When it comes to investing in real estate, most people are pretty familiar with buying a single-family home or rental property. You choose the market and area, determine how many bedrooms and bathrooms you desire, get together with a lender and a broker, tour potential properties, and 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 that 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 your goals
- 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 to find investment opportunities that best fit your personal goals.
Think about the amount of capital you have to invest and the length of time you want that capital invested. Are you looking for specific tax advantages? Is your primary goal ongoing cash flow to help supplement 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. Real estate syndication projects range 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 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.
Take time to vet the sponsorship team, ask questions, and read between the lines of any materials they provide. Consider whether the business plan has multiple exit strategies and double-check whether the proposed project makes sense given the asset class, submarket, and current economic cycle.
Research market trends in job and population growth. I would also review minimum investment requirements, the projected hold time, and returns. Finally, attend the investor webinar and ask tough questions.
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, opportunities 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 hours, so it’s essential 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 log in to the investor portal 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 imperative that you fully understand the risks, subscription, 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 (LLC) holding the asset and which bank account you want distributions deposited.
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. Your active participation is upfront when choosing a deal, reviewing the investor materials, reserving a spot, reading and signing the PPM, and wiring 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.