What is Real Estate Syndication?? - Pros and Cons - Live Mentorship

Syndication sucks. Hashtag stupid.

Now, there are actually some ways you can use syndication, but I don't think there's anyone on this call that I'm aware of who's in the position where it's the appropriate tool yet. However, all methods are a tool in the tool belt. Syndication just happens to be a giant sledgehammer.

And when you're a hammer, everything is a nail. And our goal is to have a whole bunch of tools so that we can identify different resources in different locations. If you treat everything as a nail, it will be a nail and it will break stuff or it'll put it together. But that's about it. Yep.

Now, if you're in the real estate space, you've probably heard a lot about syndication because the people who do it, it is a marketing game. So they are very, very public. The biggest, most public syndicators that come to mind for me are like Michael Blank, Brandon Turner, Grant Cardone. Yeah, Grant Cardone. There's a lot of big people who are doing these big syndication plays, and it is a way to get into real estate without using your own money. It's essentially crowdsourcing real estate.

So we wanted to educate briefly on what it is, how it's used, what the restrictions are, why we don't currently do it, and at what point we would consider doing it and why. Because it is a tool and it's an opportunity. We look at it as two ways. You can use it to expand your portfolio, or you can use it to do 100% cash-out refis on your portfolio. And so let's just chat about what it is. What is an actual syndication?

So syndication— got one person to let in here.

Chris.

There we go. So syndication is essentially crowdsourcing real estate. You're going to create a fund which you file with the SEC. So you are actually creating what's called a security. You're going to do this with a securities lawyer. I've had a lot of real estate lawyers who won't even touch them because they're much more specific. And the level of insurance you need as a— I'm going to mute someone.

Okay, there we go.

Thank you. The level of insurance you need as a lawyer to do these is much, much higher than a lot of the smaller lawyers, because if you mess these up, you can really get messed up. So syndication has a little bit more inherent risk because you are creating an actual security that is filed with the SEC. It's going to be more legal costs, a lot more marketing costs, a lot more accounting, and a lot more reporting.

Yep. There's two R's: regulations and reporting. You're going to have a lot more regs that you have to follow. If you don't, you can get slapped with hefty fines. They don't do a lot of imprisonment for white-collar crimes anymore. However, it can happen. And, uh, you can go to, you know, get huge fines. So we don't want to mess with all the regulations, all the reporting. There's a lot more disclosures. We like to keep private. However, you can go buy real estate without any money. And so the thought process is you usually— people get it out of order. They usually go find the money, then they go find the debt, and then they go find the deal, which is wrong. That's completely backwards from the way we do it.

If you take some of the big syndication courses, they'll actually recommend Here, pitch a hypothetical deal, get them to invest their money, and then find some deal that's kind of like the fictitious deal that you pitched.

Yep.

That is how syndicators, a lot of them, train people to raise money, which is wrong.

Yeah, the, the thought process is the money is the hardest piece to get and you can go find any deal you want. The money is the easiest part if you position it the way we do, which is why we structure everything with Let's go find a great opportunity that we love, we see the vision for, then let's locate the debt. We take it private, meaning we go seller finance, and then we find the money if we need it. If syndicators did that, they would not just be investors, they would be great operators because they know the priorities. You have to put first things first, always. And most investors are just investors. They're not great operators. And as far as syndication goes, you can use it to scale up. However, how are we going to look at using it if we wanted to use this tool?

You know, before we go into that, let me go. Okay. I want to make sure that we start with like absolute clarity on what it is, how it works, and then we will answer that question. So you have two parties. You have the GP, the general partner, and the LP, the limited partners. So all those people that you're marketing to, raising capital for, you're going to have some minimum requirement. Maybe it's $5,000, maybe it's $100,000. It depends on how you want to structure your fund. But you get this fund that just has a bunch of money that you as the general partner are allowed to steer. Now, general partners generally own anywhere between 10% and 40% of the deal. I've seen some where they own 60%, but they don't own all the deal. Limited partners have limited risk. They also have almost no say on what happens. General partner is a way for you to gain control of properties.

As a standard, the general partner, the GP, if you ever hear them talking about GP, LP, the GP is the operator and they can be good or bad. You have to have a description before that that describes them, but they're going to be the operator. They can foresee, okay, this has to happen. We're going to do this, this, and this. They're going to optimize the systems or they're not. If they're not good, the LPs put in their money. And the way that good syndications are structured, their risk is limited to the capital they put in. So there are these things called capital calls where the GP can come back to them and say, hey, we need more money. Good, good syndicators won't do that. Bad ones often will because they're bad at money management. But as an LP, typically the money you put in is the risk, the exposure that you have.

Yes. And so why do people do syndication so often? It is the easy way to raise money. You can bring in a lot of money and that is how you skip steps to get to the 3, 4, 500-unit buildings. You can go in 2 years. Like we met, and this is someone, and we'll get into this, but he actually, I think he used the syndication a lot wiser than a lot of syndicators.

Oh yeah, Terrence?

Yeah, because he puts a lot of his own money in the deals.

Terrence Doyle, if you guys aren't familiar, you should check out his Instagram. But, um, he's with the BP team. He is one of the only BiggerPockets people that I am impressed with, like, and that, that means a lot. So you guys should definitely check him out, but he puts most of his own money in those deals. He only raises just a portion. He is the biggest investor in a lot of his big deals. Yep.

He actually takes the, he takes the risk. He, he is the biggest investor in every deal that I've seeing that he's done. Oh, we got a walk-up. What was it, 270, 280-unit building?

280 units, 3-story walk-up, beautiful asset. He's the biggest investor in that deal. Most syndicators— and this is something that if you're just going to operate any business, you should know— most syndicators don't put any of their own money into deals. And the key to running a successful business, regardless of what business it is— and some people are going to seller finance businesses on this call, so you should know— you have to outline and align the compensation model with the successful outcome of the business, meaning everybody gets paid more when it does better. Most people put flat fees into play. So if you're a syndicator, you go out, you don't own as much of it, you don't actually have as much incentive to get operational at a higher level. When he's the main investor in his deals, he's able to actually say, okay, I have a majority percentage of this. I do better when this does better. I am aligned and incentivized to make this happen, then most syndicators will not do that.

So just a brief summary. So, I mean, you know, if you're new to this concept, I just want to make sure you understand it. Basically, syndication, you're going to crowdsource money from others. You're going to put typically little to no of your own money in, though a good syndicator will take a big piece. Cardone actually invests pretty heavily in his own deals.

Yep.

But they'll come in, they'll do these deals, and they get paid. This is the other big part of syndication. They make their money upfront as well as throughout the deal. There's a fee structure. They're usually pretty high. You're going to see a list of fees that include an acquisition fee or a finding fee, a management fee, the fee fee. There's a whole list of fees. Normally they, they'll be anywhere from 5 to 8% of the purchase price. I've seen some really crazy ones.

Yeah, so that said, we're not a huge fan of it. We look at it as we can actually figure out how to get a little bit more creative. When you just go the syndication route, if everybody's doing it, you don't have to be as creative to make it happen. However, there is a point in time where we would consider doing it. I talked about 100% cash-out refi. Example, I bought a deal, 10% down, bought it for $1.1 million, put 10% down, borrowed the 10%. Yep. I've since paid that off. However, it was $1.1 million when I bought it. Today it's worth $1.6 million. Which lender on planet Earth is going to give me a $1.6 million loan on an asset that's worth $1.6 million? Nobody. It's not going to happen. You might get lucky if you can take it private. However, that's not realistic. If I were to syndicate that, Let's sell it to my own fund, sell it for $1.6 million, go get the investors to front the equity. I keep a portion of it and I go get a new bank loan. Now I get 100% cash out and I maintain ownership in that deal. I could syndicate it for myself. This is what Cardone does to get super liquid. He goes and buys deals at X price and sells it for higher to his own fund. So there's a point in time where you can look at that and you can say, okay, I can get 100% cash out. On all my portfolio, I can go buy more real estate, and then I can rinse and repeat. And I keep a small position in all the pieces of real estate that I bought originally. And if I put buyout agreements, then I can use all my future money to buy them back out and hold it all. So there's a point in time where you can look at doing that. However, it is not the main strategy we use because we want to have full control in the beginning of the portfolio, and we don't want to have to worry about regulations and all the reporting because in the beginning, you typically don't have the systems or the skill set to manage all that. That's something that you build over time. And that's why we want to start out all that so we can learn it without all the repercussions if something goes wrong.

And on the syndication, you want to use that fund typically to take out a bigger piece of real estate. So if you're going to essentially sell from yourself to your own syndication, you'll want to have acquired some real estate. Like, I would look at doing that at probably a minimum of a package of 50 units. So as you're building, this isn't something that you guys really need to worry too much about. Like, if you are right now buying your first 10-plex, your first 20 units, I would not be looking heavily at syndication. And there's a lot of marketing from syndicators— hey, take my course, learn how to syndicate. I would not start with syndication because if you don't have any money, you're going to come in with a low equity position in your own fund. And what tends to happen is you fall into one of many pitfalls of syndication. We'll go through a few of those. The number one thing, and you alluded to this earlier, a lot of them are very bad operators because they haven't learned to run multifamily. They start with syndication. Their first deal might be 80 to 100 units and they find a deal that is this big margin, this skinny, skinny margins. They miscalculate reno cost, cost to operate. They have to do capital calls. We have friends who have lost 7 figures in a year placing money in like 4 or 5 different syndications. The whole market's going up and all the syndicators they place money with lost money because they have no idea what they're doing. It is incredibly common Because one of the things that syndicators do is they made their money upfront. The incentives aren't aligned with the objective. They go, well, if I buy, we'll say, $50 million deal with raised capital, I get a 5% cut upfront for putting together that deal with my acquisition fee and my management fee and my whatever fee. If they get paid 5%, they get paid that whether or not the deal is absolute garbage or not. That is money that is paid and it is a line item on the closing settlement. Like that closing statement is just a check to them. It's not tied to the real estate. That's their fee for the opportunity. They can make a bunch of money off of their investors without any significant risk to themselves.

So that's just the reason, like, you don't have to be super creative to play that game. And when there's lack of creativity, there's a lack of growth. If you're not forced to learn, most people won't learn. It's why we say you need to have an objective going in and a takeaway coming out. Keeps you intentional. And when you have intentionality, you're more likely to grow. It's not guaranteed, but you're more likely to actually say, okay, this is what I learned. This is how I can apply it. In syndication, if you can borrow the authority, you go get someone to sponsor your deal, and they're called a KP. They're going to sponsor your loan. You have to have a net worth equal to or greater than loan amount. You can borrow that authority from someone that's done it before. You can raise the money from someone who's earned it before, and you don't have to have any special requirements. What are you going to learn from that? Oh, I can just borrow everyone else's credentials versus creating your own credentials, which is what we talk about. You go find your deal, then you go find the debt that you can actually get without needing to borrow it from someone else. You don't have to borrow from someone else's track record. You can create your own track record, which is what we say when you take it private. You go to the seller, you build a relationship. Now you actually start learning how to play the game. If you just borrow it from people that have done it before, it's a little bit more difficult to actually learn how to reapply it over and over and over for yourself. You can keep borrowing it from everyone else, but if you learn how to do it for yourself, you won't need to.

So two more downsides. First being, what can you negotiate on a seller finance deal? We do creative finance, we talk about this all the time. Terms are typically better than price because everyone else who has to go through a bank needs an appraisal, right? And if you need an appraisal, you're subject to price. You have to get your price or the deal doesn't work. If you're a syndicator, you're typically going to use a bank, right? So if you're syndicating, you have one item that you can negotiate. It's price. You're competing with every other syndicator and every other buyer and every other institution for the same product, and all of you are negotiating on the exact same terms.

The only difference is the institutions will always have more money than you, which makes it very difficult.

I would make the argument that you can grow faster and do better deals if you're focused on creative finance, because you can negotiate deals that no one else knows how to do, because other people are not in this space nearly as densely. As the big players and the syndicators who are trying to just hammer this on price. The other piece is with no creativity, your ability to actually maneuver and switch around. Like if you, if you have any sort of mistake that's made in your analysis and granted we do very, very conservative numbers, but if you make a mistake on a syndication, You do not have a lot of exits or negotiating power. You're just— either you raise more capital or you lose.

Yep.

In creative financing, if you have a relationship with the seller, it is much easier to come back and you can work something out because you already started creatively. You should be in a place where the seller and yourself are aligned and on the same side. Most of our people— granted, every deal we've ever bought has made money.

Yeah.

However, if something went wrong, I'm 100% sure we can go to like a Gary and a Dan. If something went wrong, we can talk to them and say, hey, we're having some trouble meeting these payments because we grossly miscalculated something. We made a mistake. What would you like to do? I guarantee you they would work something out and help us not lose the asset.

Now, I've got a question for those on the call that are good at math. I buy a property for $1 million and sell it for $2 million. What's my ROI? 200%. Tell us how much you put in. There you go. Whoever said that, you're smart. You put— you do a $1 million deal, you sell it for 2. Typically people say the ROI is 200% because you doubled your money. Most syndicators are putting 35 to 40% down right now because of where interest rates are at. And so they're borrowing less money. But if you put 40% down, the property value has to go up 40% to double your money. If you put 10%, and net of fees, you put 10% down, the property value has to go up 10%. If it goes up the same 40 that the syndicator got, you turned your 10% down and you multiplied it up by 40%. You get a huge ROI boost. You buy it for $1 million, you sell it for $1.4 million, you get your $100,000 back plus another $400,000. It's 500% ROI versus just a double. And so what we want to put out there is there's a point where syndication can make sense if you combine it with creative finance. All the syndicators are focused on their price. They have to get their price. If you can combine the two where you play the creative game and you can do 10% down all day long, you could, you could syndicate, you get your regulations in. Get all the filings correct, then there's a point where you can multiply investor returns and go buy bigger deals. However, most syndicators— by most, I mean all of them— aren't playing the game with creative finance where they're doing seller finance on these huge deals. And if you do that and you just keep simple math in check, if you can put less money down, it's easier to multiply it, which means it's a lot easier to get investor returns. Yep.

That is pretty much it for what I have for the weaknesses of syndication. That was the last point I had was they require a very large down payment. It's just harder to multiply money when you have more in. If you buy something for a dollar down and it goes up $100, congratulations, you've just got a massive return.

Yeah. So if you can combine the two, you do the creative finance side, less money down, which you can typically, typically get non-recourse debt with. And you syndicate, great. However, if you're getting low money down on most of the deals that most people here are gonna start with, you probably don't need to syndicate. You could probably do it with a JV, or you could just borrow the down payment second lien. So then it comes down to why would you? Mm-hmm. Does anybody have any questions? What was the answer to the question Cody asked? Well, that depends. If you buy it for a mil, you sell it for 2, it's a— you need one more function. How much money down did you do? 'Cause you put a million down, you doubled your money. Put 100 grand down, you 1,100% of your money 'cause you get your 100 back plus another million. You turn $100,000 into $1.1 million. It's all a function of how much money you actually put down. And most people don't think about that, that third input. You have what you bought it for, you have what you sold it for, but what was the actual investment that you made into it? If you're playing with cash, it's just a double. If you're putting 40% down, you turn your $400 grand into a million for, because you get that extra million, then the ROI just goes up a lot more when you leverage. So that was just a trick question, but you need to know your inputs for what are you investing down. And when a syndicator puts 30, 40% down, if I put 10% down on the same deal, my returns will be significantly higher. The question is, who's going to give you that debt? And it's typically private, it's typically seller financed.

Andy has a great question in the chat. Could you do a large multifamily deal with seller finance without syndication? Now, syndicators will typically tell you no. They're like, we did syndication because you can't take out the big properties without syndicating. What's the biggest property we've seen?

Biggest one that we've seen, Caleb and Chuck actually brought it, is 432 units seller financed. They want $7 million down, and that was a $35 million purchase.

That's a stellar deal.

Yeah.

As far as the amount of down payment, like, you could—

you can't buy that with a bank.

Yep. I was gonna say, you can't do that as a syndication.

Not gonna happen. Uh, that deal, the way it was operating, you're gonna need 45% down. So huge savings. Needs reno, and the rents were $300 below market. So there are huge deals that you can do that are multi-hundred unit properties Now, could you do that without syndication? Well, you need to find $7 million. So if you don't have a JV partner, you don't have someone who will lend that in second position, that might be a time where you syndicate that. However, regardless of whether you syndicate it or you borrow it or you do a JV, taking it creative, taking it private is significantly better than going with a bank because you're going to save— what's that— another 25% on the $35 mil, another $7.5 million. There's some more than that. 8.5?

Yeah.

8.75. Yeah.

Yep.

So you're saving a ton of money. I mean, that's almost $9 million that you're saving off the down payment just by taking it private.

Now, if a $7 million raise sounds difficult, think of a raise of over $15 million for the exact same deal.

Yeah.

Like, it's astronomically better when you can get creative. So again, it doesn't mean that you never syndicate. Like, you You could raise a fund and buy that after you figure out the debt. The biggest difference is if you take any class or any online course, book on syndication, they're gonna teach you how to play with the bank. The order of operations that today's syndicators look at is debt, deal, equity. We'll figure out all the players, but we'll get this big fund and then we'll move the pieces that we want and we'll figure out the equity once we figure out what the deal is.

Yeah.

When you do that, you have a cost of capital that you're holding or people are just placing money and not receiving a return until it's placed, which I think is a terrible model. I would not invest in that.

Yeah.

You're not stewarding money well if you're just holding it, waiting to place. If you do this in our model, deal, then debt, then equity, you get to customize the debt before you get to the equity piece. You don't have to worry about Do I syndicate it? Is it a JV? Do I have this in cash? Like, can I pay it myself? You don't have to worry about the equity piece because you actually put together the deal, then the equity with creative finance.

Yeah. And again, it, it's just a tool, but we don't want to be a hammer because when you're a hammer, everything's a nail. We want to get everything else ahead of it. You know, first things first, deal, then we figure out the debt. And if we can take it private, we can go get seller finance debt. We can look at, okay, do we JV? Do we syndicate? Do I fund it personally? Do I borrow it? Then you get to look at it as, okay, these are all my tools in my tool belt that I know how to do, and let's see which one works best. We got a question from Jake. What's the lowest percent down payment you've ever put down? 4.5%. Bought a deal for $1.1 million, $50,000 down. That was close to Seattle. From Bobby, could it be an advantage to join a syndication as a learning experience to get some experience on running large multifamily? No, I wouldn't.

I wouldn't either. If you want experience running larger multifamily and you want to do it through like getting a job or going through a class, I mean, just get a job as a property manager and run a large property.

Yeah, you'll learn a lot more as a property manager for a larger asset than you actually will being an LP in a deal because they're not going to let you run it. LPs don't get to run operations. It's not how that works.

Now hypothetically, and this could be appropriate, this is open to discussion. I'm actually curious your opinion. If you negotiated the deal creatively financed, so you brought the debt and the equity, you partnered with the syndicator, you guys are both GPs. If I'm a syndicator, I might actually take my fund to fund your deal because you're not just bringing me the opportunity like a wholesaler. You're bringing me the debt— or sorry, the deal and the debt. That has a different level of value than what most people are doing. People who sell deals sell a deal, and the other party has to figure out the debt and equity. If you've already done deal and debt, if you were able to ride a deal where you were a GP, it would be worth discussing. You would have to choose that partner very, very well. It'd be just like— I mean, it'd be very similar to a JV, right? They're using their syndication, you're using your creative finance. You could marry the two and that could be appropriate.

And there's nobody doing that right now. I mean, there's some people that are saying they're doing that, but, uh, you look into how they're actually structuring it. It's not quite what they're leading on to be. If you can get really creative and you can find someone who's already got their fund, you can be the good operator. The problem is most people are not good operators. So if they have the systems, they've got the asset management, they just don't know how to structure these deals. You bring a huge value add because nobody's doing that. So it's—

Yeah. And I only bring that up because we had that discussion with a syndicator last week. Ethan on the call had a huge deal and I was like, well, I'm not in a position right now to try to help someone manage a deal in Tennessee or Kentucky.

It was Kentucky.

Kentucky. But we talked to a syndicator out there who just hopped on the phone and asked them, Okay, how would you look at this and what would this look like? Just, just as a mental exercise, like if you were to do this, what would you think this would look like? And their answer was an $8 million deal is too small for them because there's not enough fees.

Yep.

However, however, if you found a $25 million deal and you don't have the network to fund that deal, you could find someone who's like, I have the fund, I love the deal, I'm going to multiply my client's money and I will run it with you. I would be open to that. I think that hits the bill for creative finance. You hit that leverage point. There's no banks involved. And like every JV, you have to be very, very careful with who you're partnered with. You have to choose the right operator. You take a good operator like Terrance who does syndication and owns his own deals. I would have that conversation with a guy like Terrance.

Yeah, that's it for syndication. Does someone or anybody have any questions?