What does it take these days to invest in real estate and get your hands on an income-generating property? For the average investor, this can be tricky for two reasons – real estate is expensive, and everyone wants a piece of the market.
Luckily, raising capital for a real estate fund can be accomplished in different ways. While it is possible to make money from property assets with no money down, really going down the road of hoping for seller financing or relying on hard money loans is not very realistic. Not surprising, as this is a site dedicated to real estate syndication, syndication is the best way as long as you do it by the book and know who to listen to.
Forming a real estate syndication is one of the best ways to make huge profits while getting control of the property. When teaming up with equity partners, real estate investment properties become more accessible.
And filing under the right SEC regulation can set you up to raise $1.5 Million even if it is your first syndication. Really? Yes, because Reg D Rule 506b and Reg D Rule 506c have no limits on how much you can raise.
But you have to know how to get started. You need to know real estate syndication companies, like their structure, payouts, and most importantly, how to find and attract investors.
How to Raise Money for Real Estate Investing
Real estate syndications need one thing (besides real estate): capital. Raising money for real estate deals is critical and it can make or break the syndicator.
While there are plenty of ways to secure working capital, there are five typical sources syndicators use the most:
- Friends and family (506(b))
- General solicitation for investors (506(c))
- Crowdfunding (Reg CF)
- Public offering (Reg A)
- Joint venture
Tips for Raising Capital for Real Estate Syndication
The money-raising process involves many things. Yet, there are some fundamental aspects of raising capital that some sponsors, or syndicators, seem to miss.
Choose Your Sector
One of the first mistakes that most sponsors make is casting too wide a net when it comes to properties. They might go after any type of multifamily property classes, dabble with industrial or commercial sectors, and even scout for deals in the residential market. Understanding what investors look for in real estate syndication offerings is critical.
While it’s never a bad thing to diversify, it’s preferable to gain experience in one niche before attempting to conquer another. Besides, some segments of the real estate market offer more syndication opportunities than others.
You’re unlikely to raise a few million for a one to a four-unit building. However, you can raise $1.5 million or more to buy apartment buildings in good areas that can generate a steady rental income.
Of course, you’ll have to get clear on your vision and research all market segments before deciding what specialization aligns with your goals.
Have a Business Plan
Being a real estate syndication sponsor is about more than raising capital from investors. Those investors expect you to make money since you’re not putting any cash of your own into the deal.
Therefore, you’re in charge of managing the whole operation, ensuring the cash flow is enough to cover preferred returns and that there’s enough profit left for you to make some money.
For this, you’ll need a solid business plan on how a property can make money, what’s a desirable term for the deal.
Depending on how you register the syndication, you can have multiple ways to contact investors and present your proposal. For example, under Regulation A+ or Regulation D 506(c), you’re allowed to market your offering.
Thus, you can have it so that interested investors can find you and contact you to get more details about the deal.
Operating under different SEC regulations might not entitle you to do any marketing, in which case you have to personally get in touch with accredited or sophisticated investors.
Spend some time finding individuals willing to diversify their portfolios with income-producing property assets by explaining potential returns and other benefits of getting in on the action.
Meet With Investors
Say you want to raise at least $1.5 million on your first syndication. Real estate is a great playing field, so the odds are you’ll want to make another deal and another one after that.
To sustain a steady deal flow, you need a constant supply of interested investors. Therefore, you’ll want to spend enough time meeting with would-be partners, giving them updates on what you find, and explaining your plans for the future.
You have to keep any potential investors apprised of opportunities, so they don’t forget about the benefits of having real estate private equity as an asset in their investment portfolios. Note that you don’t necessarily have to sell them on anything during these meetings.
It’s enough to get them excited, educate them on the industry, and remind them of how they can make money.
In doing so, you’ll build an investor database that you can tap into for the next deal. When you can turn some partners into loyal investors, that’s when your buying power increases, and you can chase even more profitable deals.
It’s a common misconception that some people don’t invest unless they get a big enough slice of the pie.
Do you want $1.5 million? Then consider creating a complex waterfall structure and allowing investors to contribute both small and large amounts until you get the capital you need.
There’s no point in chasing five investors who can contribute $500,000 each if you can get 15 others contributing smaller amounts easier.
Remember that real estate syndication is like investing in the stock market for many would-be investors, only safer and with lower entry points.
Build Your Authority
If you’re new to real estate syndication, it doesn’t mean you know nothing about the market. In fact, chances are that you have a background in this industry; you just haven’t done syndication deals before.
This means that you have something to offer that passive investors don’t – knowledge in this space.
But you don’t have a track record, and it’s difficult to back up your claims. Therefore, you have to show potential investors that you know what you’re talking about.
Although under certain SEC regulations, you’re not allowed to market your offers, nothing’s stopping you from advertising your brand. You can make use of a personal website, blog, and discussions on specialty forums to showcase your expertise, give advice, and offer solutions on various industry-related issues.
Once you build your reputation, you’ll enhance your ability to raise millions, even without having done a syndication deal before.
Syndication deals not only with real estate, but also with securities laws. A real estate syndication attorney can help you put your offering together in a way which draws investors to it and is compliant with the SEC regulations.
Know the Fundraising Limits
Since real estate syndication fundraising is very similar to issuing securities, the syndicate’s legal entity must be registered with the SEC. As such, it has to follow specific regulations mandated by the regulatory body.
Fortunately, real estate syndication companies have a couple of options when it comes to this. You can file your syndicate and enjoy laxer guidelines, or you can go strictly after the big bucks if you don’t mind following stricter rules.
In any event, raising capital under the SEC’s different rules is a matter of concern only for sponsors. These won’t impact passive investors in terms of profit splits and preferred returns.
Syndications filing under this rule are allowed to raise any amount of money from accredited investors. However, they can’t perform general solicitations or engage in any advertising efforts for their offerings.
Rule 506(b) enables syndication to have up to 35 non-accredited investors and an unlimited number of accredited investors.
The 506(c) rule of Regulation D 506 from the SEC adds an interesting provision to the previous guidelines. Filing under this rule will allow your syndication to market your offer but restricts you from raising capital from non-accredited or sophisticated investors.
Depending on who you’re targeting, each rule has some benefits when it comes to finding equity partners. Real estate regulations that govern syndications are not difficult to understand, and a real estate syndication attorney can always offer some assistance in that regard.
What Makes a Profitable Proposal
Just because you need to raise $1.5 million to make a particular deal doesn’t mean that you aren’t looking at a property that isn’t worth that amount.
Before trying to raise capital, it’s essential that you determine the real value of the property.
Here are some factors to look for.
One of the main profit drivers is the location. This isn’t just for real estate syndication; it’s a fact regarding any real estate private equity deal or personal investment.
Desirable properties usually sit in low-crime areas with decent infrastructure and easy access to schools, hospitals, retail stores, cultural centers, and so on.
The lower the quality of the neighborhood, the more it attracts tenants with unstable financial situations that can default on their rent.
Newer buildings cost more, tend to feature modern amenities, and require less renovation before they can command a high rent.
That said, some cheaper 20 or 30-year old buildings can have upsides too. A low upfront investment combined with some renovation costs can turn a Class C property into an in-demand and profitable Class B or A building.
However, remember that most passive real estate investors might not understand how the market works as much as a sponsor. Therefore, they might fail to see the upside of buying into a $2.5 or $3.5 million multifamily or commercial property that isn’t ready for renting.
It’s critical that you focus on what is included in a private placement memorandum (PPM) and explain both risks and benefits regarding the investment.
Otherwise, some investors might frown at the idea of renovating and waiting months or even years before the building can turn a profit.
Economic Development and Occupancy
You can find properties that are currently in unfavorable neighborhoods and still make a killing through real estate syndication. The secret is to identify whether there are plans for economic development, such as optimizing or modernizing the infrastructure, investing in businesses, creating communities, etc.
A good and stable local economy might be just as attractive to tenants as an up-and-coming economy. As long as you can prove that tenants won’t be an issue, investors should jump at the offer because the projections should satisfy their return targets.
Investors need to understand that there are two ways to make money through syndication – rental income and profits made upon selling the property after it appreciates in value.
Create a projection based on key factors and metrics and mention to potential investors how much they stand to make on an annualized return as well as after the liquidation phase.
What Is a Private Placement Memorandum?
This is one of the most important documents you’ll have to fill out as a sponsor looking to create a syndication. Raising capital for real estate doesn’t happen if you don’t have a PPM. Investment opportunities have to be presented clearly to both accredited and sophisticated investors.
It’s not just a matter of good business practices. It’s also mandated by the SEC for many syndications. Accurately informing would-be investors is required by law.
Therefore, the drafting of a quality PPM is critical and makes your chances higher to raise that $1.5 million or more.
What Is PPM?
Look at it in terms of a disclosure document that also serves as a hook for potential investors. You can start drafting the paperwork with a brief introduction and general overview of the syndication. By summarizing your proposal, you can educate investors on what to expect and what the property asset can do for them. You also will want to describe the structure of the LLCs or Corporations so they know what they are buying into.
From there, you have to create a PPM real estate investment section. In this, you can offer details about the property and highlight the most exciting points in your offer.
After that, it’s best to cover all the risk factors to satisfy the SEC and, of course, have your investors’ best interests in mind. Make sure to go beyond the property-specific risks and discuss challenges within the real estate industry as a whole.
Risk factors may include everything from crime rate, occupancy, natural disasters, and everything in between.
Again, most passive investors can join multiple syndications without actually learning about the market.
You should also clarify that you’re the sponsor and mention the tasks you will be responsible for once the deal closes. Another aspect worth noting in the PPM is your proposal for the use of the capital raised from investors.
Let investors know of the fees you incur for your efforts and the distribution of the profits – including the preferred return and any waterfall structures you have in mind for dealing with different profit thresholds.
Information on taxes, government incentives, deductions, and other things of this nature should be discussed in the PPM document. The more research you do on the financial side of things, the better you can explain it to potential investors – thus, the higher the chances of actually getting the money you need.
Go With a Structure That Favors the Investors
When you’re just starting out as a syndicator, you don’t have a track record or proof of concept. Consequently, you might have a hard time convincing investors to give you money.
So, you can take advantage of the profit distribution structure to further incentivize interested parties and get the money you want instead of a smaller amount.
One of the things you can do is to work out a payment structure where investors get their preferred return before you do. Giving them priority and perhaps even lowering your commission for finding the property as well as the management fees.
You can start the first profit split with a 90/10 division between passive investors and yourself when working on a waterfall structure. Make it so that you’ll only go into an 80/20 split and increase your share of the profits if you meet a secondary internal revenue rate/threshold.
By offering your investors a larger share of the profits, you guarantee a higher return on their investment. That might not net you a huge profit on the deal, but it can help you raise the $1.5 million you need to close the deal a lot faster.
Besides, if you do a great job, you might have secured a couple of loyal investors to follow you into the next deal.
It’s also a good idea to avoid delayed payment structures, such as those prompted by fixer-upper properties that won’t generate cash flow until after renovation work.
Master the Syndication Fundamentals and Build Yourself Up
Investors put their money in the hands of people they can trust. The importance of this cannot be understated as it relates to passive investors looking to become equity partners. Real estate is a complex industry, and people outside of it wouldn’t know how to buy or manage their assets.
That’s why you have to become known in investment circles and in your own niche before you start thinking about raising private capital for real estate. Create a private placement memorandum that can help you educate and engage potential investors.
Make them interested in looking beyond the usual real estate fund structure and seeing the financial upside of syndication partnerships as a superior alternative to diversifying their portfolios.
If you follow the tips in this article and do your due diligence, you should have no problem raising $1.5 million or setting your sights even higher.
Still Have Questions?
Visit our Real Estate Syndication FAQ or give us a call to schedule a free consultation.
Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.