7 Steps To Investing In Your First Real Estate Syndication

For most people, the process of buying a house is fairly familiar.

You decide you want to buy a house, think about the neighborhoods and features in your must-have versus nice-to-have columns, talk with a lender to see how big a loan they’re willing to give you, consequently move some things from your must-have to your nice-to-have column after you get your lender’s pre-approval letter, then get together with a broker to tour properties until you find the home of your dreams and put in that offer package that the seller would be crazy to turn down. [Insert your own variations and horror stories here.]

By extension, the traditional types of real estate investing that involve buying a house and making some sort of profit on it, are also fairly easy to grasp. Fix-and-flip: buy a house, renovate it, sell it for a profit. Buy and hold: buy a house, rent it out, get monthly rent checks.

Beyond that, the edges can get a little fuzzy, especially when you start talking about things like group investments (aka, syndications), in which you invest passively alongside several, sometimes hundreds of, other investors to purchase a large asset, like an apartment building.

In this post, I’d like to take you through that process from start to finish, so you have a clear understanding of all the steps involved in investing passively in your first real estate syndication.

While the timeline can vary with different deals, the overall steps of investing in a real estate syndication are largely the same:

1. Decide whether to invest in real estate, period

2. Determine your investing goals

3. Find an investment opportunity that fits

4. Reserve your spot in the deal

5. Review the PPM (private placement memorandum)

6. Send in your funds

7. Celebrate

I tend to think of this process as a funnel, each step of which helps you gain a little more clarity on what you want and helps you get a little closer to your goals of finding and investing in a specific deal.

Step #1 – Decide Whether to Invest in Real Estate, Period

This is perhaps the most important step of all, the decision of whether you want to invest in real estate, period. After all, there are many other things you could invest in, from gold to coffee plantations to stocks and bonds.

This is a decision that I won’t be able to make for you. You’ll have to look at your overall portfolio, reflect on your goals, and decide whether investing in real estate can help you reach those goals.

What I can tell you, is a bit about how I got into real estate investing.

For me, I more or less fell into real estate investing. The first house my wife and I purchased was a great starter home, so right out of college, we became homeowners. Shortly after, we got into buying single-family fix-and-flip homes. We quickly fell in love with creating active real estate income, and we had fun doing the renovations ourselves and finding buyers for our repositioned assets.

Over the years, as we fix-and-flipped more homes, we really started to grasp the power of passively investing in real estate through syndications. Today, we are equity owners in many properties in a number of different markets, and all through group syndications.

Has every passive real estate investment been a homerun? Absolutely not. But am I glad we made each and every investment that we did? Yes. 100% yes. Real estate has taught us about people and relationships, leverage, tax benefits, passive income, and the power of community. For us, passive real estate investing is a critical part of our personal portfolio and of our long-term strategy of building wealth for our family.

All that is to say, every person and every family is different, so you’ll need to do some research, thinking, and reflecting to decide if real estate investing is for you.

Step #2 – Determine Your Investing Goals

Once you decide that you want to invest in real estate, think about what you’re hoping to get out of it. Are you looking for a long-term or short-term investment? Are you hoping for a lump sum fairly quickly, or a steady stream of passive income over time? How much do you have to invest, both in terms of money and in terms of time?

If you’re not afraid to roll up your sleeves and put in some sweat equity, or you want to choose your own tenants or cabinets or flooring, you might consider trying a fix-and-flip, or buying and holding a small rental property.

If, on the other hand, you want more of a set-it-and-forget-it type of investment, a real estate syndication might be a better fit. You can invest your money alongside other investors, then have an asset manager take the helm, manage the asset, and carry out the business plan to update the units and maximize impact and returns.

Step #3 – Find an Investment Opportunity That Fits

If, at this point, you’ve decided that a real estate syndication is the best fit for you, the next step is to find a syndication opportunity that works for you. Just as there are a variety of different real estate assets you can invest in personally, there are a variety of real estate syndication projects available as well, from ground-up construction to value-add assets, and even turnkey syndications.

To help investors learn about investment opportunities, deal sponsors typically provide some variation on the following materials:

• Executive summary

• Full investment summary

• Investor webinar

These are the core materials that will give you a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.

Personally, when I review these materials, I’m looking first and foremost at the team who’s running the project. I want to make sure they have a solid track record and that they’re good people. As you know, you can give a great project to a terrible team, and they’ll drive it into the ground. On the flip side, you can give a struggling project into a terrific team, and they’ll turn the whole thing around.

Beyond the team, I look to see if the business plan makes sense, given the asset class, submarket, and where we are in the economic cycle. I do my own research on the market, looking at job growth, population growth, and other trends. I look at the minimum investment amount, projected hold time, and projected returns. I look to make sure that the team has multiple exit strategies in place, in case their Plan A doesn’t pan out. I look for conservative underwriting. I attend or review the investor webinar and ask tough questions.

Basically, I look for any reason NOT to invest in the deal.

If, after all my research and analysis pans out, I consider investing in the deal.

But again, this is my personal philosophy and methodology. As you review different investment summaries, you’ll come up with your own criteria of what you’re looking for. The more you review, the better you’ll know exactly what you’re looking for.

Step #4 – Reserve Your Spot in the Deal

One thing to note about real estate syndications is that the opportunity to invest in the deal is on a first-come, first-served basis.

This can be especially important for deals in hot markets with strong deal sponsors.

I’ve seen multi-million-dollar investment opportunities fill up in a number of hours.

That’s why it’s important to do your research ahead of time, to know how much money you want to invest, and what you’re looking for in an investment opportunity.

That way, when the opportunity opens up, you can jump on it.

Often, there will be an opportunity to put in a soft reserve amount. This is to hold a spot for you in the deal while you take some time to review the investment materials. If you decide to back out or reduce your investment amount later, you can do so with no penalty.

The flip side is, if you don’t hold a place, but then later decide you want to invest, there may no longer be room for you in the deal, and you’ll have to join the backup list.

Not every deal offers a soft reserve, but when there is one, and I think I might be interested, I always put in a soft reserve to buy myself some more time to think about the deal, review the materials, and do my own research.

For deals with a soft reserve, this step and the previous step #3 might be flipped or more fluid, so I tend to review the executive summary, reserve my spot in the deal, then review the rest of the materials.

Step #5 – Review the PPM

Once you’ve decided to invest in a deal, the first “official” (aka, legal) step is the signing of the PPM (private placement memorandum).

This is a legal document, often quite lengthy, that goes into detail about the investment opportunity, the risks involved, and your role as an investor in the project.

The PPM is certainly not the most fun document to review, but it’s very important that you read through it, so you fully understand all aspects of the investment opportunity, including the risks, subscription agreement, and operating agreement.

As part of signing the PPM, you’ll also need to decide how you want to hold your shares of the entity that’s holding the asset. Often, you can also specify whether you want your cashflow distributions sent via check or direct deposit.

Step #6 – Send in Your Funds

Once you’ve completed the PPM, the next step will be to send in your funds (aka, the amount you’re investing into the deal).

Typically, you will have the option to either wire in your funds or to send in a check. I’ve used both methods before and have had no issues with either method. If using Self-Directed IRA money, you’ll want to coordinate the wire transfer with your IRA custodian.

Pro tip: Before wiring in your funds, be sure to double check the wiring information, and let the deal sponsor know to expect your funds so they can be on the lookout.

Step #7 – Celebrate

You did it! By this point in the process, you’ve done your due diligence on the investment, reserved your spot in the deal, reviewed all the legal documents, and sent in your funds.

That means you’re done with all the active parts of your role as an investor. If we’re using the syndication-as-an-airplane-ride analogy, that means you’ve picked your destination, bought your ticket, checked your bags, reviewed the safety information, buckled your seat belt, and now you’re ready for a cocktail and a movie.

The next piece of communication you’ll likely receive is a note once the property has closed. Deal sponsors typically like to put lots of smiley emojis and exclamation points in these emails.

After that, expect monthly updates on the project, more detailed quarterly reports on the financials, quarterly cashflow distributions, and an annual K-1 for your tax returns.

Conclusion

So, there you have it. Hopefully, the process of investing in a real estate syndication is a bit clearer now, and perhaps, a little less intimidating.

Real estate syndications are more of a set-it-and-forget-it type of investment, so most of your active participation is up front. After you decide to invest in a syndication, you review the investor materials (executive summary, full investment summary, and investor webinar), reserve your spot in the deal, review and sign the PPM, and send in your funds.

The first time you do it, it might seem a bit confusing as to what to expect and what questions to ask. However, as you review and invest in more deals, the process will become second-nature.