What is Real Estate Syndication | REIal Talk | EP. 20

Hey, everybody. Dannielyn here, co founder of the Freedom Real Estate Group, family of companies. And instead of Flipper, I am here with CJ and he is our investor relations specialist. He is the person that you're going to talk to every time you jump on the phone for the very first time because. Because he knows everything about all of our companies.

Hey, everyone.

So welcome to the podcast, cj thank.

You very much for having me. Excited to be here.

Yeah, I'm excited too, because, man, when we started talking about stuff, I was just like, man, you're such a pro and you're just so smooth, it's right off the top of your head. And I want you to be the person that talks through all of this stuff, especially since I'm coughing and sick and I don't want to cough through this entire episode.

Of course, of course. I love talking about this stuff, so it'll be a good session.

All right, so we're going to be talking about syndication, right?

Yep.

Okay, let's do it. All right, so can you start by defining what is syndication?

Yeah, of course. So syndication is similar, you know, if you were to buy a single family rental, but we're just doing that at scale. So we are raising funds from a lot of people to buy a larger apartment or complex. Right. And you know, in the last deal with the Lake Forest Apartments, we just purchased 384 unit property with, you know, $12 million and at a purchase price of around 44. So we were able to raise capital among dozens of investors in order to do that and get access to such a large deal.

Okay, that's great. So I'm gonna randomly bring up stuff we never even talked about beforehand. So what does it mean when we have. When we pool money? So what are the changes that we have to make happen if we're taking my money and your money and putting it together?

Yeah. So this is, you know, regulated by the sec and there's a lot of, you know, lawyer fees, which I'm sure you're familiar with, that we have to kind of go through and organize and basically address the investors in different ways. So you have to be accredited in certain cases and you can also be non accredited in others.

Okay, can you define those for people that where that's a new term?

Yeah, of course. So an accredited investor is someone who has a million dollar net worth and or earned $200,000 per year or $300,000 as a couple.

Okay. And so non accredited is just the opposite, meaning you don't qualify for that. So you're therefore automatically non accredited.

Yep. Yeah, exactly. So if you're below that threshold on either front, you would be considered a non accredited investor. And this again is, you know, a regulation that's from the SEC and how they kind of qualify you to be sophisticated enough as an investor for certain opportunities.

Okay, so what does that mean to me? If I'm non accredited, can I invest?

Yeah, of course. So in our most recent deal, we set it up as a 506B which allows a non accredited investor to invest if they have a relationship with the general partner or the person who is putting together the deal. In this instance, it would be you or us at Freedom. So yes, if it is a 506B, you are able to do so, but if it is a 506C, you would not be able to as a non accredited investor.

Okay, I know that the Lake Forest deal was a 506B. Right. So how will I know as an investor if it's a B or a C?

Yeah. So the, the person who's putting together the deal should be able to tell you right away. They'll know. And it also changes for them how they're able to market the deal. Right. So if it's a 506C and they are, you know, it's going to be only accredited investors, they are able to market the, you know, however they see fit. Right. It can be someone that they do not have a relationship with, but if it is that 506B, it has to, you already have to have a previous relationship with the general partner.

Okay, so how do we start the relationship?

Yeah, so that is, you know, come and have a conversation with me and kind of get plugged into all the information that you guys provide here at Freedom and that is enough to start that relationship as a non accredited investor.

I love that, you know that apartments and multifamily and syndications are new to me even like I'm, I'm like, yes. Why did I not know about this before? And I wouldn't have understood accredited, non accredited or, or that I just needed to talk to you and that's all that needed to happen and I didn't have to have that net worth requirement.

Yeah, a lot of people do, they focus on that and think that this is not available to them in the slightest because they know they're not an accredited investor and it's really just what type of fund is being set up. And yeah, this is an opportunity as long as they have a relationship with you.

Yeah. Okay. I love that talk to me, this is my favorite question because it gets asked a lot, at least when I was talking to people about the syndications. What are the pros and cons?

Yeah, of course. Yeah. So with these properties, there's normally a business plan in how we are going to, you know, basically through the years improve the net operating income or basically all the revenue minus the expenses of the property. And in order to do so, that normally takes multiple years in order to, you know, execute on that business plan. So these a con is that these prop, you know, and positive potentially how you look at it. A deal, if you were to choose to invest in a syndication, typically will have a hold time of three to seven years. Right. And anywhere in between. It just depends on how quickly they can execute and improve that net operating income. So depending if you're wanting to have a investment that's earning you a specific return for a long time, that could be looked at as a positive. But some people also like the flexibility of not having it held out, you know, for a long time. And some people look at that as a con. The positives are typically these syndications have a very strong interest percentage or preferred return in this instance that they are returning. Our Lake forest deal was 12%. And they also have tax benefits. So because of cost segregation studies and how they are able to depreciate the property, we are able to take a lot of depreciation in year one and basically relay that to the limited partners and general partners to write off on any other capital gains that they're incurring.

I love that. I think that's the one that we shout from the rooftops, right?

Yeah, it's. It's huge. And especially for us being in the turnkey business, you guys are incurring a lot of capital gains through the years and how we hold these properties. So there's a huge advantage for us to get involved with this as well.

Absolutely. You mentioned a word that I again, didn't talk about, but that's how I love having these conversations. You mentioned preferred returns. Can you explain?

Yeah, exactly. So the way to think about syndications are there are two groups of parties. There are the investors or people who are maybe such as yourself, investing into this deal. And they are referred to as limited partners. And then there are general partners who are people such as yourself, Stephen, who we partnered with at ihg, who are help underwriting the deal, putting it together, raising the funds, and then also helping to manage it after the fact that. So the preferred return is what the limited partner or investor Gets paid to them before you get to make any money. Right. So in this last instance, we had a 12% preferred return to our investors. And, Danny, you know, you're not going to get paid unless we make over that 12%.

That's right.

So we are making sure we are going to hit those numbers because we want to obviously pay out our investors. But you need to, you know, stand to make. Make a wage as well, right?

Yes. Yeah.

Make it worthwhile.

Exactly. So I love that you already walked into kind of what I wanted to go in next, which was the returns. So, and this is why I'm not talking. How was the Lake Forest deal? How is that structured in terms of the 12%? Can you talk through that as an example of.

And what we're hoping, you know, obviously these percentages may change from deal to deal and how the cost of capital is. But in this past deal is 12% and it was paid out, and it's going to be paid out in two ways. So 6% is going to be paid out basically quarterly, and then the other 6% will be paid out at the sale of the asset, whatever that is, you know, three to five years down the road. So they will, you know, in an example, I like to think in real numbers, right. If someone were to have invested $100,000 into the lake. Lake Forest apartments, they would be paid out 6% or 6,000 each year that we are holding the asset, which would be paid out quarterly. So 1500. 1500, 1500. And then all of that other 6% that is accrued would be paid out at the sale or exit of the asset, however many years later that is.

Got it. Okay. That's a great explanation. I love that. All right. Tax benefits. That's one I keep on saying is one of my favorites. So talk about the. What's involved in the tax benefits, maybe starting with the cost segregation study, since that's where it begins.

Yeah, of course. And some of you guys may be familiar that you are able to depreciate a property a certain number of years. So for residential, that's 27 years, but for commercial, that's 39 years, which is a long time.

Yes.

But fortunately, there is a cost segregation that you can do with, which is basically where engineers come out to the property and understand the depreciation of all the different pieces of that property. Right. Because certain pieces are going to depreciate faster. A good example is carpet. Right. That's not going to last 39 years.

Right.

It's going to last five years. Right. And so they basically put everything into different buckets. And then with a thing such as what's called bonus depreciation, we are able to take all of a certain amount of it, certain amount of the depreciation in year one. Right. And that's what allows us to, you know, pass on such a large tax write off or loss on the property in year one that you can attribute to any of your other capital gains.

Nice. Yes. Yeah. And so quick disclaimer. We're not CPAs and, or tax professionals or anything else.

Yeah. You definitely want to have a conversation with them to fully understand your situation and what would qualify. But. Exactly. You're going to be able to get a tax write off in year one anywhere from 25 to 40 plus percent. Right. Which is huge for these people who are incurring a lot of capital gains.

So can you do another example like you just did before in dollars? So if they invested $100,000, what does that look like?

So, yeah, so for our Lake Forest deal that we're, you know, a month or so into, we are finishing up the cost segregation study right now. And, and they, the numbers aren't finalized, but they're anticipating 35% tax write off that's going to be passed on to the limited partner or the investor. So in that, you know, keeping with that $100,000 in, in year one on their K1 that we send them, at the end of the year, there will be a $35,000 loss or tax write off that they can attribute to other capital gains they're incurring with their stocks, businesses, other real estate deals that they're, they're part of.

Okay, I love that. Thank you. With K1 because you already mentioned that. Oh, tax free wealth. That's what I wanted to bring up. So. Because I got that book and I think I got 20 of them so I can hand them out and mail them out.

Yeah, I've read it as well. Yeah, I think it's a great way to just think differently about taxes. And you know, that's one of the things that I'm extremely passionate about. Personal finance. Right. And taxes is almost everyone's biggest expense and always will be. Right?

Yes.

So I think just taking time to understand how it works and how you can structure things differently, it's been huge for me to just, you know, eye opening, to think of things through a different lens.

Yeah, I agree. So let's talk about diversifying. So we, you get on the phone with a lot of investors exploring what, what they want to do and talking about their goals and the different opportunities or investments that they can do. So can you talk about the importance of where they go based on what they want for their life?

Yeah, exactly. I think this is a great way to diversify because not only is it a different asset class or, you know, anything, but you're diversifying across, in this instance, 384 apartments. Right. So if one becomes vacant, it's not going to hit you or be detrimental. Right. Where if you were investing in a single family turnkey home, it, if that goes vacant, you have no income coming in. Right. So this is a great way to diversify and that's why a lot of people, you know, are part of these large syndications because it brings diversification in of itself. But yeah, that. And also it's just a different asset class. Right. Turnkey, private money lending, the stock market, they all allow you to diversify across the board and, you know, get different returns and if different things are happening in the market, it's just advantageous.

Yeah. So I remember when I was starting to do the calls, I was talking to some of our guys that had just a lot of money sitting and so I asked them about syndications and it was the first time I was learning about it, talking about it and saying, we're going to do this, you know, with somebody who's been doing it for a long time. And one of the guys, he's a lawyer and he's got like, I don't know, over a million dollars just sitting there and he said, Danny, I'm in 35 syndications. You and I got together because I wanted to be your private money lender. And so that's why I talk about diversification because, you know, a lot of people don't know that we do private money lending. The private money lenders, some of them are now doing syndications with us. Some turnkey people now starting to do syndications with us. So it's really nice to have your. Those buckets, you know, in different places.

Exactly. And I think it comes down to your goals and timeline. Right. Turnkey properties can be a longer term commitment because you're buying a 30, you know, you might be buying it with a 30 year loan or, you know, it's a little stickier to sell. Right. Whereas private money lending is nice because your commitment can only be, you know, six months to a year depending on what happens with the property and you get your principal and interest back.

Yeah.

And then syndication tend to be a little bit longer, but you can get that Higher interest rate, as well as get those tax benefits on that side. Right. So it's just, it's understanding your personal finance situation and where you're trying to go and what, you know, how passive you want to be. Right. And that's probably something that we should hit on with syndication is, you know, a lot of our investors, you know, took time, did their due diligence, looking at our business plan and how we're trying to execute on it. But now they are really going to receive a monthly report from our investor portal and they will receive their cash flow every quarter. Right. And besides that, they don't need to worry about anything else. We are going to relay any information that's important to them. And our asset manager on the ground is doing the work. Right. And their money is working passively or while they sleep, however you. You like to refer to it.

Yeah, I love that because we did a turnkey versus flipping versus syndications because we didn't include private money. And syndications was the most passive of every single one because they take one time, do their due diligence, ask their questions, invest their money and now their hands off.

Exactly. And I think that's the important, you know, you kind of asked about the pros and cons, and it depends how you look at it. Right. And really looking at that timeline, you know, a lot of us invest in a 401k or an IRA. Right. And you're not able to touch that money for some time afterwards. Right. So maybe that's what you're trying to do with your capital. And if it's actually advantageous for, you know, you want to have that 12% return for as many years as possible. Right. And that's why, you know, we are trying actively to try to underwrite more deals and find more for our investors to kind of keep, keep going on this train.

Yes. I love that. So talk about that. You're really good at kind of leading me right into where I want to go. Thank you very much. Let's talk about what are we doing now, what's coming up.

Yeah. So we are, you know, actively looking for deals in house here in, you know, Dayton or the broader Ohio region that we can kind of take down on ourselves. But we, we're going to continue to partner with our great partner Steven at IHG and help them raise capital for the deals that they're underwriting. And we're partnering with, you know, the asset managers. So I believe we actually may have gotten under contract for a, you know, another large property. I think it's a $55 million acquisition, roughly 400 units or so down in Florida. So we'll have more deal, you know, more deals hopefully coming out and more details about that investment opportunity coming up shortly.

Yeah, I'm super, super excited about that. Okay, so I don't know how far we've gotten, but before I let you go, a lot of people don't really know you, so, in fact, we don't even get the pleasure of seeing you in the office very much. So tell us about you, your background. Who. Who is cj?

Yeah, of course. Yeah. So I'm a guy that was born and raised here in Dayton, Ohio. I went to Ohio State with a finance degree and went into consulting for a number of years, working for big clients, basically doing financial software implementation. So I've been around the kind of the intersection of technology and finance. But my, you know, my passions really are personal finance and real estate. And that's what's been awesome about working with you guys here at Freedom, getting to talk to investors every day about their strategy and how they're just trying to set themselves and their families up for, you know, a stronger, you know, personal finance, like, personal finance journey. And I absolutely love it. Right. And. Yeah, just. Just here to have fun. I love how authentic and honest everyone here is and trying to help our investors across the board.

Yeah. You know what I love most about you, too, is that you. You have all this knowledge at your age, and I don't even know how old you are. I just know that I'm old, and I just learned about it. And you look at. You just, you know, pretty much did the whole entire podcast yourself, sharing all of this education, and not a lot of people, even my age, have this knowledge. And you at yours. I think it's. If we can empower more people across.

The board, it's all about communication and just asking questions and getting out there. Right. I definitely get, you know, those kind of looks at me. I was. I was closing on a property earlier today, actually, and the. The seller kind of looked at me, and he's like, you're the buyer. Right. And just kind of surprised. But, yeah, I think, you know, age is just a number, and it's really about the knowledge and how you apply it and taking action on it.

Yeah. Yeah, I love that. Okay. Personal. Totally off the topic.

Yeah, let's do it.

Hobbies?

Yeah. So I am super outdoorsy. My biggest passion is skiing, so I've skied all over the country. I've gone to Canada, Japan, all over really enjoy that. Working out. I'm hoping to do 100 mile cycle in the next month or two.

That's awesome.

Yeah. And, yeah, just hopefully seeing friends. Like I said, I used to travel for work, so I'm, you know, always traveling all over.

Yeah, I'm always. Are you in town? Yeah, no, I'll be in town next week.

Yeah, exactly. You know, again, I'm young, I don't have that family yet, and I'm just trying to get out there and get as much knowledge and just meet as many people as I can.

Awesome. All right. Is there anything that you think that we missed or that everybody listening should know?

Yeah, I think, you know, the biggest thing with syndication is just to ask questions. You know, I think a lot of us, you know, you don't need to act as if you know all the answers. Right. It's okay to be curious and just, you know, maybe see a couple deals come into some of our webinars that we host just to get yourself educated. So when the time is right, whether that's financially or mentally right, it is just about, you know, or emotionally that you, you know, can pull the trigger. And it's maybe not the first one you're seeing because every syndication can be different and, you know, it's a risk tolerance. Right. We're. We're underwriting these deals relatively conservative because we want to make sure that we make, you know, our money being the general partner. But yeah, just I think getting, Getting out there and taking action. Right. And talking, talking to different opportunities is. Is important.

Yeah, I love that. Great advice. You're a wise soul. So we always end our podcast with this phrase. So I'm putting you on the spot. Are you ready?

I believe it is. Invest smart.

Live happy. Bye, everybody.

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