#15: Real Estate Investing 101 - How to choose the right syndication partner

The market was so good that you could be a mediocre business operator and do pretty well and get good returns for your investors and good for, you know, good for them. With all the dynamics that you just shared, that is not the case. Now, the people who are really doing fine and doing maybe even well through this time frame of where interest rates are, where they are, and, you know, all these things going on is the ones who are doing well are running their business efficiently. They're managing their property well, they're executing their business plan. And for those who maybe don't have that business background, and again, we're not saying that because if you don't have a business background, you're not going to succeed. That's not what we're saying. It's a higher likelihood of success, though, if you have that background and have gone through the ups and downs of running a business through ebbs and flows of the market. But the people who are doing well right now are focusing on running their business efficiently because they have that background and experience in running a business. On this episode of Heading west, we discuss how to choose a syndication partner. So, Steve, we're starting this brand new adventure where we're taking a break from our typical way of running Heading west, which is about stories about people's professional and personal lives as they head west through life. And we're going to really dive into how to get started in private real estate investing. We're really, over these next eight to nine weeks, we're going to establish the foundation and the building blocks for somebody who wants to get started in private real estate investing. So step one, today's episode was on how to choose your syndication partner, which really is where you begin with this whole process. And that's really going to lead us into these next few weeks. We start talking about how this affects your taxes, how this affects your generational wealth, what you need to do legally to get started. But we thought it was only appropriate to start with, what is syndication? And how do I even find a syndication partner?

And Jake, this is the fun part of real estate investing. Getting involved in the community, finding a syndication partner. But what you'll learn in this episode are what are the critical things you need to know? And how to vet and find that syndication partner.

Yep. And our goal, our hope, our desire is at the end of these eight to nine weeks of episode, you feel confident getting in and investing yourself where you feel knowledgeable enough to say, yeah, you know what? I've got some money that I've wanted to invest in real estate for a while with whomever doesn't have to be a skyline, but to say, I know enough about this to feel confident that this is a good decision for my money, to diversify our investments as a family and to take the next steps and to know what to do and how to get started. So that's our hope. Stay tuned over the next eight to nine weeks as we break down and build those steps, those stairs, for you to get started in passive real estate. But start here. Episode one, how to choose a syndication partner, and let's head west together. This episode is brought to you by Skyline Point Capital. If you're anything like me, you're always considering where to invest your money. Stocks, bonds, crypto, a rental home. The list is literally endless. As we've all seen over the past year, the stock market is unstable, the housing market is just weird, and inflation is on the rise. In times like these, the clear place to invest my money is in multifamily real estate, AKA apartment complexes. Here's why. Returns on real estate investments have little to no correlation with the stock market. There's lower volatility, stable income streams, and the tax benefits are insane. And let's not forget that the apartments will typically appreciate in value over time, which means you can walk away with a pretty nice return when the complex is sold in three to five years. Best of all, multifamily investing is passive, so you get all the benefits without the hassle and headache of your typical rental home investment. Getting started has never been easier. Head to skylinepointcapital.com to learn how you can start investing today. Welcome to Heading West. This week we're starting a brand new podcast series. We're going to call it real estate investing 101 because we're super creative and we came up with something really unique. But with this series to take about eight to nine weeks, and we're going to break down the basis, the foundation of passive real estate investing. So first episode right here today is talking about syndication. What is syndication? What does it mean? What does a syndicator do? How do you find a syndicator that you can partner with? So today I'm going to be taking the role of interviewing Steve. Steve's a syndicator. He's highly successful one. And so he's really on. On the spotlight, in the spotlight right now as we talk about syndication. You ready to get going, Steve?

Hey, I'm ready, Jake.

All right. Okay, so let's start from the very beginning. The topic of this discussion is how to choose the right syndication partner. But I think we should back up a little bit. Let's really talk about what does syndication mean to begin with.

Okay, and this is a great question because there's a lot of misconception of what a syndication is and what's involved with it. But basically we're going to talk from a very high level. A syndication is just bringing a group of investors together to go buy, to jointly go buy real estate. It could be an apartment, an industrial building, retail land, mobile home parks. But it's basically bringing people together to go buy something that they couldn't buy on their own.

So would you say it's layman's terms for everybody else? So it's sort of like pooling funds to go out and buy something together? Like if we wanted to buy a $5 million retail strip, well, I don't have $5 million sitting around. And so you're going to pull some money. I'm going to pull some money. These other people, we're going to pull our money together so that we can jointly buy a piece of real estate. Is that. Is that sort of how it works?

Absolutely. And the reason that people go to syndications is that when you pull your resources together, you can buy much larger properties. And as in the big scheme of life, the larger properties are easier to manage. So it really leverages everybody's capital to get something much larger.

Okay, gotcha. Is syndication really the only option for people who want to get into private real estate investing? Is that like, the primary one? Is that the only one? What other opportunities or avenues do people who want to get into this, what kind of avenues can they take?

Well, I think it also, Jake, it depends on what your goals are. And with our limited partners and with us being the GPS is the people that invest in syndications are. You are passive investors. They want to take advantage of the benefits of investing in real estate, which would be their passive income and reducing their taxes. But they really don't want to own the property. That's why you want to get into syndication. But if you're an investor who likes to be involved with things, you could go together with some other people and jointly own the property where you are, in fact, are the manager, you're working with the tenants of your property. Or if you want to do it by yourself, you could buy a piece of property on your own. And you do everything from soup to nuts, A to Z on that property. And that's fine, too. It just depends what your goal is.

Yeah. And so, like, if you're just starting out, you might say, hey, I'll partner with the syndication group where I'm just giving them my money. I'm not involved in any way. It truly is passive. I get the passive income, I get the depreciation on my taxes, I get the appreciation when we sell the property. And then maybe as I get further down the road, I get used to this thing, I take on a different role within a syndication where maybe I'm partnering with them, maybe I'm helping raise money, maybe I'm managing the property. I mean, you can really sort of scale from there. It sounds like based on whatever your desire is.

That's correct. And if you're part of the syndication, another word for, for the manager, the members of the syndication are GPS or general partners.

Okay.

I know people that have started off as limited partners and once they got the experience, they became a general partner within other syndications to help raise money, manage the asset, do some acquisition or due diligence. Diligence and be part of the JP side of it.

Okay, that makes sense. So we talked about what syndication means for somebody who wants to invest in passive real estate. Now I know what syndication is. So what does a syndicator do? The person who runs the syndication group.

The syndicator is basically the group of gentlemen, ladies, whoever that are going to run the property and run the business. But before you can get the property, what a syndicator does is they underwrite the property, do the financial analysis, determine if the financial metrics make sense, and once that, once they put in an LOI for the property, then the next step is do due diligence. And what that is is very analogous when, whenever you bought a house, before you can close, you have to do an inspection, mechanical inspection on the property. Due diligence is the exact same thing. They have to do that, they have to arrange the financing, they have to negotiate with the seller, they have to build the business plan in place. So, and as we've talked about it with syndicators, you are running a business. You're not just buying it, you are running a business. And the business plan is so critical. Once they develop the business plan, they find investors, raise capital, work with the property managers, they do asset management and they handle investor relations. And the list goes on and on. It's a quite an exhaustive list.

Yeah. So it's not just find a property, make sure it's a good deal, gather a bunch of people to buy it. There is a lot more even after that. Whether it's property management, you Know, building the business plan. I mean, there's a lot more behind it that essentially, like you said, since, like running a business that goes behind what a syndicator does it.

Jake, you're absolutely right. It's more than just buying a piece of property. That's the easy thing.

And I use, that's the fun part.

I use an analogy about real estate investing. It's, it's similar to golf. You've heard the phrase you drive for show and putt for dough. That is so analogous for syndicators and investing in real estate. The exciting thing, the sexy thing when everybody talks about, I bought this property and I own this many doors, but that's not where you make money. You make money on the management of that asset.

Yeah.

And that is, that's putting, that's putting in golf. That's where you make your money.

Yeah. And we'll talk about that more as we move into this discussion. We're going to talk about a criteria of, hey, if you want five to seven, 10 things you should list as your criteria when looking for a syndicator. Business experience is, is one of those criteria. So we'll get, we'll get more into that down the road. But where would someone even find a syndicator to partner with? Because again, we're talking about how do you choose the right syndicator partner? Is that something you just Google? Is that something you go, Is there like a dating app for syndicators that you, that you go on? Like where, where do you even start with something like this?

And luckily, Jake, with today's technology, it's at your, it's at your, your fingertips. You can go onto Google and type real estate syndicators. That's one. But more fun in your area is look on Facebook for real estate groups in your area or meetups with that go that, that are going on. Virtually every city has a meetup of some real estate group. And I highly recommend you go there for lunch or their monthly dinner dinners they have and start talking with people there, the investors. Another way is if you have investments, talk to the person that's doing that's managing your investments, where you have your 401k or your stocks and bonds with your company, do that. But there are multiple ways to get connected in your, in your local area. Yeah, it's real easy.

That makes sense. And so, you know, with most professionals, like in my life, for instance, I've got one tax guy, I've got one financial advisor, typically it's customary for a professional that you have One of those things is that the same for a syndication? Like if I choose a syndication partner, would I invest all my money with that one syndication partner? Or is it best practice to find a couple and diversify? What's sort of the, the advantages or disadvantages to both?

If I understand your, your question properly is, is, are you asking in syndication, is it better to invest with, with one GP in a syndication or is it better to have multiple GPS running one syndication?

Good distinction. Let me clarify that. So if I'm a, if I'm looking to get into private real estate investing and I've identified a couple syndication potential syndication part want to invest my money with like a Skyline Point Capital and you name, you know, two or three other ones, is a best practice for me as, as the, the person who's new to passive investing to give all my money to one syndication and say, hey, I want to invest with you guys. Or is it more, is it more prudent to give half your funds to one syndication group and half the funds that you want to invest in real estate to the other syndication group to kind of diversify amongst different syndication groups?

I'm going to say yes and no. And let me the reason I say that and we're going to talk about this how you vet and find a syndicator and after you have gone through, you've asked all your questions, you talk to investors and you have one syndicator that meets your needs and you're aligned with, you should test it out the first time, put some capital in there and see how that goes. From that, from that side of it, if you have two of them, you could split that. But usually what people find is that they do, they put a limited amount of capital into a syndication and get experience to see how it's run. What is the communication, how is the quarterly dividends coming and the taxes. But it's more important in my mind that you find a syndicator that you vetted, you can trust and somebody that's going to take your funds and make you a lot more.

Yeah.

And you trust. That's more important. So if I found five syndicators and I don't know that much about them and gave them all 20% of what I wanted wanted to put together.

Sure.

I highly recommend. Do not do that.

That's good.

Do not do that.

Well, that's a good segue because I want to give people something to grab onto. So sort of a criteria for, hey, here's a couple things that you should be thinking about when vetting these syndicators. And so let's, let's kind of walk through, and I know you've thought through some, some criteria. Let's walk through your criteria of what things should people consider when vetting out their syndicators. What's number one for you?

Can you trust them? Do they have business experience in running a business and do they have integrity for your funds going forward? You've got to have somebody that you can trust. Yeah, absolutely. That's critical.

Yeah, I guess that makes sense because in a lot of these deals there is a minimum threshold for entry and a lot of times it's $50,000, which, that's a lot of money for most people. It's a lot of money. And so to your point, you really want to be able to trust this person that they're going to invest your money wisely, like a financial advisor. You give them, you trust them with your, your money because. And you're essentially trusting their, your future to them. And so you want to make sure that, that there's a lot of alignment there, that you can trust them, that, hey, I know if I give my money to Steve at Skyline Point Capital, they're going to do their best to make sure there's a great return on this thing that's safe. They've been very conservative on underwriting. They found a great team, a great property. So trust makes a ton of sense.

And, and, and Jake, that's no different than your wealth planner. When your wealth planner is taking your 401k, stocks and bonds and et cetera, you have to trust that person and you're talking to them to make things are. They're executing your plan, executing your wishes and desires, and you're communicating back and forth. It is so critical that you're aligned with your syndicator. And I see many problems with that.

Yeah. And you touched on having a business background, somebody who's shown an ability to run a business, manage a team, build a business plan that's sort of outside of what you'd expect from a real estate syndicator. Like you expect them to have real estate knowledge, to have a track record in buying and fixing and selling their, you know, their real estate. But having that background in business is one that I probably wouldn't have expected. Can you kind of. You elaborate that a little bit more?

Absolutely. Most, I can't say most times, but I've seen a lot of syndicators that have, that have decided that they're tired of their normal job and they've come from a Different background, haven't run anything, haven't managed anything. And they want to come in and jump into real estate. And like I said before, they get excited about, I got to do the deal, I got to buy the real estate, I got to buy this. But that is.

That.

That's a part of it. But running experience and running successful businesses, anybody can run a business. You can run it into the ground. It doesn't mean. Yeah, you have experience in running a business. Well, did you run it in the ground or did you actually make money and sell it and whatever from that side of it? But you've got to find syndicators that know how to run a business. And why is this so important in the business world, whether it's manufacturing, service or et cetera, and especially like today, Jake, is that right now, today we've got high inflation, we have banks failing, we have interest rates at, at a. At a level that's making it difficult for existing property owners with their real estate. There's so many things going on, and I can tell you in the business world, people deal with that every day. There's so many factors moving on and moving in that, in that mindset. And a good mentor of mine told me that it's very, very difficult to predict the future. And if you look at the year 2022, if you go back to 2021, if you look at, look at all the experts and the prognostic prognosticators and all these guys that were giving and given their wisdom on 2022, I think 99.8% of them got 2022 wrong.

Yeah.

So the key is you've got to be able to see what's happening in front of you and adapt to it. And with real estate, there is no difference. There's absolutely no difference. So when you look at a syndicator, look for someone that has a proven track record of running a business. That is so, so important.

Yeah, you know what? We found that recently, too. You know, in years before this, let's say the past five years, roughly, the market, especially multifamily, which is where we spend a lot of our time in at Skyline, is the market was so good that you could be a mediocre business operator and do pretty well and get good returns for your investors and good for, you know, good for them with all the dynamics that you just shared, that is not the case now. The people who are really doing fine and doing maybe even well through this timeframe of where interest rates are, where they are, and, you know, all these Things going on is the ones who are doing well are running their business efficiently, they're managing their property well, they're executing their business plan. And for those who maybe don't have a bad business background, and again, we're not saying that because if you don't have a business background, you're not going to succeed. That's not what we're saying. It's a higher likelihood of success, though, if you have that background and have gone through the ups and downs of running a business through, through ebbs and flows of the market. But the people who are doing well right now are focusing on running their business efficiently because they have that background and experience in running a business.

And you say that in up to 2021, in the beginning of 2022, if you bought property in 6, 2016, 17, 18 or 19, you could be asleep at the wheel. And just the way the market was, you could sell it and have great returns. And everybody is saying, I've sold this, we have this amount of return and how great we are. But if you ask those, some of those indicators today, what, what the, what's happening in the marketplace, you don't hear that enthusiasm as before. It is, it is so different. And the, the great operators that, that you see out there, they're tried and true. Steady Eddie, great fundamentals, they're conservative and they're not over their skis, is what we call it. And one other thing, Jake too, that is real interesting that what we don't do at Skyline Point Capital, I see a lot of syndicators where they, you know, where they make their money on the upfront fees doing the deal. Yeah, they make their money on the upfront fees of doing the deals. So when I look at syndicators, I want to know how much they are actually putting in of their own money.

Great.

I, and I don't mean the fees they're collecting. Sometimes they syndicate and then rolling back in. Yeah, they say, oh, I got, I got a half a million dollars of fees and doing the deal and I'm rolling that in. So I'm putting in a half a million. No, no, no, no, not the same. Yeah, no, no, I want to know, out of your own pocket before all the fees, what are you putting in? Yeah, and we like to look at it with our investors. We're all partners in this deal. We want a great property. We want a property that was thrown off cash. And also, whether it's a longer term hold like a seven or 10 year, we've got great returns and our Investors want to stay with us. And that's something different about Skyline Point Capital.

And there's nothing wrong with a syndicator rolling their fees over. But yeah, there is. You know that when someone's putting their own money from their own pocket into a deal with also fees, maybe they're rolling in two. That says a lot about their belief in, in the product that they're pitching to you as well. You know, are they, are they drinking their own Kool Aid? And so if someone's investing half a million, a million of their own funds into this deal, but you know that your interests are aligned with theirs and that you can, your 50,000 or whatever you're investing is going to probably be in pretty good hands because their million is on the line as well, so.

Absolutely, Jake. And we take it. If, if we like the property, we, and we want to be owners. That's the property we want. We, we buy properties because we want to be an owner along with our limited partners. We want to own the property with them from that side of it and not just be someone who's buying and flipping and selling. Selling perspective.

So so far, just going down the list, we've got an alignment of interests and trust. And as one of the criteria, we've got management and business experience. Somebody who's, who's run businesses in the past, who's been part of teams, has built teams. Again, not a, not a must have to succeed. There's a lot of people who don't have it, who've done really well. That is helpful, though, understanding. Are they putting their own money in here? What's the fee structure like, which we haven't talked a lot about, but are there equitable splits and reasonable fees built in? What else are we missing?

If we go back, when I tell people when you're going to vet a syndicator, you want to ask question after question after question, and any question you can think about is you want to understand what the splits are. How do I get my returns? How is the cash on cash figured out? Can you tell me about the underwriting? And what I mean by that is how did they analyze the real estate deal to come up with the numbers? The key is that you are going into partnership with somebody that you may not know, you've never met them before. So you must ask more questions. More questions. And if you don't get a good feeling, don't do the deal.

Sure.

Do not invest with them. But it's critical that the sponsors, the general partners, you are aligned with them and what they want to do and what. When you make, as we'll talk in, in different segments, is where is the deal located, what type of deal? But it's got a line with your. With your interest. Yeah, there is.

It's. It's.

I look at syndications. Well, let me ask one other thing. Don't do. Don't fall in love with the apartment, with the deal. Don't fall in love that it looks so pretty. Don't fall in love that it's in this town and what have you. And I use an analogy. Imagine you just fell in love with. With a race car.

You just.

You're in the Indianapolis 500 and this car is so beautiful and it's got all this specs and it's great and you just fell in love with it, but the driver doesn't know how to drive it. I have problem. I have seen great, dry, great race car teams with a great car and a mediocre driver, they don't do very well. That's analogous to real estate investing, which is so critical. It's the driver of the car and the management of the property. It is so critical. I have seen mediocre properties. I'd say mediocre to average properties run by a fabulous GP team that have turned that thing into one of the most successful properties around. So it's this cohesive group of having the right GP team, buying the right properties in the right location for the right price and the right debt. Yeah, you got to be so careful with that.

Yeah. I think I would much rather have a decent or even mediocre property with an Ace team. A syndication partner, rather the inverse of an Ace property with a mediocre syndicator. And Jake the first is going to do better.

Every time you say that, that is so important because a. An ACE team will know how to respond. If there are economic factors that are happening or there's a pandemic or things like that, it's critical to respond quickly. And the ACE team, with their experience has probably been through those things and they've lived a couple of them so they know what to do. And you're. Absolutely. I would rather have an average property with a Ace team. Absolutely.

So let's go through the criteria one last time before we wrap up. So we got alignment of interests. We have trust. We have a team that's got a management and a business experience. We've got equitable splits and fees. We got alignment with your personality. So do we have an alignment in just who we are? Is there good Communication here. Do I like you? Do I trust you? A couple we didn't touch on but we're gonna, I'll list them out is who's their team? What kind of a team do they have surrounding them? What partnerships do they have in place to make these deals work? Like for instance a property management group that is local with the asset you're buying. How does their team look? How does it function? What's their experience as well, what's their investment strategy and philosophy? Does that align with what you're looking for? If you're, if you're a long term person, you don't want to be buying and selling. Is that the same strategy and philosophy that this indicator has as well? What's the reputation and last but not least, track record? Do they have something they could point to and say we've done this before, we've succeeded, you can trust us with your money? I think it's a pretty good list of criteria to start with. It is.

And Jake, I wanted to sum it up with team. That team is your internal GP syndicating team team and all of the support functions from your accountants, your property management company, your lawyers, everything that your brokers are you connected with the brokers. It, this is a team event. If you think you can do it on your own, you're mistaken. And it's critical to have the great internal and external team to make the, the syndication work and be very profitable.

Yeah. Well, Steve, thank you for being the guinea pigs. Thank you for being the spotlight. You're usually the one interviewing so I'm sure it's difficult being the one interview. But if you want to learn more about investing in real estate, go to skylinepointcapital.com We've got tons of content there for you to continue to learn. And this is episode one of our eight to nine week series. So stay tuned. Over these next few weeks as well, we roll out more the Real Estate Investing 101. But again, thanks for joining us. Go to skylinepointcapital.com to learn more. And until next time, thanks for joining us on Heading West.