How does one go about investing passively in a Real Estate syndication?
Perhaps the idea of investing in larger real estate has caught your attention, now what? If you're confused or in any way are not clear on the process, you aren't alone! Let me begin this article by stating that by far the most frequently asked question is "How exactly does syndication this process work"? How do I get access to your deal list? Once you find a deal, what are the next steps, how do I invest?
Although these questions have been answered in different forms in different places, it's clear to us after countless questions that additional detail would be massively valuable to achieve a certain comfort factor with most investors. With that in mind, let's get right to it!
Although sometimes these steps may not happen in this exact sequence, let's look at how this process typically works in most scenarios:
1) Find a "sponsor" that you're comfortable working with - one that has a track record of experience and/or works with a team of experienced individuals. Often times the best sponsors are found through referrals or through investing events/conferences. Keep in mind that due to SEC regulations, some deals/specifics may not be allowed to be advertised or shared unless you have a prior relationship with a sponsor so this step of developing a relationship is key.
2) Establish a rapport with the sponsor as well as his or her team. Ideally during the first few connections they should be asking YOU about your goals with investing to ensure that any future deals align with what you want to achieve. Any good sponsor will hold their investors as well as their interests and goals above ANYTHING else. Not every deal or project will be a good fit for every investor's goals, so it's good to align and establish what you're looking for in this step. Sign up for their preferred method of communication - in our case at Redline Equity this is our investor newsletter through our website
3) Once the relationship has been established, the sponsor (or sponsor team) will begin to share deals as they come in - this will often take the form of an investment summary or offering summary. This "package" will outline the details of the investment such as the purchase price, location details, business plan, expected returns, financials/proforma, and any other details relevant to what the investor needs to know. This may also take the form of or be complemented by a webinar or pre-recorded overview of the property with a narrative around the investment. At this point if the opportunity looks attractive to you, let the sponsor know you're interested along with the amount you'd like to invest. At this point this is what we call the "soft" commit, as no money has changed hands yet nor have you signed anything officially but we will add you to the "interest" list.
4) Once the official investor documents are ready from the attorney these will be distributed to the interested investor list. This list of documents typically includes the private placement memorandum (PPM), Operating Agreement, and the Subscription agreement. Collectively these documents contain a legal and official summary of the investment, the use of all funds for purchase and improvements, the business plan, how the profits will be split, how the LLC (or other entity) will be structured, and your official commitment to invest among many other details. These must be signed and returned to the sponsor and team to officially subscribe to the investment. Once received, reviewed, and accepted by the sponsor, you're in!
5) Once all documents have been collected, the sponsor and team will ask for a "Call for funds" where each investor will then need to wire the committed funds to the account or escrow defined. Once all funds have been collected, we are officially ready for closing!
6) Once the property has closed, the real work begins! The team will then begin immediately to execute on their business plan including a transition to the new property management team, transition contact work with new vendors (laundry, pool service, lawn service, etc), begin exterior and interior improvements (if relevant) with a goal of improving net operating income (NOI) as soon as possible. The sponsor and team will communicate regular updates to the project as things unfold. In most of our offerings, you can expect a monthly update as well as where there is anything notable to share (good or bad).
7) The sponsor and team will continuously monitor progress of the property as well as market conditions against our original business plan objectives and target returns. Ultimately the asset will be sold or refinanced (typically 3-7 years) when the original goals of the investment are achieved.
I hope this adds some clarity to the details of investing in a typical syndication process. As always, feel free to reach out with any questions.
Founder and CEO