Single family syndication?

Question

Hello everyone,

Has anyone done syndications on a small level and invested in a single family residence with investors' money?  I'm looking at doing one with 1 investor buying in at $50,000.

House- $175,000

Repairs- $15,000

Hold period- 3-5 years

8% preferred return- Around $4000/annually (money from rent minus mortgage)

20-30% return at closing

Then I would keep the leftover annually and at closing minus carrying costs.

Any idea if I need a securities lawyer or if I can just sign a promissory note?

Am I missing something?

Thank you for your help!

Steph

It seems like a bit of work for a small deal, but I wanted to try a syndication at a small level while I'm looking for deals at a bigger level.

Amy Wan · Answer

Hi Stephanie,

That deal is likely too small to syndicate. You should just go take one check from one person (not more than one person), and call it a day. Otherwise, if you truly do need multiple checks, you should bundle a number of SFRs into one syndication offering. Otherwise, the transactional cost of legal docs alone (starting at 7.5K) will not be worth it. All your profits will be going to the lawyer, not you and the investor. (I mean, I'd take it, but I'd strongly advise against it).

Taylor L. · Answer

@Stephanie Martinson

@Ben Leybovich wrote a very nice summary here.

Joe Fairless has a great summary here as well.

Basically, if you're taking money from someone, you're doing all the work, and you're limiting their rights, you need to do a syndication. Joint Venture agreements have additional legal requirements, so if you decide to go that route make sure you're in compliance.

Obligatory I am not a lawyer. Go talk to a securities lawyer.

Jerel Ehlert · Answer

A debt can be a security, but if you want a private lender, that usually* is not a security.  That is a promissory note and a lien instrument (deed of trust or mortgage) to secure the note.  Other auxiliary docs as needed, but the note/lien are core.  Talk to a real estate lawyer in your jurisdiction to draft, but they should work for the lender.

Logan Hassinger · Answer

@Stephanie Martinson

@Taylor L.

This isn’t even a question if this “deal” is worthy of syndication. I appreciate the outside the box thinking and the use of OPM but please don’t go down that path with a single SFR. An attorney would gladly take your money for the drawing up of a PPM, Subscription Agreement, etc if you insisted on going that route. What you need is a simple JV Agreement or Prom Note.

Plus you’re looking at over 10k in fees just to draw up those docs.

Taylor L. · Answer

@Andrew Bosworth at this point we're squarely into "ask a securities lawyer" territory regarding promissory notes v syndication equity structures.

From our standpoint, we syndicate deals 100+ units for a number of reasons, including the fact that the legal costs are less of an impact with larger deals.

David Ziegahn · Answer

Did you end up buying the SFR Stephanie? I'm looking into doing something similar, but wouldn't an LLP with you(me) being the General Partner and other investors (friends and family) be the other partners? Hoping with the market the way it is to find 4-6 investors to buy homes with cash.

Theo Hicks · Answer

@Stephanie Martinson no problem. We've all been there. This is probably controversial advice, but if you are the kind of person who suffered from paralysis by analysis, it might make sense to just jump into a deal, especially if it is a house-hack since the down payment is lower. That's what I did for my first deal and I probably wouldn't have gotten into real estate if I hadn't. But it depends on your risk tolerance and current life situation. I was single with zero debt and the capital I used was from the college fund I didn't use.

Stephanie Martinson · Answer

@Theo Hicks Thank you for your advice.  Sometimes it's easy to get sidetracked and want to just "do" a deal so that I can build some credibility.  It's a little harder than I had assumed to find a great apartment deal in my market.  Cheers to the joys of real estate investing!

Theo Hicks · Answer

As others have said, the costs of putting together a syndication isn't worth it until you are in the millions of dollars. I would have your one investor have an active role in the deal so that it is a JV.

You don't necessarily need to do a syndication on a small level to do deals on a bigger level. In fact, you don't necessarily need to do a MF deal (Joe Fairless syndicated his first deal after investing in 4 SFRs). You'll need to either have a preexisting network of high net worth individuals or leverage past experience to raise capital (plus put together a credible, experienced team).

Single family syndication?

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