I had an idea about "Syndication", what do you thinK?

Question

Hello Everyone,

I'm toying with an idea that I had today and was wondering if the forum would help me shoot holes in it.

I'm thinking about a family syndication that would allow the parents (my parents and their siblings) help secure homes for their children (me and my siblings/cousins) while giving the parents an investment return.

My thought is, someone like me or my cousins do not have the capital built up to get a loan from a bank that does not include PMI so offering the "syndicate LLC" a higher return on investment for a short period of time while allowing the child better leverage to grab a house with the cash that the syndicate provides.  The child would then take out a traditional mortgage from a bank to take hold of the property themselves and paying the syndicate back + interest.

This would help the parents secure better lives for their children and make money in the process.  This would also give the parents the confidence that a syndication works and eventually could move into a full investment mode and make money as a family.

That is in essence my idea, what do you think?

Thanks for your thoughts in advance!

Bill F. · Answer

@Josh Gold or the parents could gift the down payment to their children.

You are confused on exactly what a syndication is and is not. A syndicated deal gives the sponsor the ability to market securities to people they have never met (in most cases). The act of marketing securities is regulated by the Securities Exchange Commission.

The situation you have described above does not involve either securities or people with no prior relationship. It also doesn't solve the PMI issue since the bank will still require a down payment when the child goes to buy it from the parents (or their entity).

The parent could buy the house and hold a note on it, but unless you want to pay 7+% interest , mom and dad will end up losing money on the deal.

Simplest option, the parents buy the kid the house (if they are so inclined) and leave it in their will to the kids. When they pass, the kid get it at a stepped up cost basis.

Jay Hinrichs · Answer

I am thinking a simple family trust or llc will do it without SEC regulations and all the over sight a 506 has..

Josh Gold · Answer

@Alina Trigub, this is an intriguing idea.  The only constraint is that I'd like to see this replicated more frequently so that more of my extended family can take advantage of it and receive benefit out of it (both on the investment front as well as on the home ownership front).  Great idea nonetheless!

@Bill F., you are correct I may not have fully understood a syndicated deal, what I knew about it is that it is a pool of money from investors in order to purchase property.  As to your points on interest and combining it with what @Alina Trigub stated, 7% might not be that far fetched if you consider what PMI will do to the payment if PMI is translated as interest as well.  Also, if a home was purchased and "Brrred" then the property could be sold to the child at a below market price (with the 7% interest built into the price) putting them in a position that PMI might not be an issue due to the equity built in from the renovation.  Obviously this is all dependant on ARV and budgets, etc.

Again, this is all just spitballing thoughts but it still intrigues me from a standpoint that you are working together as a family group improving everyone's position.

Thank you both for your contribution to the conversation!

Alina Trigub · Answer

@Josh Gold why not let your parents/relatives buy it as an investment property and lease it to you with an option to buy down the road.

Eventually you can buy it from them with potential seller financing option (to reduce their tax burden to a minimum on an annual basis.

I had an idea about "Syndication", what do you thinK?

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