Potential Syndication Opportunity

[Kyle Handy]

Hey BP!

I'll try to summarize so this post doesn't get too lengthy.

I'm an agent and have been for 8 years. I've bought 8 homes in 8 years. Live in flipped 4 of them, flipped 2 of them, and rehabbed/rented 2 of them. (1 flip and 1 rehab/rent is going on currently). Things started slowly but have picked up in the last 6 months for me. 4 of the 8 homes I've purchased have been in the last 6 months. They have all been SFR between $100-200k ARV homes ranging from complete foundation repair to cosmetic.

My investments have done very well and now I'm being approached to start a syndication with a small group of individuals.  A good friend of mine, and two of his co-workers that are higher ups at a major investment bank here in San Antonio.  We've met and talked #'s and all hit it off.  The 3 partners all work in the investment world (stocks/bonds).  

We talked about structuring the deal so that I would be the "sponsor" and take a 3% acquisition fee and 33% of the equity after a preferred 10% annualized return was given to the equity partners.  We also talked about raising part of the funds as debt which would earn an 8% annualized return.  We mentioned doing 75% of the deal as debt and 25% as equity.  We talked about starting by pooling $500k together, of which $50k would be my own, $50k would be my friend, $100k to the 3rd partner, and the 4th would put the remaining $300k. I'd be investing my own money for two reasons.  1. So I could earn extra return and 2. so I'd have additional skin in the game).  

The $500k could increase quickly as the partners have more money to invest and other friends that would be happy to invest if the track record is gained.  I asked their motivation since I know they have other options being in the field they are in.  The partner with the most capital to invest said he's wanted to be a part of starting a business and with his position in the company he wouldn't be able to start a hedge fund as it would be a conflict of interest but real estate is fair game.  Additionally, he doesn't have to good a feeling on the stock/bond market and wants to be more in on real estate.  The other partners shared this feeling.

One of the partners has a wife that is a CPA at EY that could keep our books clean and everyone is pretty well networked (myself included). We would be looking to start an LLC, and would formulate a general agreement.

My mindset is this, if just doing $100k-200k flips a few a year, I'd be better off doing on my own and making 100% of the profits or potential losses.  Where this becomes exciting to me is the ability to scale up and do more deals quickly and/or work my way into larger deals down the road as I become familiar with that market. 

My question is basically to anyone who has done something similar to this, what advice they have and things I'm not considering that I should be. I'd love the ability to have someone who's done this before and are a step ahead that I could bounce ideas/challenges off of.

Thanks!

[David Thompson]

Kyle,

Absolutely agree that if the relationships you have built are around the experience and expertise you currently have and you say you MUST start now w/these folks, then you will gain a lot of experiences in the syndication game that will carry over to any niche for sure.  That said, you would be surprised how quickly you can come up on another niche (I've done it in less than one year) and have raised a ton of capital leveraging others capabilities and experiences.  IMO, the end game is passive income and professionally managed properties as most of us don't want a job in the traditional sense, preferring lots of flexibility and freedom.  Flipping is a job and creates income now and if that is how you want to start, what you are good at and folks believe in you to give you money to do it, by all means start there.

As Taylor notes, yes, I see it all the time and have experienced it.  Syndication is a team sport.  It's a bigger undertaking than most folks realize and just like any great team, their are role players that focus on their niche and can be significant contributors to the whole.  For one, bringing on experienced partners will lend you instant credibility when talking w/lenders and investors alike.  Take some thought into what skills / roles you have experience in, what you want to do and evaluate where you see gaps in experience, your time, resources, etc.  Key syndicators can come in a variety of roles from lending their portfolios to shore up lender net worth requirements, to bringing significant cash to the table, to bringing other investors in (what I do), or that have experience in flipping / syndicating homes that can help shore up gaps, gain credibility to accelerate your growth.  Don't get over concerned about the equity splits initially.  I'd rather give more up front to gain the experiences w/the right partners.  You can change the splits later or break off and start your own model once you have that experience.  I understand the compensation and split structures for MF apts syndications very well and certainly can have a conversation w/you offline about it and see what might translate well to SF flipping.

Lastly, see legal advice with a specialist that focuses on syndication and spend some time studying / researching it.  Couple syndication books:  A Whole New Business - Gene Trowbridge; Real Estate Securities - Mark Levine