Why I Decided to Become a “Start-up Syndicator”

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Well – I guess it’s no big secret that I am working on my first syndicate.

I don’t think that I couldn’t have been more transparent about this fact if I got on top of the roof of my house and put the loudspeaker to my lips.

What can I say – I am excited indeed!

I am in the opening minutes of the first quarter of this game, having made my final decision to pursue syndication just a few days ago.  This decision was not an easy one and required some soul.  But, as of this writing I am all in – as they say.

I have decided to chronicle my experiences on this journey, and considering my love affair with the written word I think it’s not unreasonable to assume that my thoughts will eventually find their way into a book.  For now, I am one of the lucky few who get the opportunity to share knowledge as it becomes available to them on a platform as magnificent as the one we lovingly call the BP Nation.

Don’t worry, not every article over the next year will be concerning syndication; I am sure that I’ll run into things on the forums that will be appropriate to address.

Soul Searching…?

I mentioned above that I’ve just recently and upon doing a lot of should searching have committed myself to the syndication game – the operative words being soul searching.  I’d like to let you in on some realities that exist in this world of which I did not realize and you likely do not either:

Syndicating, at its’ core, is doing the same thing that I’ve always done, but on a bigger scale; simply pulling more money together to buy bigger properties.  But, the fact of how BIG it is tends to give me a moment of pause…

Think this through with me.  I am looking at a $4,000,000 building.  A 25% down-payment would mean that I have to raise $1,000,000.  Additionally, there are closing fees, pre-pays, in-pounds, deposits, acquisition fees, due-diligence, legal, and more – all of this can easily add up to 4% – 8% of the purchase price; let’s say $250,000.

Finally, there’s the rehab costs and even if all this pig needs is some lipstick, we can run through $250,000 in a blink of an eye.  This means that in addition to the 25% down-payment of $1,000,000, I have to raise an additional $500,000 to be able to close on the building.

Where’s this money coming from – people; it’s coming from people who, having evaluated the deal are choosing to bet that I will manage it to a successful conclusion.  WOW – can you say RESPONSIBILITY?

Let’s say someone is an accredited investor with Net Worth of $2,000,000 and they choose to come into the syndicate at $100,000 – do you see how through this syndicate I am controlling 5% of their wealth?  What if they come in at $200,000; what if their Net Worth is 1.3 million?

The deal may make all of the sense in the world, and this may in-fact be a wise decision for them, but are you able to ponder the responsibility this puts on me as the guy at the helm?  May be you are not, but I feel the gravitas of this situation indeed!

This is one reason I felt that I needed to take some time to think this through.  Here comes the other:

The Warren Buffett Way

While to a lot of us small guys on BP Cash Flow is everything, this is not necessarily the case for the people who have the means of investing in a syndicate.  They already have money, which in most cases means that they have very high-paying jobs.

With high income, as you know, come high taxes, and for a lot of these folks Cash Flow would simply mean a higher tax bill.

No, what they want is to grow their wealth exponentially by way of organic inflation and forced appreciation of property.

They want to roll the profits from one deal to the next, to the next…this is what I am being asked to do as a syndicator – to be the guy who gets paid in Cash Flow and Equity for running the operation which makes big wealth for investors by continually acquiring assets, managing assets, selling assets, and rolling the dough into more assets; and in order for the program to work I would have to commit to it for the foreseeable future…

There is a Potential Problem With That

If I agree to this, then what I am agreeing to is a JOB – no ifs, whats, or buts!  Crap – I spent a decade practicing techniques that would allow me to get out of having to have a job.  I did pretty well considering I haven’t had a traditional job in a couple of years.

Do I now trade the freedom I have found for a job?

This was the other reason I needed to take time to think.

Conclusion

As you by now realize, having thought things through I did indeed make the decision to commit myself to a career of a syndicator.  I am learning at a rate that I didn’t think was possible at my ripe-old age of 39, and I will continue to share my thoughts with you for as long as you’ll have me.

I hope that there is some value that you can derive out of the present discussion.  I know – this one is a bit on the liberal arts side of things, but I feel it is important.  Besides, I don’t have too much time to think of things to write, and as such you will have to just get used to reading my diary.  This week it is indeed liberal arts :)
Photo Credit: Jon_Tucker

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About Author

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

41 Comments

  1. Oh, look dear, our little Ben is growing up and getting a job! ;-)

    After having built a certain degree of “freedom” over the years you are not giving it up, but simply exercising that “freedom” to step into a “job” because you wish to so do, not because you must do it.

    I mean, how much freedom will you forsake with a job that can be performed, at least part time, from a beach or ski lodge? Yes, there will be tremendous responsibility, for which there should be tremendous remuneration, and maybe you cannot just run-off to Sochi for two weeks to watch Canada win another pair of gold medals in hockey. But, it’s not like you’ll be putting in 12-hour shifts at Chuck E. Cheese to keep your skinny butt off the cold-n-nasty street.

    I’m interested to hear how your new adventure plays out. Who knows, if you don’t curl-up into the fetal position and come out the other end with happy investors, I might scribble my name on a piece of paper for your next one.

  2. Good luck Ben!
    What kind of returns are you looking for out of a giant complex and are you offering a percentage of those profits to an investor or just a return on their money?

    I need to read Warrens book again. It never made sense to me to invest just for a tax wrote off. If your making more money, you pay more in taxes, but your still making more money. Even if the tax rate was 50%, you would have more money investing in something that made money than you would investing in something that was only a tax shelter. What I am I missing?

    • Mark,

      Add the book that covers the teachings/philosophy which influenced Buffett himself “Security Analysis” by Graham & Dodd. Though it is aimed at the stock market investor of a different era, the real lesson is on finding value and purchasing it correctly.

    • If you are making money, you don’t have to take it out – you can let it compound Mark. Many times investors prefer to take enough of a distribution to cover that tax liability but to leave everything else in.

      What I am looking for, and I haven’t seen it yet or I would have had it under contract, is 1.6 DSCR, 9.5%+ CAP, 12%-15% IRR, and 11%-15% Cash on Cash. I am also looking for 40%+ NOI/Effective Gross Ration. This is very safe and I haven’t been able to find this – perhaps it does not exist.

      I will let you know what I actually take action on :)

  3. Having a “job” ain’t so bad if you love what you’re doing, and I can already tell you are over the moon right now. Congrats on the decision, and I for one can’t wait for your weekly diary installment :)

  4. Ben,

    Do you have any idea what the structure is going to look like? How much equity are you looking to give up in the project?

    Thanks,

    • Yes Cliff –

      The structure will be a Reg D 506 PPM. Equity position both from the Cash Flow distribution perspective and the back door is negotiable. I’d rather not say what my proposal to my investors is as it is not inked yet. Once it is all a done deal you’ll find out the exact numbers :)

      Thanks cliff!

  5. Ben, been watching your progress both here at BP and on your blog for a while. I will stay tuned to learn about your progress and dont hesitate to reach out to us here on the BP community. Good luck my friend

    • Haha Ryan – where do you think the investors (at least some of them) are coming from…? BiggerPockets is a powerhouse, but BP sees through the bull shit in about 30 seconds flat in which way BP is a sword that cuts both ways. Translation – I better not mess (substitute another word for “mess”) up… This is why I don’t have anything in contract yet. Not interested in OK – want a really solid deal with a margin for error…

      Feel free to reach out Ryan for more details. Thank you!

  6. Will be in touch Ben and agree about BP. By the way I’ve been through CFFU in last few days – great content and delivery…

  7. Congrats, Ben! You just did what I’ve been thinking of for awhile myself…syndication. And I had to laugh at your comment that you are making a career change at 39…well, I’m doing the same thing, but I’ve got you by a few years…ok, a lot of years!

    I don’t have nearly your expertise in real estate, but my eyes are bigger than yours. My project is 4 times your cost and not for the faint of heart, since it’s raw land and not in this country. But the good news is it’s priced way below market value and it’s oceanfront, and a lot of oceanfront at that.

    I don’t know if I can help you or you can help me, but I would like to talk about it for a few minutes. If you would be willing, I will list my yahoo address for you to contact me.

    Best of luck,
    Gary

  8. hi ben I have been reading your blogs for several months and i think you are going to do a great job for your investors. congratulations Ben.

  9. Ben, I too follow your BP posts, and admire your many talents. I know you are a man who thinks things through very well. I also know you are a family man about the same age as myself. I’m sure you have wrestled with the following questions, but it needs said. Is your wife on board with this? How will it affect the remaining years you have with your kids? Will dad be someone who passes through the house in the night? Will he be on his phone and unavailable when he is home, always on edge for work related issues. I read a book that had one of those statements that sticks with you….
    To succeed at work and fail at home is to fail completely!
    I grew up with a work-a-holic absentee father. He was too busy for us and the marriage failed. You are in a spot to earn a living as things are. Once the kids are grown there will be time for the time intensive projects like this. I too have worked myself out of a regular job. I could make more money and do larger projects, but choose a modest lifestyle filled with flexibility and family time. Once my kids are gone I will frankly be bored and will likely take on larger projects. I don’t mean to discourage, just to remind you what is important. Just wanted to balance the comments, and challenge you on the other “costs” of doing this huge commitment. It will be a balancing act that i’m sure you are capable of doing, but will be a challenge. Much luck Ben.
    Dave Tanner – Greenville, OH

    • Dave – yours is one of the most heartfelt and thoughtful comments I’ve ever received. Thank you, and I will try to do justice…

      Patrisha is not only completely behind me on this, but she is the main motivation. We have twins, as you know, and currently I am the one at home with them more than mama. It’s like this – either I take a job and she stays home, or everything continues as is. Both my wife and I feel that she should be the one without a job, if this can be helped…

      This is definitely a change in perspective for me. Everything I’ve done over many years now has been in search of PASSIVE income – the property, the CFFU, etc. Why – because my time has been the most valuable thing to me. Now, I’ve realized that my wife’s time is even more valuable then mine as it relates to Aaron and Isabella.

      It will be a balancing act indeed. Like Dr. Seuss says – I’ll have to be dexterous and deft… You are in Ohio – we should have a cup of tea. I am expecting a call Dave!

      • Thanks for receiving my comments well. I’m glad to hear your wife is completely supportive. Also that a major motivation is to give her the chance to spend more time at home with the kid-O’s. That is commendable. We’ve been blessed in that my wife was able to stay at home with our kids until they were into school full days. Since then she has worked PT at jobs that have a “family 1st” flexibility build into them. We are rich, just not financially ha ha (yet). I would enjoy hanging out for a couple hours sometime and talk about life, RE, family, etc. Although I’m not much of a tea drinker. Do you have to extend your little finger when drinking tea? If I do that they will take away my man card, haha. I pass through Lima (on I-75) a few times/yr. What is the best way to contact you next time I’m coming through your area?
        Dave T

        • We are home-schooling and Patrisha is better suited – period. They are 4 now and while her schedule is very flexible in that she sets her own hours, she still needs to be gone a lot. I am getting a head start on syndicating so that 2-3 years down the road when the kids are in 1st grade my CF from the syndicate (having done 1-3) is high enough so she can cut her hours to about 10/week…

          Thanks so much Dave!

  10. So I will defiantly keep you in mind. I will also read Security Analysis as well in the mean time. Your blogs are always very exciting and catchy. It always draws me in : )

  11. You’ll do great at this, Ben. You are a thinker first and a doer second. It’s critical that you are careful in opportunity selection so you mitigate downside risk. You are the type of person that will think it through before jumping in, and that’s what your investors want. I look forward to watching your success.

    • Thank you so much Brian!

      I have looked at countless proformas in the past 2 weeks – nothing even remotely interesting. Tell me – why do none of the CCIM brokers want to include CapEx into operating costs; it’s like it is a big secret that stuff breaks over time. I thought they taught them at CCIM…? Seriously – what’s up? Their NOI is $250,000 – mine is $173,000. Is that normal?

  12. Ben, remember that like CPA’s and other professions, CCIM’s are trained a specific way and follow certain rules. As an engineer, I used to be a robot – doing things a certain way because they were rules of thumb – without questioning why at times… RE investing has allowed me to be more creative, become a better thinker and a better engineer. Thinking both outside of the box and in new boxes as well…

  13. Ben, looking fwd to that discussion on CCIM. Actually havent come across anything on BP concerning that subject. Have my fair share of experiences with the good, the bad and the ugly…

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