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Strategy Saturday
SS17: Understanding the Basics of Real Estate Syndication
April 11, 2021
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Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing the nuts and bolts of real estate syndication.

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Transcript:

Charles:
Welcome to Strategy Saturday, I’m Charles Carillo. And today we’re going to be discussing the basics of real estate syndication. So, disclaimer, I am not an attorney. If you’d like to be part of a syndication, I suggest you speak to as sec, attorney messaged me. I have a list of them for you to choose from. So what is a real estate syndication? It’s a partnership between several real estate investors. They’re combining their experience, capital resources, skills to purchase a property that otherwise individually they would be unable to purchase. A syndication is any time. There is an investment of money in a common enterprise with an expectation of profits through a promoter. So a syndication is not a joint venture syndication is where passive investors also known as limited partners put up the money and active investors also known as general partners, promoters sponsors, syndicators manage the project and execute the business plan.

Charles:
A joint venture is a partnership between several investors where every investor is active. There are three types of passive investors in syndications, so unaccredited, which are not so smart and not so rich investors, sophisticated investors, which are smart, but not rich. And then there’s a credit investors. And these are right now. Currently they make $200,000 a year individually or $300,000 a year as a couple and or have a $1 million net worth not counting their personal residence. There’s two types of syndications, two main types of syndications. There’s the five Oh six B. And this is like the original one. This is, think of this as like a con the country club one where it’s it requires a preexisting relationship. So if you guys sitting at a country club, want to buy a piece of property and they all know each other, and one guy is going to be running the deal.

Charles:
And the other few are just gonna be putting up money with him. That would be like the five Oh six B. You’re able to use sophisticated investors and accredit investors. Okay. So people that are smart and that might not have the financial capacity of an accredited investor. You’re unable to generally solicit. So what this means is that you can’t broadcast this on the internet, right? You can’t broadcast this deal on social media. You can’t talk to people that you don’t know previous prior about the deal you can raise unlimited funds. That was great. In 85% of the deals are done with five or six PS. So it’s a very, very common structure for syndications Five-O succeed. This is the newer one, general solicitation is allowed. So what that means is that, like I said, you can now advertise this Facebook, social media, whatever you want to do, your deal, a credit investors only.

Charles:
So you can only, they must verify investors with a third party. So there’s some services that do this, or the investor might be able to submit a letter from their you know, CPA or attorney or something like this that can verify their accredited investor. So this is perfect for like portals, right? And a crowdfunding type things. And you can raise unlimited funds. The only caveat here is that they have to be accredited. Now, the there’s another one, which we won’t talk too much about. It’s called regulation a and some investors utilize this. We do not, and we will never utilize this. It’s general solicitation is allowed. You’re able to use unaccredited sophisticated and a credit investors, and you can raise up to $50 million. And I’ve seen investment groups except as little as $5,000, which is a double-edged sword when you’re raising funds from investors, because you want to have investors that can weather a loss.

Charles:
And you also want to make sure that you have to manage those investors too. You know, a investor that invest $250,000 with you is probably going to require less time from you than someone that invest five or 10. Right? And this is a very time-consuming and very, in a more expensive route to go could take several months for a sec approval because it requires the sec approval. So documents, I’ll be doing a future video on all the documents, but I’m going to give you just a brief overview. So investors need to execute a PPM, which is a private placement memorandum, which outlines risk in every different way. You as an investor can lose money. There’s going to be an operating agreement for the entity, the LLC, a business plan, which we usually call like an offering memorandum or an O M, and that educates your investor on your business plan, the market, et cetera.

Charles:
Then there’s going to be a subscription agreement and the investors who do ability questionnaire, and this is about 10 to 20 pages. And what this is, is just information that you’re going to fill out. So the operator can confirm that you’re going to be suitable for the investment. So fees and splits. Well, typically there is an acquisition fee of 2% all the way up to 5%. I’ve see some groups that do 5%. We typically will do 2%. I think that’s a very fair fee. As the market gets a little tighter you might see that fee go up a little bit because more deals have to be reviewed before you close on one. There will be an asset management fee of typically 2% as percentage from gross reps. So if you have a property that brings in a hundred thousand dollars a month, 2% of that will go back to the, the general partners.

Charles:
And that’s what they use for compensating themselves for the time that they’re spending, working with the property management and also with project management, normal splits are usually 70, 30 and 80 20. So 70, 30, 80, 20, the 70 and the 70, 30, 70% of that would be for the limited partners, the passive investors, and the 30% would be for the general partners. And usually this is done after a preferred return is met. So preferred returns are usually seven to 8%. So for example, if someone, once a, if you had a, you’re investing in a deal it’s a 70, 30 with a 7% preferred return after the return exceeds 7%, your return is split 70 30 with the general partners. And you’re getting 70% of that. And they’re going to be getting 30% of that. So if it went to 8%, there’d be one extra percent there you’d be getting 70 basis points of that. Your general partners would be getting 30 basis points of that, possibly other fees. They will be posted in the private placement memorandum. So make sure to check out when you’re investing, remember to always speak to an sec attorney before entering into any syndication. So I hope you enjoyed it. Please remember to rate, review, subscribe, submit comments, and show potential potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar incorporated exclusively.

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