Your First Real Estate Syndication: A Simple 5-Step Process

When it comes to investing in real estate, most people are familiar with the process of buying a single family 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 one before.

So 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:

1. Determine your investing goals
2. Find an investment opportunity that fits
3. Reserve your spot in the deal
4. Review the subscription package
5. 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 for, the 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. Also consider what segment and type of project meets your risk/return profile — potential real estate syndication projects include ground-up construction of a multifamily or other type of property, the purchase
of an existing value-add asset (e.g., multifamily, self-storage, etc.), and even
turnkey syndications.

Related: STOP!! Know Your Goals Before Investing in a Real Estate Syndication!

Step #2 – Find a Fitting Investment Opportunity

Once you’ve determined your investing goals, look for deals being offered that are in alignment with your goals. Deal sponsors typically provide an investment summary and a project webinar for investors, and potentially other materials.  Together, these provide a full 360-degree view of the asset, market, deal sponsor team, business plan, and 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 the 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. Deals are usually 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, making a soft reserve to hold 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.

Deals that offer a soft reserve will also have a firm commit phase where you confirm your commitment before the next step or bow out of the deal.

Pro tip: Don’t register your firm commit if you’re still on the fence about investing. Not following through with the investment after this point causes problems for the sponsors, and some may decide not to let someone who does this invest with them in the future.

Step #4 – Review and Complete the Subscription Package

Once you’ve decided to invest in (i.e., subscribe to) a deal, the first official step is to review and sign the subscription package.  At minimum, this consists of —

• The Private Placement Memorandum (PPM) — this legal document provides in-depth details about the investment opportunity, the risks involved, the return structure, and your role as an investor.
• The Subscription Agreement — this document is where you indicate how much you’ll invest and how you’ll hold your share (e.g., as an individual or joint, through a business entity, or through a self-directed retirement account).
• The company Operating Agreement — this document details how the
  sponsors will run the investment project, their obligations to you, and your rights and responsibilities.

There may be other requirements. As part of signing the subscription package, you’ll also decide whether you want your distributions sent via check or
direct deposit.

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.

Step #5 – Send in Your Funds

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 and provide confirmation of receipt.

Conclusion

By now, the process of investing in a real estate syndication should be clearer, 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 up front, during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading and signing the subscription package, and wiring in your funds.

Don’t worry 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.