Real Estate Agent · Cedar Falls, IA · Member since 2009 · 38 posts · 17 votes
So here is my situation. My wife and I own 4 houses and a 4-plex by ourselfs, We have a 50% ownership in an LLC that owns a 4-plex and is closing on a mixed use building with 2 store front units and 4 apartments.
Here is my question. I have friends and family who want to invest with us in our business. I know starting up an LLC for each partnership would be hard for administration purposes. But is a syndication a good fit for adding partners at different times on an ongoing basis, we would be buying SFR and apartments of all sizes for long term buy and hold? I got stuck reading to much info and would love to hear from guys who are doing syndications right now. Thanks
The best approach we have found is to create a syndicate or pool of investors, for each property, with a specific time period, usually 5 years. It is not fluid or flexible to allow investors to come and go as they please. It also costs us around $10,000 to $12,000 to set up. We are investing in Self Storage Facilities in the $500,000 to $2M range so the fees are simply the cost of doing business, and we gladly pay them to avoid the bank, and to allow us to 10X our business. If you want to stick with houses and small multi-family, then partnerships are the most flexible, but also risky, as there really isn't any protection for you, like you would find as the General Partner/promoter in a syndicate. And I would give SERIOUS consideration before simply entering into a partnership with friends and family on some single family rentals. Many, Many investors have crashed and burned with this method, and lost friends and damaged family relationships. I've seen it dozens of times. If there's anything to take away from this, it's to leverage your time, and buy bigger properties with more investors, rather than going through the same amount of work to buy single family homes. You've already begun to climb the ladder into commercial, why go backwards?
A properly prepared syndication can be rather expensive to have written by an attorney. Some say around $5-7k. Other options, depending upon your state, include a Tenants In Common way of holding title. These can get a little sticky also, especially if a partner wants to leave. I believe, with little experience in this area, that a properly prepared LLC with a well stated Operating Agreement may afford you the agreement that you need....unless you grow into a very large project.
Im looking at putting 6 investors together for a multi-family project. I considered the syndication, but it gets too complicated. TIC was not a good option. So, each investor will have their own ownership of particular units.
From what I've been told $5-7K would be very cheap to put together a property syndication. $20K is more like it. I'm sure it varies, though.
The problem with trying to short cut the process and do it on the cheap is that you give up all the protections that you create by spending the money up front. Your private placement memorandum will say things like "this is a terrible investment. You will lose your entire investment. Only a fool would invest in this deal." That may seem off-putting, but it gives you protection if things go south.
The syndications I'm involved in as an investor don't do this:
All participants signed up up front. In one case, a second round of funding was needed to accomplish a cash in refi. That became different class of investment. Getting out is essentially impossible until the syndication winds down. That should be very clear in your PPM.
If you're going to use the money to buy SFRs by far the simplest approach is to get the money as a loan from a single person, secured by a note on a single property.
The best approach we have found is to create a syndicate or pool of investors, for each property, with a specific time period, usually 5 years. It is not fluid or flexible to allow investors to come and go as they please. It also costs us around $10,000 to $12,000 to set up. We are investing in Self Storage Facilities in the $500,000 to $2M range so the fees are simply the cost of doing business, and we gladly pay them to avoid the bank, and to allow us to 10X our business. If you want to stick with houses and small multi-family, then partnerships are the most flexible, but also risky, as there really isn't any protection for you, like you would find as the General Partner/promoter in a syndicate. And I would give SERIOUS consideration before simply entering into a partnership with friends and family on some single family rentals. Many, Many investors have crashed and burned with this method, and lost friends and damaged family relationships. I've seen it dozens of times. If there's anything to take away from this, it's to leverage your time, and buy bigger properties with more investors, rather than going through the same amount of work to buy single family homes. You've already begun to climb the ladder into commercial, why go backwards?
thanks you guys. That is exactly the response I wanted. Most of my family would be fine just lending there capital. But if I have people who want part ownership it sounds like the best thing would be to continue to set up an llc partnership. Is there any way to set up part ownership in just one house without using an llc?
@Darren Flater You could buy a property with one or a few investors in a Tic, but be aware if the success or failure rests solely on you, the Sec will consider this a security with you in violation. The cleanest way unfortunately, is to get a loan from the investors and pay them interest.
I have never participated in a syndication, but know there are many on BP that are interested, and will read this thread, therefore; I will ask a few questions that I know people are wanting to know. @Scott Meyers You mention syndication and pooling funds. In some states it's allowable to have a fractionailized note, others not. How do you handle multiple investors in a "pool"? How do you find your investors?
@Darren Flater go talk to your title company and find out the best way to take title and write the note to accomplish what you want to do.