Basics of Real Estate Syndication

in this video you're going to learn how to use OPM or other people's money to help you find your commercial real estate investment now let's face it at some point in your investment career you're going to run out of money what do you do you shouldn't stop you must not stop you're going to learn how to raise private capital from individuals now what I mean by that is to learn the techniques and tactics and laws of going out into public and raising capital and pulling your investors capital and your resources along with yours to complete a deal okay in other words raising a down payment this process is called real estate syndication I am Peter Harris with commercial property advisors I'm author of this book commercial real estate investing for dummies also author of this book commercial real estate for beginners you can get your free copy of my new best-selling book by clicking on the upper right hand to swing I'm also a coach a mentor to many commercial with investors all across America alright and so in today's video we're going to learn all about how to syndicate your commercial real estate deals number one I can tell you what is syndication reasons why we do it and the three ways to profit greatly from syndication your deal number two what are the four most important things to know when synciq you doing your deal you don't want to miss back number three is how do you find these investors number four how many investors do I need per deal or just to get started and number five I'm going to share with you how to convince your investors to invest with you and at the end of that segment I'm going to give you a link to a tool that you can send to investors to see if they're interested in over six I'm going to give you the top three questions investors will ask you now these questions there you are guaranteed to be ask these questions so you better know the answers they lastly I'm going to give you a real-deal example I'm going to break down for you in fun detail okay so let's get started let's get started with what gives a real estate syndication and why do we do it it's not a quick illustration here and I will share with you alright John here has found a three property portfolio of commercial properties that he likes the cash flow flow well they produce great returns in a great area John does not have a whole lot of money he has experience but no money he can probably then body one well not all three so what John does he decides to syndicated you so he goes out and he finds his good friend Jane who he has known for years right now Jane has lots of money lots of net worth but she has no experience so she has no confidence that she can buy this and operate it successfully so she would love to work with John right now knowing that this is a large this required larger down payment they decided to recruit Jim who just come along for the ride Jim would just be a financial partner for them okay now we'll give you mixes they go out to hire a syndication attorney to help them put together the syndication paperwork alright so what we're going to do is the attorney is going to have the three John Jane can start JJJ invest LLC so this will be the syndication alright and now the this LLC is going to be funded by John Jane and Jim and an LLC will purchase these three properties alright so this in essence is a syndication all right now the question is why do we syndicate why well here's the answer right let's say that you have an outstanding deal that John had but there's no down payment money he or he is very short right so in that case you with syndicate deal by getting a personalized Jane and Jim to help you another reason why will syndicate is let's say you have the down payment like Jane but you have no experience so you want to bringing an experience you would syndicate deal with John and Jim right or let's say that you just want to close on more deals by leveraging everyone's financial resources and experience right that's what syndication is now the other reason could be and this is a very popular reason for people like my age is syndication can help you with retirement planning right I call to munication your personal pension that's what I call it right so this is what syndication is the fifth reason of why you may want to syndicate is to make fees okay now here's some of the fees you can make John since John will organize the syndication hire the attorney do the due diligence and do lot of the legwork John can charge a syndication or acquisition fee let's say you know between ten and twenty five thousand dollars just to put it together alright now after they close job is also going to look after the property management and help prepare the tax returns for Jane and Jim so on the monthly basis John with you the oversight not the proper management but the asset management oversight he can collect a what we call it asset management fee for that babby month that will be about maybe one percent of the Rick collections that he could collect the multi basis so there's a pretty good season it's for for John now the another set of fees let's say that Jim was a real estate agent alright now in about five years we're probably going to sell the properties right now since Jim Zoroaster agent Jim can be the agent and collect the Commission's on on this portfolio sale all right so that's what syndication is and that's why we do it the next thing I want to jump into is what is that four most important things that you get you need to know when raising cattle that's look let's still into the four most important things to know when raising capital number one is it's a relationship based business okay this journey you're about to embark upon is a relationship based business it's about people so what I want you to do is to be yourself but be genuine to people care about the people and honor their relationship call people back when you say you will do what you say and say what you do that's very important if you do not get this part about it being a relationship based business you will not be the business very long okay I will always say that commercial real estate is a relationship based business understood okay number two I want you to put the investor first all right this is their mindset put your investors first and put yourself second here's something to grasp let's say you have to raise a certain amount of money and the only person that will mess with you is your grandmother and it's sort of life savings how well would you be a good steward over that money pretty a pretty good steward right because it's your grandmother's life savings that's the mindset I want you to have when you go out to recruit an investor and use their money for your for your investments alright so again put the investor first in your self second it's not about you it's about them that's the mindset you need to have got it okay number three is and number three speaks for itself the efforts in doing syndication right there need to be systematized in structure for efficiency and for legal reasons alright that's I'll leave it there because syndication is not not a simple thing to do there's lots of moving pieces there's lots of things to learn right but whatever is great and once achieving is worth going through the efforts alright but it needs to be systematized and made efficient for you to work properly now number four is probably the most important thing don't try to do this by yourself I need you to hire an attorney who's experienced in syndication you can do you can serve a syndication and do one wrong things of paperwork and you can have a lawsuit or even worse right so once you hire an attorney one attorney will do is it will give you the proper documents all the required documents they will give you all the disclosures you need and then they'll give you a set up for the protection that you and your guess is relieved now all the documents and slowly just protections are kind of set up through what we call the SEC the Securities Exchange Commission they are the governing body you see syndication is all about the complying to the strict laws and regulations that protect the investor and if you don't follow these rules again there could be a lawsuit or even worse alright this video will not cover those SEC laws rules and regulations I don't have time for that that will be another two hours alright to cover it all so just making that disclosure now we're not cover that alright so number one is a relationship based business number two need to put the investor first your second is not about you number three be system of times and structured wind when syndicating and number four hire an attorney to do the paperwork for you it is not worth it don't try to do this by yourself it's not worth it alright okay so the next thing I want to talk about today is the three ways that a syndicator can profit greatly I'm here let's jump into the three ways that syndicators can profit from syndication alright number one is when you said it can deal the first type of way to profit or to achieve a fee or pay is to get an acquisition fee so let's say that this is your deal and you can syndicated you're going to pull people around and arrange the deal so it's your deal if you were to find the deal do the due diligence structure the deal do the legal legwork to make sure everything's right hire the property management it arranged financing you are entitled to what we call an acquisition fee right and any amount between 1% to 5% of the project size so let's say it's a five million dollar project a five percent fee would be what two hundred fifty thousand dollars right so you can see that fee or it could be just a flat fee all right you gotta be careful with your fees and make sure they're they're not over-the-top you make sure your investors think it's a a reasonable fee alright so that's the first way to profit the second way to profit is through an asset management fee let's say you have closed the deal again you're in charge and then you're going to manage the partnership alright so you have several partners in your syndication you're going to be the main person okay the head honcho you're going to manage the partnership you're going to over you're going to oversee the property management on-site make sure they're doing everything correctly you're also going to over see if there's any construction going on to renovate the parts of the building you're going to oversee those type of things at the end of year there's your in tax prep you're not doing it taxes your CPA is doing the taxes but you're going to make sure everything is going as an orderly pace to make sure things are following time and then you're going to the person compiling the reports and reports their partnership how the property's performing if you're leading your objectives and lastly extra strategy you're going to keep your laser focus on the extra strategy because let's say in five years you have to sell at a certain level right to receive our certain return on investment this is the asset managers responsibility to make sure things are on track all right and if you are the asset manager you get an estimated be in the range of one percent to 5 percent of the monthly gross income okay so over month in a month a month they can start to add up especially when you add an acquisition tree ok and on board you can just join charge the syndicate a flat fee it's up to you so that's the second way the third way to achieve profits through syndication is probably my favorite way this I put a dollar sign here because this is where the big dollars are made so equity participation equity participation is when you have an ownership stake in the property okay in the syndication and whatever you do whatever you put if you put money in or you sign them alone or whatever your role is and you have an equity stake it can range between 5% ownership and 50% ownership it just depends on what you do now here's how it works let's say you put your investors and 8% preferred return okay so the first 8 percent of the property produces gets paid to the investors first and when there is that over the equity partners get second ok so if there's cash flow of 8% those investors first whatever's after 8% gets split between the equity partners or let's say that you sell the property again the investors get paid first so from their sales proceeds and every partners whatever your split is 5 to 50 percent you get that and as a second payment okay so those are the three ways to get paid and the profit from syndication this being the most profitable way all right and also have a fourth one I shared with you I mentioned this a few minutes ago a lot of syndicator are also licensed real estate agents and they will sell with permission the apart nurse they will sell the asset to make a commission so if that's your thing you can do quite well with that endeavor as well all right okay so the next thing I want to share with you is something very interesting how to find these investors okay so let's go there next alright let's jump into a very fun topic called how to find investors okay one of my favorites now I teach a lot of investors how to raise capital and we all have to have our humble beginnings of where to start I started here my students start here some of our students have gone on to raise millions of dollars by starting here so it is with you no one's going to give you investors no we're going to hand over money to you or hand over people with money to you you have to go out there and get it alright okay so here's where you're going to start you're going to network at REO meetings you know real estate group meetings meetup.com meetings that are real estate related you're going to try your inner circle alright friends family co-workers former co-workers alright so this is this is the start this is your humble beginnings now I'm starting to think out there some of you are thinking certain things and you're coming up right now with one of the lamest excuses I get when it's time you raise capital here's the excuse Peter I don't know anyone with money they're all drunk all my family my friends they wrote they have no money my co-workers I'm too embarrassed to asking for money alright so I know that's what you guys are thinking that's a lame excuse lame excuse because we all started here my students all have the same excuse but they went up there and get it all right so this lame excuse you just gave me forget it okay does not exist okay you can have the excuse but we're not going to live it got it okay because I want to give you the truth here's the truth there's four truths number one is you just don't know anyone yet with money they're out there right in fact there is more money out there than there are deals at this moment got it so there's more money out there where you are than there are deals and deals are hard to come by yes there's a lot of money out there thirdly money follows good deals right that is served now your job is to put together good deals that's your job put together good deals because good deals money follows okay money follows good deals because there's more money out there there are deals because if you do all this you're going to find a person with money all right okay so that's the truth right there this excuse is not the truth all right next I want to challenge it and what I want you to do if you can take out a pencil and piece of paper I want you to write down 24 people okay this challenge is going to help you raise capital this is what our students do right this is what they do I want you to write down on a piece of paper 24 people write people that you know people that you know with money and people that you know who may know people with money but it has to be 24 people once you have this 24 people I want you to send out what I call our executive summary it's a tool that our students use in that program to send out to potential investors see if there's any interest it's called the executive summary in a few minutes is going to there's going to be a link up here they can click on and download it's a word document all right so I wish you send that executive summary to 24 on list now here's what's going to happen out of those 24 12 are going to be interested right six are actually going to read it right three we're going to talk to you and one will invest that's the ratio 24 to 1 because you're beginner now after you have a track record your ratio can be 2 to 1 or 3 to 1 but when you're first starting out you can't take a shortcut here it is 24 to 1 all right so no sense is going to be easy but anything worth great going after it's not easy it's not alright so 2041 alright so there I just challenged you I beg you if you do that you're going to get results alright now the next thing I want to do is talk about how many investors do you need to get started or to do your first deal and I'm going to add to that the question is what do i do first do I get the investors first with a deal first I want to answer those when they come back all right let's jump into two really fun questions question number one is how many inventions do I need for my for my first deal and secondly what comes first the investor or the deal let's jump right into it number one is how many investors do I need here's a short answer the short answer is devil let me give a long answer let's say that you need to raise two hundred and fifty thousand dollars as a down payment for your deal right so what you need to do there would be my double is even though this is how much you need to raise you need commitment of five hundred thousand dollars alright so you need people actually making commitments that you know Peter I will send you my check and then out of all the investors it's going to equal five hundred thousand dollars even though you need two hundred fifty thousand dollars right the reason why is because the people you're dealing with are called humans and humans have human issues that come up their life for example the deal not having the money the timing they may not be right their spouses may object so this $500,000 will quickly do a go down to the money that you need God okay so the answer is devil so need to raise to 50 have commitments for 500,000 got it okay second question is what comes first the investor or the deal well I'm going to give you two perspectives and I'll give you kind of a more personal perspective number one is if you're beginner right through beginner you want to have investors lined up first that just makes more sense and that will make you more ease that when you do find your deal you have the versions to go to to raise the money for rather than vice-versa okay now if your seasoned if your veteran if you have a track record you can go up with a deal first because you already have investors lined up alright so it makes sense now here's a different perspective we teach our students to do even if they're beginners to go for both at the same time so work on a deal and fund investors at the same time now here's what happens a typical student will find a great deal that can be a life changer right and you have zero student zero investors lined up because the deal is so grand and so great they will do whatever they can to find that investor and most times they're successful all right so even though this is common sense a lot of times we just have to jump in and just go for it alright okay so the next thing I want to talk about is something I think you'll be really interested in and that is how to convince investors to invest with you all right so let's go there next all right next is how to convince investors to invest with you all right let's get started there well let me start here is when you have made an appointment to to speak to investor or you just share your deal someone to see if there your interest to become an investor when you're thinking about as you sit across from them is you're thinking three things they're thinking about you right can I trust you they're thinking about the deal if it's good enough and you're thinking about the risk all right so we have you the deal and the risk so in this first meeting we have to address those three things rather quickly all right so in these seven items here I address you the deal and the risk right here let's get started all right so number one these are the seven attributes that you need to address to get investors to work with you number one is you want your deal to be priced under the market right everybody likes a deal you don't want to send to your investors a deal where you're overpaying right okay so number one the deal must be under price number two you want your deal to have some income upside potential right so can we raise the rents over time can they get higher lease rates over time because higher rents and higher lease rates means higher income on a higher net off of the income and remember as the net operating income goes up so does the property value so having income upside means you have property value upside to investors love that all right number three is excellent cash on cash return this is your honor a lie right I put an asterisk here because this is what investors that are coming to your investment this is what they're focused on you're focused on the ROI evil eye is because their thing edgers as you're speaking about investment they're thinking that their IRA their 401k just produced two or three percent maybe even one percent right and you're talking this investor I'm projected to make 8% per year over the next five years or whatever whatever it is it'd be probably in that range right but they're thinking that their 401k their self-directed IRA just produce 1% 2% 3% so you're blowing off the water so number three is have an excellent cash in cash return number four you need good demographics demographics are number one the jobs number two the neighborhood all right all those things must equate to do it all right good demographics right remember probably the most important demographics for commercial real estate is jobs right no jobs mean no rentals right no new leases so we need jobs so make sure wherever you're investing where we Gillis the job scene is solid number five is you need to have a realistic exit strategy all right realistic if you if you tell you investor you your you're going to reach here you may want to tell them you're reaching here but between you and your teams you're going to go here so you're kind of dampening expectations you're promising gear but you're shooting to here so you can exceed their expectations so have a realistic extra strategy okay nothing too over the top because they won't believe you be too risky for them all right number six we have a track record right either your tracker your track record if you don't have one you can get someone else on your team that has a track record all right so don't let this stop you have so whenever you chain with the track record give them some equity participation to come on the team to get the deal done okay and to lend their experience all right number seven is you need to prepare an executive summary right that is a one or two page document that just goes over the highlights of the deal it's a very short form I personally believe that if you cannot explain your deal than one page you don't understand your deal right so one page to lay out your deal also you think about people are very busy they don't have time to read five or 10 or 15 page they can read one page you're going on all right so executive summary prepare one of those so what we're going to do for you is we're going to provide a link for a download to our personal Zeca celery a link is going to cure right here if you download it's a Word document that we use to send to our investors to gauge interest it's just a gauge interest that's all okay all right so that's going to be up here in the link right here so go ahead and download it all right so these are seven Deal components you need to get yourself in the best position to get investors to that's with you all right my last word of advice okay probably the most important is start small okay there's no reason for you wanting to raise this amount right when you're first starting out right start here then build up to the higher levels all right okay so the next thing I want to go into is I want to share with you what the top three questions investors will ask you so you better be prepared because I guarantee you they're going to ask you these three questions all right let's go there next all right let's jump right into the top three questions and this is we'll ask you now these three questions are probably the most popular questions when you sit in from investors so prepare yourself okay look at these questions look at the answers and get ready question number one is is there a guarantee that I'll get my money back all right here's your answer no right there was no guarantee there is a universal risk with any type of in essence and stocks no States whatever there's a universal risk so you cannot guarantee that they give the money back however you can't tell them that the property will be only two LLC so the shelter there will be protected there for protection and privacy sakes right it is so that you have insurance hazard insurance liability in terms of the property just in case there is a fire or flood or there's a cook some other type of claim against the property the insurance will cover it okay so that's the only thing you can tell them all right so that's question number one question number two is what will you return my money now your answer is well it depends on the extra strategy so excuse me your extra strategy must be thought out ahead of time before the meeting right so if yours if your extra strategy is to buy their property hold it for five years fix it up increasing Noy increase the value pay down the mortgage stabilize it and then sell it for profit all right and that takes five years your your answer is one which are my money in five years right typically most syndicated deals left between three and five years that's typical investors mainly don't want to see their money out for longer than five years all right so three to five years is typical number three do I get tax benefits the first answer on your mouth is I'm not sure it depends on your status talk to your CPA that's the first answer audio mouth then you can add a few things such as if the automats deems you to be a passive investor which most are by the way and then you get no property tax write-offs so at the end of the tax year whatever cash flow and receive will be what you will be taxed on however if you are classified differently per the IRS again I don't wanna get too much into this it's very possible that your cash flow may be sheltered by the property's expenses it just depends on your tax status all right so that's a tax question ask your CPA for more clarity on that alright okay so these are top three questions memorize them because you will be asked alright so the last thing I want to do here it would be a short presentation is to go over with you a real-deal exam all right this little dere-lique later all right we're down to the last piece here thanks for hanging or with me hope you enjoy the previous few minutes now I'm going to share with you a real deal from one of our students it's a 24 unit apartment oven he paid a nine hundred twenty-five thousand dollars for the down payment was $200,000 in he were able to raise the $200,000 from two investors okay I'll go over what the measures are getting in a second we found out that the rates can be raised a hundred and fifty dollars per unit that's significant right the owner was living on the state and had no idea what the rince could be because he had very little debt on their property so his he was fine with his cash flow so he had no motivation increase the rents so this was just a bonus for us right so $150 per unit over 24 units that's thirty six hundred dollars more per month that's significant right multiply that by twelve years and you get an annual number so forty three thousand dollars more income per year by raising the it's $150 over the over the course of two years okay now the $43,000 increase in income as you guys know you watch many of my videos as your net operating income goes up Sol does your property value right I'm not going to go over that equation with you it's in my previous video so please watch those right but if I divide my new income I mean my my additional income by the market cap rate of 8% it will give me my increase in property value okay so I did the math here 43,200 divided by 8% gave me a five hundred forty thousand dollar increase in property value so he bought it for nine twenty five we're going to add to five forty to it right so the knew that their property is now worth one point four six five all right over two and some odd years okay now the question is how did he structure this deal with his two investors here's what he did the investors are going to earn an 8% preferred return plus they're going to get an equity split when the property sells right and this whole deals lasting for five years all right so let me break this down for its eventually going to get an 8% return on their $200,000 per year right preferred return preferred means that the very first money that comes out of the property cash flow goes to the investors so it's preferred for furniture investors our first he is second okay all right so preferred return plus is getting a 25% equity split so when he sells the property investors would get an extra 25% bonus on on the sales proceeds when the property sells okay so again eight percent preferred plus at 25% equity splits pretty generous now here's the entry strategy this is probably the most important part they made this deal easy to raise Ashmore right extra strategy was increased events over time so he did this over two years he's going to do a cash out the refi so he's going to bring up the property value bring up the editor why bring up the property value stabilize the property here go to the bank and do a cash out refi he's like he's going to refund their first loan put a second hole under property and pull cash out it was able to pull out the entire two hundred thousand dollars okay and he's like paid back all of the investor money give the money give all your money back right now the other thing is going to do what I think was brilliant right he's going to allow the investors to maintain a small piece of ownership right so here's the benefit of that the investors have all their money back right but they're still getting quarterly checks from their property even though they have no money in right so the reason why we did this is because how likely do you think that they were reinvest with them very likely right if they have all the money back and now they get still getting paid from the property all right so that's how to deal with structure right so but the most important thing we're going to have our student here do is to repeat do this over and over and over again right so that you can build up well like get practice build a track record do larger deals all right okay so this is my real deal example it's a great deal something I'm sure that you can do now that you watch the rest of this video all right so if you want more resources and training like this please go into our website commercial property advisors comm or simply subscribe to our YouTube channel thanks for watching the basics of real estate syndication I'll see you see

Channel: Commercial Property Advisors

Views: 109,446

Rating: 4.9259257 out of 5

Keywords: Real Estate Syndication, Raising Private Money, Raising Capital, Pooling Money, Syndicating Investor Money, Commercial Financing, Commercial Real Estate, Commercial Real Estate Investing, Commercial Property Advisors, Peter Harris Real Estate, Syndicating Real Estate

Id: tSl2qjSQhqI

Length: 37min 39sec (2259 seconds)

Published: Thu Apr 20 2017