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Intro to Syndication: Raising "Pooled" Capital for Real Estate

handsIf the idea of financial “syndication” confuses you more than Lady Gaga’s wardrobe, then this lesson's for you.

This is part one of a multi-part series on deal syndication, from Mogul faculty Susan Lassiter-Lyons.

Susan's been a real estate investor since 1994, has raised $26.2 million in private money since 2004, has participated in 600 real estate transactions as an investor, broker, lender, advisor or syndicator, and has trained and coached 5,128 investors since 2009.

So yeah, she knows her stuff.

In this lesson, Susan will introduce you to “the basics” of syndication, starting with why she loves the private money “pool” so much.

From Susan Lassiter-Lyons, Funding Adviser...

poolWhy I Love the Private Money “Pool”

Every investor understands at some level the power of private money, right?  It’s “Real Estate Investing 101” that having a reliable private lender with liquid capital on tap can be like steroids for your real estate investing endeavors.

But why have only one? I mean, the more, the merrier, right?!?

So why not gather a whole mess of passive investors, and let them all play in your playground at once together? Then you can just scoop up all their money into one big pile and really go to town!

Well hold up right there.

Yes, “pooling” investor funds like this can absolutely be done – and can be an immensely powerful way to leverage your way into bigger and better deals. But it’s also not quite as straightforward as you might think at first. In fact, the almighty SEC says it can only be done in certain, specific ways.

Do it right, and you’ve got your own little, highly profitable pool of private money, busily earning a nice return for your investors, and paying you handsomely 11 different ways.

Handle it wrong, and well…I hope you look good in orange.

So let’s take a look at the right way to do it, shall we?

puzzle“Pooling” 101

What we’re talking about here is a little something called “syndication” – which is really just a fancy word for pooling capital from multiple investors, and then organizing the use of those funds into real estate assets or projects.

Essentially you’re assembling your own little real estate hedge fund. You are often called a “Group Sponsor” because you're managing a group of investors, and you’re responsible for not only assembling them, but managing the group’s investment activities.

Why Syndicate?

Real estate hedge funds and syndications are a topic near and dear to my heart primarily because they are the best way I know of to raise money to invest in bigger deals. And let’s face it, bigger deals means bigger profits.

As a real estate investor, I’ve constantly got my eyes open for ways to syndicate real estate opportunities. By successfully syndicating real estate deals, I’m not only able to land more and bigger deals for myself than I could by flying solo, but I’m also able to profit handsomely from the syndication in numerous ways besides simply the deal itself.

I touched on it a second ago – but there are at least 11 different ways you can get paid for putting a real estate syndication together. Eleven.

I’ll explain this more soon, but for now I want to impress upon you that syndication is one of those “little profit secrets” higher level investors like to keep to themselves.

thirstyYou Have a Thirsty “Passive” Crowd Who Needs You

The fact is, there’s a LOT of people out there in the arena – more than you’d probably ever think – who love the idea of investing in real estate, but wretch at the idea of being what they perceive to be an active “real estate investor”.

These are people with big piles of money, earning paltry-to-nothing for them right now. Inheritances, IRAs, savings… These people are financially parched and would love to get a piece of the real estate action, but only if they can do so without “tenants, trash and toilets”.

And that’s exactly where your syndication skills will come in. In fact, almost $800 billion in private offerings were funded in 2011 alone as a testament to this.

You can be the one to offer this thirsty crowd a passive way to have their cake without having to take their medicine

Ha, how’s that for mixed metaphors…but you get my point, right? You give them a way in, where they don't have to deal with any of the yucky hard work, or the day-to-day management drudgery. They get to just sit back and enjoy getting a much nicer return on their money than they could get in the stock market. While you get to enjoy leveraging their funds to do what you do best – create and fund highly profitable real estate deals.

Everyone wins:

  • The syndicator/sponsor (you) supplies the experience, expertise and deal flow.
  • The investors supply the money.
  • The investors are drawn to the passive nature of these investments not the day to day decision-making and management.

instructionsWays You Can Use Syndicates

When you are managing a group of “syndicate” investors you must keep in mind that you can’t use their pooled money for just any project. But there are a number of solidly profitable ways you can go.

Here are two of my personal favorites:

#1. For a Mortgage Pool

This is your traditional lending for traditional real estate transactions.

I owned a mortgage company for eight years, and we provided residential, commercial, and hard money financing to real estate investors in Denver, Colorado where I'm based. We used syndication by putting together a private equity mortgage pool, the making 100% rehab loans to the investors in our area.

We were getting this money from our private money partners at 6-7% with no points, and then we were charging 4 points on this same money and 15% to make these loans. 

It was definitely a “cash cow” for us. :-)

#2. For a Real Estate Hedge Fund

A hedge fund sounds a bit daunting but it’s simply a private investment fund or pool that trades and invests in various assets such as securities, commodities, real estate, currency and derivatives on behalf of its clients, typically wealthy individuals.

optionsAs a real estate investor you can put together hedge funds to invest in just about anything real estate related, including acquiring property or real estate notes in their entirety, or as an equity contribution to a real estate project in addition to commercial financing, which can often fund the lion’s share of the project’s costs.

  • You can purchase foreclosed properties from banks.
  • You can purchase performing and nonperforming notes. 
  • You can put together real estate funded by commercial property like apartment buildings, multi-family, office buildings.
  • You can even put together a real estate fund to do a development.

A Little Story of My First Syndicate

In later lessons I’m going to share with you some pretty incredible case studies.

But just to give you an idea of what it might look like to get started, and even to make you smile a little, let’s take a look at my first real-life syndicate deal.  I often refer to it as the “accidental syndicate.”

Keep in mind this was just my starting point. I’ve made a LOT of money, many different ways with real estate syndication – which is why I’m such a huge fan and believer. But you’ve got to start somewhere, and this is where I started.

The “Accidental Syndicate”

It was 1994.  I was a group sponsor of a small group of coworkers at Hertz Rent-A-Car where I worked at the time. I arranged for us to pool a whopping $2,500 in capital to purchase tax liens at the Arapaho County auction just outside of Denver.

Impressive, I know.  :-)

untitledNow granted it wasn't a whole lot of money, but I thought it was a big deal.  We went to the auction and bid on (and won) four tax liens.

And as you can probably tell from this real life picture of one of the properties we ended up with, you can tell we did exactly zero due diligence on these tax liens. (not recommended by the way)

Luckily, three of tax liens we won were redeemed just like the book said that they would and Arapaho County paid us 16% interest on those three tax liens that were redeemed.

Oddly enough, the fourth one never redeemed – and it just happens to be the one pictured here. Go figure. Five or six years later we actually applied for and received the Treasurer’s deed to this spectacular “single family home” far out on the eastern plains of Deer Trail, Colorado.

It's obviously abandoned and it's completely worthless, but we keep paying the $17.00 annual tax bill so that we continue to be the proud owners of this “Jewel of Deer Trail.”

Truthfully I’ve only been to property about a total of three times because it is so far from my house and to be honest, it’s a bit creepy.  But we keep it around and keep it in the portfolio just as a lesson to always, always do my due diligence.

So back to our epic numbers, that’s 16% interest on just north of a couple of thousand bucks, split six ways…clearly no one got rich here. But with a taste of success, we were on to the next strategy. 

But as I said, you’ve got to start somewhere. I’m thrilled to report that my next syndication was a lot more successful than the first. I raised $3.5 million to put together a private equity mortgage pool to make hard money loans for 4 points and 15% interest. That was much more of a success than that little jewel at Deer Trail.

And my future syndications were even more successful than that.

But let’s not get ahead of ourselves. I’ll share more case studies in coming lessons, and learn even more about how you can make an incredible amount of cash from setting up your own syndicated note buying fund.

biggerMore deals. Bigger deals. Better deals.

I’ve just given you syndication from the 10,000 foot view. Are you starting to connect the dots yet? Are you starting to get a sense of just how powerful it can be?

Look, I’ve been in this game a long time. I've done many, many traditional, one-to-one type of transactions you’re probably accustomed to and comfy with, leveraging the funds from a single private lender. And that’s not a bad way to go at all.

But I’ve also done small group deals, and I've crafted a number of large group deals where I've been the group sponsor and put together syndicates for both mortgage funds and real estate funds. 

The fact of the matter is, my best, most wildly profitable deals have been syndicated.

In my lessons coming up, show you 11 different ways you can profit from a real estate syndicate/hedge fund, the exact steps I use to create one, and to make it especially tangible, I’ll walk you through one of my personal favorite syndication models right now: how to create and manage a note buying fund.

But here’s something important to remember as you go through this information: Don’t be overwhelmed.  Hedge funds and syndication might seem like a super advanced topic but the truth is it’s actually very simple to put together once you educate yourself. And that’s exactly what I want to start doing here.

Until next time,

Susan

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