For The Love of Pete Don't Syndicate your First Deal!
There has been a lot of activity in the forums about newbies syndicating real estate. I feel like someone needs to be a voice of reason here.
Look, I get it. The allure of doing big deals and taking big fees for buying apartments with other people's money is enough to get anyone excited about syndicating. You're probably giddy as a school girl just reading that. But syndicating real estate is possibly the most complex, tricky, difficult, and risky avenue for a new investor to go down. Actually buying the real estate is only a small part of what you need to do as a syndicator. If you can raise the money from a handful of close family and friends that really believe in you and you can do a relatively small deal, then fine. Still get a PPM and do it by the book, but maybe you can make it work. Maybe. But if you're looking to truly syndicate a 150+ unit deal, think again. It's bad enough that you'll lose your own money, but if you start losing other people's money, that's when things can really go downhill in a hurry. Say hello to Madoff for me. Or at least say goodbye to your life savings, your credit, and your reputation.
Trying to find, underwrite, negotiate, and perform due diligence on your first deal in a space where highly experienced real estate professionals are playing means you'll be swimming with sharks day 1. There are countless pitfalls in trying to properly underwrite a large deal. This isn't like the granny-owned 6 unit deal you just underwrote on Loopnet. Do you understand how market rent, loss to lease, concessions, vacancy, and bad debt all interact so you can accurately project market rents? There are all sorts of shenanigans brokers can come up with to make a deal look better with these items. How about taxes, do you understand the assessment procedure, rates, etc.? Does the assessor chase sales? Taxes can literally double on you if they go to 85% 90% or even 100% of the sale value. This isn't retail investing. If you can even get brokers and sellers to take you seriously (they won't), they will have no problem taking advantage of you (they will).
Then try raising a few million bucks, $20k at a time, from savvy investors with many other options who see you as some guy who wants to do deals without money or a track record. There is a lot of capital out there looking for deals, but make no mistake that money is easy to come by. If you don't have any more real estate experience than Bob the Dentist, Bob will put his hard earned tooth drilling dollars with another sponsor. Investors are looking for pros with good deals, good experience and skin in the game. (As a side note, investors should never put money with a sponsor who doesn't have a meaningful amount of their own money in a deal). Do you know the ins and outs of GP/LP JVs, waterfalls, preferred returns, etc.? How about what is market for acquisition fees, asset management fees, disposition fees, recourse fees, construction management fees?
Now try doing all of that while managing the due diligence and closing timeline, finding a solid lender (could write a whole post on how this probably won't happen for you), getting management in place, etc. all without losing your earnest money deposit. Then you've got to manage the deal, manage the investors, distribute the money, all while trying to replicate the process again.
For the love of Pete; take your time, do a few smaller deals with your own money or the money of private lenders and/or general partners. Then, network with a few good syndicators, offer to bring them a deal and ask for a share in the GP (get the agreement on paper). Give them a sweetheart deal in exchange for being brought under the hood and building a track record. Syndicators are starved for good deals right now. Then bust your newbie tush pounding the pavement for a good deal (if you can determine what that actually looks like). Then after you see the whole process play out in detail, maybe you find a partner and go do a syndication on your own. Maybe.