One of the best ways to raise money for your real estate investment is through real estate syndication. The sponsor and an investor or group of investors are engaging in a straightforward transaction. On the other side, just like any commercial transaction, many investors fall short because they lack sufficient knowledge and planning.
Syndicating (or pooling) of your money with others to buy significant commercial real estate projects is a great idea – if executed well . If bought at the correct price and managed properly, it is a tried-and-true method for building wealth. This recession is a perfect example of how not all real estate classes and operators are created equally. You must stay away from these eight common blunders when working on real estate syndication initiatives!
- An inexperienced operator with no track record of operations.
Many syndicators have had some success in obtaining capital, often for deals involving flow-through taxes or for other parties. They simply receive a commission. Hey, let’s start a syndication company, they suggest. Purchase a piece of property, manage it, and earn a commission and operating profit. In many situations, this is a big mistake because it takes years to learn how to buy, even more years to learn how to buy wisely and not overpay, and even more years to learn how to maintain an asset well. This is especially true in a more steady, less volatile economy!
Check their background and breadth of expertise in the asset market they operate in as a result.
- Exorbitant Fees, typically Paid Upfront and Independent of Project Success!
Some syndicators charge a commission rate in excess of 10%. Although 10% seems to be the standard, it is still high because it must be offset by asset performance, which takes time. Additionally, it’s likely best to limit yearly asset management to no more than 2% of the cash invested or 0.5% of the asset value. Otherwise, the system is unduly biassed in favour of the syndicator rather than the investor. It must be win-win!
Therefore, lower is better!
- Unrealistic ROIs based on irrational assumptions
As a high ROI is easily achievable on a spreadsheet or in an advertisement, it is a frequent ploy to use unachievable future values of condos or land prices. But because baby boomers are becoming more cautious and less financially successful, there is less demand in the world today.
The economy has served as a wake-up call to investors who believed they could ride a never-ending real-estate bubble for condo projects, land subdivisions, or international real estate in hot markets like Costa Rica, Mexico, or Belize, even though the housing market has only shown flimsy signs of recovery. Then there is the commercial and office real estate sector, where a lot of institutional investors recently suffered significant losses.
Therefore, can these future values be achieved within the promised timeframes?
- A false sense of security –
It is created by syndications using terminology like “asset backed,” “up to 18%+ interest on our mortgages,” and “secured by a mortgage.” In many cases, these mortgages are in second or third position and substantially surpass the value of the underlying real estate. In land development or construction projects, the investor’s money sometimes comes in second or third after an expensive first position—barely security and definitely a fake! If it is actually equity or investment money, don’t refer to it as a mortgage.
As a result, deceptive advertising is used when a security is not first or above going prices and is based on future speculative probable prices.
- The executives who were accused.
So, investigate the initiative and the individuals involved. What did they do before starting this project? Are they experts in the field? Do they have a good reputation? If there are any complaints about them, check them out first.
Another common mistake is choosing the wrong type of property for syndication. Not all properties are suitable for syndication, so it’s important that you find out whether your chosen property is right for this type of investment or not. You should also make sure that there aren’t any problems with the property before signing up for it, such as building defects or legal issues relating to ownership (this can be checked with a lawyer).
- Big ads offering enormous gains.
The real estate market is not a get-rich-quick kind of scheme. If you are investing in syndication, you are looking to make a long-term investment with gradual returns. You should not expect to see huge gains quickly and easily; this is not what real estate syndications are about. In fact, most syndications are purchased using your own funds as a business expense. So, in addition to (large) commissions, search for soft charges. More money raised is not appropriate; 2.5% to 3.5% is!
- Not taking ownership of the asset despite their marketing’s promises.
Make certain the investors really do own the item! Frequently, the asset is not held by the investment group but by a shadow business, and the money is lent to them. The money trail is now practically impossible to follow, especially if this shadow business also shares numerous other assets and multiple mortgages. So, even your project could be derailed by one failed, unrelated project!
One of the most potent and successful ways to create several sources of income is through real estate syndication investing. There will undoubtedly be mistakes made along the way, but obtaining financial independence is worth it in the end.
However, thorough due diligence is a requirement and the only way to feel confident about making an investment in any venture. Pull the trigger with assurance if everything looks excellent and the arithmetic is correct.
Schedule a free strategy call to know more about investing in syndications. Growth capital group is here to help you.