically pleasing property, with updated appliances and more attractive community space. By doing so, the property becomes more valuable, allowing higher rental rates and increased equity, which makes investors happy too.

The property-beautification process and the fact that renovated property is more attractive to tenants is probably straightforward. But let’s dive into why value-add investing is a great strategy for investors.

First, Yield Plays

 To fully appreciate value-add investments, we must first understand their counterparts, yield plays. In a yield play, investors buy a stabilized asset and hold it for potential future profits.

Yield play investments are where a currently-cash-flowing-property that’s in decent shape is purchased and held in hopes to sell it for profit, without doing much to improve it. Yield play investors hold property in anticipation of potential market increases, but there’s always the chance of experiencing a flat or down market instead.

In a yield play, everything is dependent upon the market.

Now, Let’s Get Back to Value-Adds

 Value plays and yield plays are the opposite. In a value-add investment, significant work (i.e., renovations) takes place to increase the value of the property and doing such improvements carry a significant level of risk.

However, value-add deals also come with a ton of potential upside since the investors hold all the cards. Through physical action steps that improve the property and increase its value, value-add investors don’t just hold the asset hoping for market increases.

Through property improvements, income is increased, thus also increasing the equity in the deal (remember, commercial properties are valued based on how much income they generate, not on comps, like single-family homes), which allows investors much more control over the investment than in a yield play.

Of course, a hybrid yield + value-add investment is ideal. This is where an asset gets improved as the market increases simultaneously. Investors have control over the value-add renovation portion and the market growth adds appreciation.

Now, before you get too giddy about the potential of a hybrid investment, there are risks associated with any value-add deal.

Examples of Risk in Value-Add Investments

 In multifamily value-add investments, common risks include:

• Not being able to achieve target rents
• More tenants moving out than expected
• Renovations running behind schedule
• Renovation costs exceeding initial estimates (which can be a big deal when you’re renovating hundreds of units)

 Risk Mitigation

When evaluating deals as potential investments, look for sponsors who have capital preservation of the forefront of the plan and who have a number of risk mitigation strategies in place. These may include:

• Conservative underwriting
• Proven business model (e.g., some units have already been upgraded and are achieving rent increases)
• Experienced team, particularly the project management team
• Multiple exit strategies
• The budget for renovations and capital expenditures is raised upfront, rather than through cash flow

Value-add investments can be powerful vehicles of wealth, but they also come with serious risks. This is why risk mitigation strategies are important – to protect investor capital at all costs.

Recap and Takeaways

No investment is risk-free. However, when something, despite its risks, provides great benefits to the community AND investors, it becomes quite attractive.

Properly leveraging investor capital in a value add investment allows drastic improvements in apartment communities, thereby creating a cleaner, safer places to live and making tenants happier.

Because investors have control over how and when renovations are executed, rather than relying solely on market appreciation, they have more options when it comes to safeguarding capital and maximizing returns.

Sounds like a win-win!

Are you considering investing in a real estate syndication but are leery that it sounds a little too good to be true? You’re not alone.

Many investors are shocked when they first learn about the potential cash flow returns they could receive through investing passively in real estate syndications.

The key, though, to put your doubts and skepticism to rest is to understand where that cash flow comes from and how it makes its way from the asset itself to your pocket, and that’s exactly what we’ll cover in this article.

Cash Flow Distributions

Typically, within the first few months after closing, you can expect to start seeing monthly cash flow distributions – your new stream of a passive income!

But how is it that these investments are so lucrative? Where does the money really come from?

Where Cash Flow Comes From

Every investment property, no matter the size or number of tenants, is an asset that generates income and expenses. Let’s talk about how apartment complexes generate income, the expenses they typically incur, and how cash flow is calculated.

Gross Potential Income

In an apartment building, the main source of income is the tenants’ rent that’s due each month.

As an example, let’s say the average rent in a 100-unit building is $800. That means the gross potential income is $80,000 per month, which comes to $960,000 per year.

Monthly Gross Potential Income

100 units x $800 each = $80,000 per month

Annual Gross Potential Income

$80,000 per month x 12 months = $960,000 per year

Now, don’t get too excited. I hate to break it to you, but that $960,000 is the gross POTENTIAL income for the whole complex assuming 0% vacancy and full rent payments with no expenses, deals, or discounts (e.g., “first month’s rent free!”).

Net Rental Income

Vacancy costs, loss to lease, and concessions decrease the potential income, and once they are removed, you’re left with something called net rental income.

Assuming only 10% of the units are vacant (i.e., in a 100 apartment complex, only 10 are empty), at $800 a month, the monthly vacancy cost would be $8,000.

Vacancy Cost

10 units vacant x $800 in lost rent per unit = $8,000 vacancy cost per month

If the vacancy rate remains constant throughout the year, the annual vacancy cost would be $96,000.

$8,000 per month x 12 months = $96,000 per year

Net Rental Income

Keep in mind, to get the net rental income, we must take the gross potential income (the total income if all units were filled) and subtract out the vacancy cost.

$960,000 annual gross potential income – $96,000 annual vacancy cost = $864,000 annual net rental income

Operating Expenses

Don’t forget. There are business expenses too.

Operating expenses like maintenance, repairs, property management, cleaning, landscaping, utilities, legal and bank fees, pest control, etc., have to be paid. No two apartment buildings have the same needs or the same expense structure.

Let’s presume that total projected monthly operating expenses equal $38,000, which works out to $456,000 per year. The sponsor team would work toward reducing these expenses over time, but we’ll use this figure as a starting point.

Annual Operating Expenses

$38,000 monthly operating expenses x 12 months = $456,000 annual operating expenses

Net Operating Income (NOI)

NOI or Net Operating Income is left from the net rental income after operating expenses are removed.

$864,000 net rental income – $456,000 operating expenses = $408,000 NOI

If you’re a little confused at this point, it’s okay! There are a lot of numbers here. The important thing to remember is that you want the NOI to be a positive number and as high as possible, meaning that the asset has the potential to generate a profit and thus create those cash flow distributions that got you into this in the first place.

Mortgage

Next, let’s talk about the mortgage. As with any property purchase, you’ve got to pay the lender back. Much like in a single-family home purchase, a loan on a commercial property consists of a down payment and a loan amount – usually, around 25% down and 75% leveraged – and the loan would need to be paid back through monthly principal and interest payments.

In this case, let’s say the group owes $20,000 each month (which is $240,000 per year) in mortgage payments.

Annual Mortgage Payments

$20,000 monthly mortgage x 12 months = $240,000 annual mortgage payments

Cash Flow / Cash on Cash Returns

Now that we’ve subtracted the expenses from the income, we arrive at our cash flow for the first year.

Keep in mind that several factors can change in subsequent years as the sponsor team optimizes the property and its expenses, so the cash flow figures tend to increase over time, though this is not guaranteed.

First-Year Total Cash Flow

$408,000 NOI – $240,000 mortgage = $168,000 first-year total cash flow

This amount is then split up according to the agreed-upon structure for the deal. Assuming this deal uses an 80/20 deal structure, 80% of the profits go to the investors (i.e., the limited partners), and 20% goes to the sponsor team (i.e., the general partners).

First Year Cash Flow to Investors

$168,000 first-year cash flow x 80% = $134,400 first-year cash flow to investors

Depending on your level of investment, you would get a share of that cash flow each month in the form of a distribution check or direct deposit.

Your Monthly Cash Flow Distribution Checks

If you’d invested $100,000 into this deal, you might expect a $667 check each month, which works out to $8,628 for the year.

Recap

So there you have it. The cash flow that arrives in your bank account each month originates from the tenants’ rent. Then, we deduct the expenses, pay the mortgage, taxes, and insurance, and what’s leftover is then divided and shared with investors.

Is this passive income guaranteed? Absolutely not.

Considering all the variables – location, team members, tenants, economy, and MUCH more – it’s important to remember that although useful numbers estimate. Projections are fun to track but should never be taken as absolute truth.

However, now that you have a better understanding of where the cash flow in a real estate syndication comes from, you should be able to more thoroughly understand and vet the figures you see in the pro forma and investment summary, which will lead you to make wiser investing decisions.

If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Fixing toilet emergencies at 3 am isn’t appealing to most people. Shocker.

The next logical step that many investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks.

What is a REIT, anyway?

When investing in a REIT, you’re buying stock in a company that invests in commercial real estate. So, if you invest in an apartment REIT, it’s like you’re investing directly in an apartment building, right?

Not really.

Let’s explore the 7 Biggest Differences Between REITs and Real Estate Syndications:

Difference #1: Number of Assets

A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls, office buildings, elderly care, etc.

On the flip side, with real estate syndications, you invest in a single property in a single market. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment.

Difference #2: Ownership

When investing in a REIT, you purchase shares in the company that owns the real estate assets.

When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset.

Difference #3: Access to Invest

Most REITs are listed on major stock exchanges, and you may invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily online.

Real estate syndications, on the other hand, are often under an SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. An additional existing hurdle is that many syndications are only open to accredited investors.

Even once you have obtained a connection, become accredited, and found a deal, you should allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds.

Difference #4: Investment Minimums

When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few bucks. Thus, the monetary barrier to entry is low.

Alternatively, syndications have higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.

Difference #5: Liquidity

At any time, you can buy or sell shares of your REIT and your money is liquid.

Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 5 years or more), during which your money is locked in.

Difference #6: Tax Benefits

One of the biggest benefits of investing in REITs versus real estate syndications is tax savings. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).

Oftentimes, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer.

When you invest in a REIT, because you’re investing in the company and not directly in the real estate, you do get depreciation benefits, but those are factored in prior to dividend payouts. There are no tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.

Unfortunately, dividends are taxed as ordinary income, which can contribute to a bigger, rather than smaller, tax bill.

Difference #7: Returns

While returns for any real estate investment can vary wildly, the historical data over the last forty years reflects an average of 12.87 percent per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64 percent per year over that same period.

This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is great ROI.

Real estate syndications, however, between cash flow and profits from the sale of the asset, can offer around 20 percent average annual returns.

As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may make $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over the course of those five years.

Conclusion

So, which one should you invest in?

All in all, there’s no one best investment for everyone (but you knew that, right?).

If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have a bit more available and want direct ownership and more tax benefits, a real estate syndication may be a better fit.

And remember, it doesn’t have to be one or the other. You might begin with REITs and then migrate toward real estate syndications later. Or you might dabble in both to diversify. Either way, investing in real estate, whether directly or indirectly, is forward progress.

 

When it comes to investing in real estate, most people are fairly familiar with the process of buying a single-family home or rental property. You choose the market and neighborhoods, determine how many bedrooms and bathrooms you’re looking for, get together with a lender and a broker, tour potential properties, and then make an offer.

However, when it comes to investing in a real estate syndication (group investment), the process can be entirely foreign, especially if you’ve never invested in syndications before.

For this reason, let’s explore the syndication process together, from start to finish, so you can invest confidently in your first real estate syndication.

Here are the basic steps of investing in a real estate syndication:

• Determine your investing goals
• Find an investment opportunity that fits
• Reserve your spot in the deal
• Review the PPM (private placement memorandum)
• Send in your funds

Step #1 – Determine Your Investing Goals

Once you decide you want to invest in a real estate syndication, consider both your short-term and long-term investing goals so you can be sure to find investment opportunities that best fit your personal goals.

Think about the amount of capital you have to invest, the length of time you want that capital invested, tax advantages you’re looking for, and whether you are investing primarily for ongoing cash flow to help offset your income, long-term appreciation, or a hybrid of both.

Step #2 – Find a Fitting Investment Opportunity

Once you’ve determined your investing goals, aim to find a deal in alignment with your goals. There are real estate syndication projects available ranging from ground-up construction to value-add assets, and even turnkey syndications.

Deal sponsors typically provide an executive summary, full investment summary, and an investor webinar for investors, which provides a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.

Take time to properly vet the sponsor team, ask them your questions, and read between the lines of any investment materials they provide. Take a look at things like whether the business plan has multiple exit strategies, whether there are signs of conservative underwriting, and double-check whether the proposed business plan makes sense given the asset class, submarket, and current economic cycle.

Research market trends in job and population growth. Review minimum investment requirements projected hold time and projected returns. Finally, attend the investor webinar and ask tough questions.

Basically, at this stage, look for any reason NOT to invest in the deal.

Step #3 – Reserve Your Spot in the Deal

Once you’ve found a team and an opportunity you want to invest in, it’s time to reserve your spot in the deal. Usually, deals are filled on a first-come, first-served basis, so you’ll want to take the time to ask questions and do your research BEFORE a live deal opens up.

Often, investment opportunities can fill up within mere hours, which is why it’s important to have completed research, solidified your investment value, and have clear goals. That way, when the opportunity opens up, you can jump on it.

The option for a soft reserve may be available, which holds your spot while you take time to review the investment materials. So, you might combine Steps #2 and #3 by reviewing the executive summary, reserving your spot in the deal, then reviewing the rest of the materials. This allows you the opportunity to back out or reduce your investment penalty-free.

If you are late in putting in your soft reserve, the deal may be full by the time you decide you want in, at which point your only option is to join the backup list or wait for the next deal.

Step #4 – Review the PPM

Once you’ve decided to invest in a deal, the first official step is to review and sign the PPM (private placement memorandum).

This legal document provides in-depth details about the investment opportunity, the risks involved, and your role as an investor. Although reading legal jargon may be no fun, it’s very important you gain a full understanding of the risks, subscription agreement, and operating agreement pertaining to the investment.

As part of signing the PPM, you’ll also decide how you’ll hold your shares of the entity holding the asset and whether you want your distributions sent via check or direct deposit.

Step #5 – Send in Your Funds

Once you’ve completed the PPM, the final step is to send in your funds. Typically, you’ll find wiring instructions in the PPM document.

Pro tip: Before wiring your funds, double-check the wiring information, and let the deal sponsor know to expect it so they can be on the lookout.

Conclusion

By now, the process of investing in a real estate syndication should be more clear, and perhaps, a little less intimidating.

Real estate syndications are more of a set-it-and-forget-it type of investment, so your active participation is upfront, during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading, and signing the PPM, and wiring in your funds.

Don’t worry though, if this process still seems a bit daunting. That’s what we’re here for, and we’ll be with you every step of the way as you invest in your first real estate syndication. As you review and invest in more deals, the process will become second nature.

One of the best analogies for a real estate syndication is to think of it as an airplane ride. There are pilots, passengers, flight attendants, mechanics, and more, who all work together to get the plane safely to its destination.

In this analogy, the pilots are the sponsors of the syndication, and the passengers are the passive investors. They’re all going to the same place, but they have very different roles in the process.

If unexpected weather patterns emerge, if an engine has issues or any other number of surprises, the pilots are the ones who are responsible for the flight.

The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”), but the passengers don’t have any active responsibilities in making the decisions or flying the plane.

A real estate syndication is much like this. The passive investors, sponsors, brokers, property managers, and more, all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.

In this article, we’ll talk about exactly who those players are, as well as their respective roles in a given real estate syndication.

People in a Real Estate Syndication

Here are the key roles that come together to make a real estate syndication happen:

• Real estate broker
• Lender
• General partners
• Key principals
• Passive investors
• Property manager
• New Level Investments

Real Estate Broker

The real estate broker is the person or team who surfaces the property for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).

Having a strong real estate broker is crucial, as they are the main liaison between the buyer and the seller throughout the acquisition process.

Lender

The lender is the biggest money partner in a real estate syndication because they provide the loan for the property. The lender performs their own due diligence, underwriting, and separate appraisal to make sure the property is worth the value of the loan requested.

In the airplane analogy, neither the real estate broker nor the lender is aboard the plane. They have important roles in bringing the project to fruition, but they are not part of the purchasing entity, nor do they share in any of the returns.

General Partners

The general partners synchronize with the real estate broker and lender to secure the loan and acquire the property in addition to managing the asset throughout the life of the project, which is why they are often also called the lead syndicators.

The general partnership team includes both the sponsors and the operators (sometimes these are the same people).

The sponsors are the ones signing on the dotted line for the loan and are often involved in the acquisition and underwriting processes.

The operators are generally responsible for managing the acquisition and for executing the business plan by overseeing the day-to-day operations. Operators guide the property manager and ensure that renovations are on schedule and within budget.

Key Principals

For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This reassures the lender that the sponsor can contribute additional personal capital to keep the property afloat if things were to ever go wrong.

One or more key principals may be brought into the deal to help guarantee the loan if the sponsor’s personal balance sheet is insufficient.

Passive Investors

A real estate syndication’s passive investors have no active role in the project. They simply invest their money in exchange for a share of the returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.

What a great position!

Property Manager

Once the property has been acquired, the property manager becomes arguably the most important partner in the project because they are the “boots on the ground” who execute renovation projects according to the business plan.

The property manager works closely with the operator (i.e. the asset manager) to ensure the business plan is being followed and that any unexpected surprises are addressed properly.

New Level Investments

In a real estate syndication, New Level Investments is part of the general partnership. Our main role is to lead investor relations and help raise the equity needed.

We serve as an advocate for investors by ensuring that the sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grow.

After the property is acquired, we act as the liaison between the sponsor/operator team and the investors by providing updates, financial reports, and other important information between parties.

Essentially, we are like the flight attendants, who prep the passengers for the journey and help ensure they are well-informed and comfortable throughout the flight.

Conclusion

A real estate syndication, by definition, is a group investment. And it’s only through pooling resources and coordinating that the syndication can be successful.

In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground.

While all their respective roles are different, they are all needed to ensure the success of the syndication.