Always keep in mind the business model of Thomas Edison:
- Get the money first.
- Find the market.
- Then, only after completing steps 1 & 2, deliver the product.
Structure your business around that 3-step model and you won’t fail. I know that’s easier said than done. Essentially, Edison recognized that financing is the life blood of any and all businesses. Most folks try to start a business with “I have a great idea for a new widget!” and then waste their money trying to fit the market to the product. Don’t be a trailblazer. Fit your product to the market. Only sell what the market wants, not what it needs. You determine what the market wants from market research. That’s why you get your financing first, so you can pay for market research and then pay for product delivery.
So, be sure to have your financing lined up first, then research the market to determine what it wants to buy, not what it needs. Most “guru” say to look for what a market is lacking and try to fill that need. I say if the market is not already buying it, then it doesn’t want it. Someone else would already provide it, and you have an opportunity to provide a better product at a better price. That’s called competition and you must learn to love it.
As for raising capital for your syndications, I suggest focusing on accredited investors rather than sophisticated investors. I am not saying to avoid sophisticated investors, but you are limited in how much you can raise from them and the investment is probably debt rather than equity. You can use “fractionalized trust deeds” to group together multiple sophisticated investors into a single trust deed (or mortgage), but it’s a hassle. Sophisticated investors are also “high maintenance” and require a lot of “hand holding”, because they all want to be the captain on the ship. Your skills at diplomacy must be superb. The upside with sophisticated investors is that they won’t scrutinize you or your project too much, and you can get a quick answer, “yes” or “no”, because the investment is usually quite small compared to accredited investor syndication projects. It’s only after their check clears that sophisticated investors want to take control.
On the other hand, accredited investors will not invest in your project until they are ready to invest in you. They want to look at your résumé, look you in the eye, and see that you have the experience, talent and drive to succeed.
I suggest starting small and getting financing from family and friends, even though you are probably not eager to put the personal relationship at risk in the unlikely event of a failed project. You can start small and include everyone in the management process. Just be sure you have the final say with majority voting rights and don’t let anyone else have access to the checkbook, so you won’t need SEC compliance. A camel is a horse designed by a committee, so be sure that your business plan for the property is well understood by everyone before you buy the property.
Splitting a $25,000 profit between 10 people won’t seem like it’s worth the trouble, but you’re not running the projects for the money. Rather, you’re running them for the experience and track record of growing other people’s money.
Build a track record of successful projects with re-investing profits into more deals. Talking the talk is one thing, but walking the walk (where the “rubber meets the road”) is how to prove that you can be good steward of other people’s money.
As Samuel Freshman advises in his book “Principles of Real Estate Syndication”, you must have the capacity to handle the project with your own resources before you consider offering it for syndication. I don’t necessarily agree with “must have the capacity”, but starting with small projects with family and friends is where you can leverage your relationships to get the necessary experience (and capacity) to start and grow your base of accredited investors. Even though it seems like a waste of time to start with small properties, like houses or 4-plexes, the experience of managing and growing other people’s money is best learned in small increments. Remember, you are being paid to learn how to be a syndicator with small projects. You must crawl before you can walk. You must walk before you can run. You are developing “muscle memory”, which is crucial for success.
Be sure that you have written goals, written investment criteria, and don’t get distracted by “shiny objects”. If you are focused on distressed residential 4-plex, then don’t waste time and energy looking at a distressed medical office. Gross lease residential income property is very different from net lease commercial business venue property. Even though income valuation applies to both, the asset management and positioning are very different. You are dealing with people in residential property and dealing with contracts in commercial property.
Don’t be averse to revising your goals or criteria according to your prudent judgment. Flexibility and responding to market changes are critical to success, but stay focused on your primary strengths.
Just a couple weeks ago I met for 2 days with an accredited investor who has a net worth of several million dollars. He is a self-made (“lone ranger”) millionaire in turning around distressed apartment buildings. He didn’t use syndication, just his own money from a good paying job and bank loans to acquire small distressed properties (class “C”), got rid of the riff-raff (he has an interesting story about getting attacked from behind by a disgruntled tenant and he head-locked the scumbag), then he repairs, repositions and refinances. Or he sells and rolls the profit into the next project.
Some properties he sold, but he kept most for cash flow. His situation was going well, so he dabbled in triple net commercial property and got crushed.
Lesson learned: Stay with what you know best.
Now he is selling some of his smaller properties and some high-end single family rental properties to “lighten the load so my ship can ride higher in the water”. He sees a storm coming in real estate (again), but the next storm will be much worse. So, he is positioning his portfolio for cash flow, rather than high leverage (debt) levels. He is willing to bring cash to the table to get rid of low performers, reduce debt and increase cash flow. He lives in a magnificent home in a gated community, so I think he knows what he’s doing.
I met him through an introduction by another accredited investor that I met when I was a real estate broker. I only got my broker license because I wanted direct access to the Multiple Listing Service and to save the commission on my own investment deals. I didn’t know he was an accredited investor, because he was working as a commercial mortgage broker. It wasn’t until much later after developing a good personal relationship that I learned he was an accredited real estate investor specializing in apartments.
It took a while to build a personal relationship with that investor before he would trust me enough to introduce me to his mentor. For that trust, I also gained an unsecured line of credit for $250K for real estate investments (it’s kind of high priced so I only consider it for projects that can afford to pay for it).
Another way to get started in syndication is to become an unpaid part-time intern at an existing company that does exactly what you want to do. Insist on doing everything in the company on a rotation basis. Your goal is to become indispensable. Learn how to source properties, learn how to analyze properties, learn how to present projects to investors and lenders, learn how to manage properties (asset management is the next big wave coming), learn how to manage independent contractors, learn how to hire and fire employees (salaried and hourly wage earners), learn the legal and financial aspects of the business. You don’t need to be an expert in every department, but you must be knowledgeable enough to handle any ordinary task that may arise.
You need to know enough about every department so that you can build your own business. Put your acquired knowledge into writing your business plan with written systems and procedures for every department. Then insist that the company get rid of you after one year, because if you haven’t started your own business by then, you’re doing something wrong or this just isn’t the business for you. If after one year they refuse to let you go, then you know you’re ready for your own business, because you’re too valuable for them to let go. Only consider staying for a percentage ownership, assuming that you want to own a piece of that company, with an opportunity to eventually own all of it. Of course, it should go without saying that you would never consider taking any proprietary materials or intellectual property with you without written permission. Your business plan, including your written systems and procedures, are yours, because you wrote it on your own time at home, and designed it specifically for your business.
If you want to be a “lone ranger” and become a self-made success, then I suggest starting with the least glamorous part of income property investment. That is property (asset) management. Learn it inside out. As your portfolio grows, your separate asset management company will also grow. That’s right, create two companies. You have one company for investments and the other company for asset management. You probably won’t get somebody in a “head lock” when collecting the rent, but you never know. So, stay physically fit, well versed in the law of property management, and always look for the next opportunity. If you can get certified in apartment management, then you’ll have a much easier “sell” when getting a “Master Lease with Option” deal (even when you intend to delegate to another professional management company), or when negotiating to buy with seller financing. That piece of paper is a great substitute for lacking experience on your résumé.
Finally, if you show me who you hang around with the most, I’ll show you your future. If you want to become an accredited investor, then you must hang around with such folks. Even if you never transact a deal with them, you must socialize and associate with them, brag about your successes, and congratulate them on their successes. This is not for selfish reasons, because friendship is its own reward. Just remember that they also hang around with other accredited investors. If your project isn’t right for your friends, then they could refer you to some of their friends. That’s networking and that’s where the best deals are found.
Learn more about real estate syndications with my product “Introduction to Income Valuation and Syndications” by clicking here.