WHAT IS A SYNDICATION?

TRANSCRIPT:

(00:00):

You've probably heard people talk about investing in syndications and how hands off and easy that is but you may not really know what a syndication is. So, I'm going to break that down for you. So, the definition of a syndication is a temporary line formed to handle a large transaction. That would be difficult or impossible to execute individually by forming a Syndicate members can pull their resources together and share in the returns.

(00:31):

It's so basically a bunch of people get together; they pool their money and they go buy something bigger than they could buy on their own and hence get that scale of business that makes things more profitable. So that's the gist of it. Generally, you have like people ask, are you a true owner when you do that? Yes, there are two groups within a Syndicate. There are General partners and limited partners. Both are owners of the property. Both have an equity.

(01:01):

Interest and how much Equity you have as a passive investor on the limited partnership side is all a matter of how much money you put into it, okay? So, they'll be when, when you get an offering of something like this, I'll tell you, you know, for x number of Investments, you get a certain percentage of ownership, okay? So, you don't own the whole thing, you own some percentage of it, but you are an owner. So, you get all the tax benefits, you get the cash flow, you get 35 proceeds.

(01:33):

Depreciation all of that. So yes, you are an owner now there are different types of syndications people can Syndicate just one property so say it's an apartment complex out there with 150 units. They can Syndicate that property or loan or there are funds. There are funds for. Basically, a lot of people put their money into a fund and that fun goes out and buys a lot of different properties. It might be multiple different apartments, complex.

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Is in the same area or different areas or it could be a combination of say, self-storage units RV parks and apartment complexes retail shopping centers or whatever it. So, it's a fund where it's kind of more Diversified and the returns are going to differ with all of them and the length of term time that your money is in it, all of those things can vary. So, it's really important to sit down with this indicator and discuss what your desires are for your money. How long do you want to lock up that?

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Money. Do you want to say, hey I want to invest it and just have a girl for me for the next 20 years because this is not money. Indeed, right now or do you need cash flow right now and you don't want to lock it up for more than three years or something like that. So those are all things you should discuss with a potential syndicator or with the Partnerships. If you're looking to do this kind of stuff, another common question I get is how much money do I need to get into a syndication? And this varies greatly depending on the

(03:01):

Offering but say the most typical is between 25,000 and 100,000. Now you don't have to have all that money sitting in your checking account, you can often invest within your retirement account. So, if you have an IRA or 401k or something like that, especially if it's an employee or not working with anymore, or if it's a privately owned Ira, something like that, you can invest through that and that's a whole other topic. I'll make a video about that as well. How

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How to do that because it has to be self-directed but a lot of people do that. I've known people to pull out funds on a line of credit on their business or house where they're they're paying maybe 2% or 5%, whatever it is on that loan. But they know they're going to get a higher percentage in the investment. And so, they choose to do that. Those are discussions. You should have with your financial planner or your CPA to see if that's right for you. Obviously, there's risk involved when you

(04:01):

Things like that. But you do not necessarily need to have it all sitting in your checking account, but if you do, yeah, best to put it to work, right? What are some of the other common questions? Oh, I get this one a lot. What are the typical returns? A syndication? Again, it's going to vary. But most indicators are aiming for greater than 10% return on your money every year. So, that's basic some might be 14. Some might be 20, you know, could be all sorts of things.

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Obviously, it's a gradient. It depends on how long they're going to hold your money, depends on the type of real estate. You're investing in depends on the risk level. So again, conversation to have with a potential syndicator, a potential General partner. They're also called sponsor sometimes because they're sponsoring the loans, they're the ones signing on the loan as they limited partner. You don't sign on the loans and you have limited liability. The general Partners. Take on all that. Porsche the risk. So, it is a less risky.

(05:01):

For limited partner, for sure. How are they structured you here? Confusing terms, like, preferred returns, cash-on-cash, RRIs Equity, split etc. These are all things that a syndicate should sit down and explain to you. So, you understand it, but I'll go over it. Just real brief, high-level preferred return. If they say this, this offering has a preferred return of say, five percent. That means that any cash flow that happens every month has rent. Come in and expenses, go out, whatever is remaining,

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you're going to get or the limited partners in general. Are you going to get the first five percent of that cash flow before the general Partners take anything? Okay. So, you can expect each month or quarter or however often they make distributions that you're going to get five percent on your money. So, if you put in a hundred thousand a year, you should be getting 5,000 a year on that. Now let's say for some reason, the property doesn't perform.

(06:01):

Very well. The first year, maybe you're doing lots of renovations to increase the property value that preferred return might get pushed to the second year. But they, your do that same return the second year as well. So, then you do both of them. So basically, they'll catch up with that as the property values, increase rents, increase, all that kind of stuff. So, that's a little bit about preferred returns cash-on-cash, that's basically how what, percentage of what you put in. Should you expect to get back to this year? In total with

(06:33):

whatever might be going on with that. So that would include your preferred return. So, if you're let's say your preferred return, like we said in this example is 5%, but the property is generating more than that. After that five percent is paid out to The Limited investors, whatever the remaining cash flow is that's going to be split between the general Partners in the limited partners depending on the equity split. And that's the other term that that people say, Okay? So

(07:01):

He splits can be all over the place, you know? Maybe General Partners have 30%, limited partners have 70%. Generally, the investors have the limited Partnerships have the greater percentage, but it depends. If they have really high preferred returns, maybe you get less Equity, it's sort of a balancing act, but anyway, whatever, that Equity split is. Let's say it's a30/70. After the preferred returns, are paid out the limited partners are going to get seventy percent of whatever. Else comes in there and the general Partners will get that thirty percent

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again. That's just an example, it can vary. So those are some of the terminologies that you might hear discussed in syndications, and then finding the right fit for you. Again, it's just a really good idea to sit down and discuss this with any syndicator. It gets indicators. Usually, going to sit down and talk to you about your financial needs before they ever show. You take your property. Most of the time, we sit down with syndicator there.

(08:01):

Going to talk to you about a deal. The first time, they're usually just going to sit down and kind of make a profile for you and then they'll call you or email you when they have something that fits you. Something that's like these are the kinds of returns. You were looking at; this is the kind of whole time. You were looking at; this is something that fits you. And also, there are there's a difference between what's called 506 B offerings in 506 C offerings and who is Allowed to be in those offerings.

(08:32):

So, there's accredited investors and non-accredited investors also known as sophisticated investors and some offerings may only be available to one or the other. So, depending on what category you fit into your syndicator, should only approach you about things that you qualify for. So, an incredibly Advanced ER I'm going to stumble on that word. These are individuals with a net worth or joint nephew worth with their spouse of at least 1 million dollars in. Does not include

(09:02):

his or her primary residence or they're an individual making 200,000 dollars per year or a couple making three hundred thousand dollars in one year with expectations for that to continue. So that is an accredited investor. If you do not fall into that category, then you are by default a sophisticated investor in the key. With the sophisticated investor is that you have to know. No,

(09:31):

the person that's doing the syndication, okay? This can't be something. You just saw online, some stranger, you've never talked to before, and the first time you talk to them, you go in and invest with that, you need to form a relationship with that person so that you can become a truly sophisticated investor. They can teach you about these Investments. How to tell a good one from a bad one and you can form a relationship. So yeah, that's part of it too. Is what's going to be available to you, so you need to get to know No, the people who are offering this

(10:02):

So, you need to establish that relationship. That's about it. So, if you have any other questions just hit me up with an email or a phone call and I'll be happy to answer those for you. Hope this is helpful.