If you decide you want to put together a group of investors for an acquisition, it's important that the investors' objectives coincide with your own. For instance, if you are considering purchasing a half-vacant retail center, upgrading it, leasing it out for higher rents, and then selling it in two years, make sure all the investors agree to this plan.
What Does A Syndicator Do?
Here is a personal example. In my case as a Syndicator, paying off the building so that it becomes “free and clear” was always my primary objective. I was managing partner so to speak that handled day to day management and pooled the investors together. All investors were fully informed that they cannot expect any money from the investment until the loan on the property is paid. This could be anywhere from eight to twenty years. After the property is paid in full, they will receive their proportionate share of the monthly cash flow. If they can't afford to wait, then they don't invest. My investors have all agreed to this. If the property needed operating capital, the investors know they are at risk for this.
I would be remissed if I did not provide the “legal” definition of what actually is considered a Syndicate:
1. An association of people or firms authorized to undertake a duty or transact specific business.
2. An association of people or firms formed to engage in an enterprise or promote a common interest.
How Do You Become a Syndicator?
If you want to become a Syndicator or pool investors and their money, you need to provide your investor(s) information about the potential property. This includes information on the investment, your compensation, expected investor returns, how you plan to structure the acquisition legally, and so forth.
Legal & Compliance Rules For Syndication
This information will likely be scrutinized by the real estate investor, an accountant, and an attorney. In addition, when you syndicate you need to be in compliance with federal and state securities laws. The federal compliance is monitored by the Securities Exchange Commission (SEC), and a number of rules affect syndications. You can request a helpful brochure called “Q & A: Small Businesses and the SEC” by calling the SEC at 800-732-0330. If you are Internet savvy, you can get the brochure by going to www.sec.gov/info/smallbus.shtml. Next click on “Information for Small Business” and then select “Q & A: Small Businesses and the SEC.”
You will also need to check with the department in charge of monitoring securities at the state level (in Illinois, the Secretary of State). If a complaint is filed against you for securities violations, it can cost you a stiff fine, as well as being on public record.
How To Evaluate A Syndicator?
When an investor considers making an investment with a syndicator, the investor will be evaluating two things:
- What is the quality of the investment product?
- What is the quality of the syndicator?
Investors want to have trust and confidence that their money is safely invested. Consequently, if an investor doesn't know you, he or she will want to know:
- Your background
- Your track record on real estate investments
- What assets you as syndicator have to support any guarantees
- References from other investors
- Any disclosures that might be a flag, such as a bankruptcy, criminal record, or any foreclosures
- How much of your own money you are putting into the investment.
Final Thoughts on Real Estate Syndication
As noted earlier, I tend to be very picky about my investors and you should be too. Personally, I want an investor who is patient and in a financial position of strength so that this particular investment isn't critical to his or her future. The last thing I want is a “pain in the brain” type who wants to get involved in every decision and second guess my every move. Life is too short for that.
Overall, incorporating passive real estate investors in your path to real estate financial freedom enables you to grow more quickly than investing on your own.