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Not A Citizen? Here’s How to Invest In US Real Estate.

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Everyone wants to buy US real estate because of the regulatory environment, stability, and economic growth. But, many people pass it over.

The number 1 reason people don’t invest in real estate is the perceived risk of it. That could come from a number of factors, but often it’s because you don’t live geographically near the property you want to buy.

Another reason might be that you aren’t a citizen of the country you want to make the purchase in. This is incredibly common for people who want to invest in the US but live abroad or are citizens of other countries.

Sure, it sounds like a great idea, but how are you going to buy and manage something on the other side of the planet in a country you don’t really know?

But, did you know that it’s not hard to invest in US real estate even if you live abroad and are a citizen of another country?

Sure, there are some considerations you have to make and hoops to jump through, but it’s totally doable.

Why US Real Estate?

Once you’ve decided to invest in another country, you need to ask “why invest in US real estate” and not somewhere else. As a real estate investor you don’t want to limit your options.

Well, recently the US real estate sector has separated itself from other sectors in the US as well as from real estate in other countries.

The financial crisis is in the rear view mirror and the US economy is fueled by strong business and job growth. The US has a very stable real estate market and mature capital markets which compare positively to other countries.

Europe, being its most comparable area, has been embroiled in one economic crisis after another from Greece to Italy to Spain. Brexit, and strain on the welfare state from migration are just the most recent which can seen with widespread protests in France.

From a more micro perspective, US real estate has a lot of mature cities that have a lower cost than in many international cities such as London or Tokyo. While the US does have very expensive markets such as Los Angeles or New York City, there are a lot of core markets that offer good returns at a lower price point.

Additionally, the U.S. market is more liquid than other markets around the world and much more massive. So, it’s comparatively easy to sell and reinvest your capital somewhere else should your personal situation change or should economic conditions dictate your need to sell.

While there are a lot of great reasons to invest in the US, there are a lot of hurdles as well.

Hurdles You’ll Face as a Foreign Buyer of US Real Estate

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It easiest for U.S. Citizens and permanent residents to purchase US real estate. Foreigners have a more difficult time and have more hurdles to overcome. So, let’s talk about all the drawbacks you will face as a foreign buyer of US real estate.

No Fannie Mae and Freddie Mac

In the residential real estate market (1-4 units), Fannie Mae and Freddie Mac are the king of the home loan. Basically, they guarantee or purchase the majority of home loans so when they set standards, most banks and lenders follow suit. Unfortunately, they do not purchase loans from non-US citizens.

So, these are not an option for foreign buyers. You’ll have to focus on finding lenders that keep the loans on their own books and don’t sell them to Fannie or Freddie.

The problem for banks is that these loans are harder to sell on the secondary market. Foreigner buyers have a higher risk of default and it’s more difficult to collect unpaid balances if they live overseas. So, you will have a harder time qualifying and pay higher interest and fees to offset the risk they face.

Mortgages to Foreign Buyers Have Higher Interest

There are plenty of banks that will lend to a foreign national who lives outside of the United States, but they have to create loans that don’t conform with Fannie or Freddie guidelines and have to keep them on their own books.

So, they charge higher interest and higher processing fees.

They will also require a larger down payment to give them some more room in the chance that you default. Often they will require 30% or more as the down payment.

Generally, a bank looks at your income, your expenses, and your credit history to determine if you are qualified for a loan. For foreign buyers, it’s a lot more difficult for them to verify these things.

So, they will ask for a lot more documentation than they would ask of an American real estate buyer. This may include tax returns, bank statements, and any credit history available in your home country. They may require several months worth of bank statements, credit statements, and a huge variety of other documents, all of which is just to make them feel more comfortable extending a mortgage to you.

Because of all this extra underwriting, it will take longer for your loan to go through and finish processing.

To speed this up, you might want to apply for a loan at a bank in your home country that also does business or has a presence in the US. The bank will be able to verify your information more easily, but also extend credit in the US.

Fannie Accepts Green Cards or Work Visas

Fannie backed loans or FHA accept work visas. So, if you happen to be in the US, even for a short period of time, you may be able to qualify for one of these.

There may be some additional documentation requirements, but having FHA or Fannie backed loans will open a lot of doors, lower your cost and down payment requirements.

How to Invest in U.S. Real Estate

We’ve covered all the reasons to invest in the US and also all the difficulties you’ll face when trying to get a loan. Now it’s time to cover some basic information to help you get started as a foreign real estate investor buying US real estate.

The first thing to consider is what niche in real estate you want to get into.

Residential vs Commercial Real Estate

For some reason, residential real estate is considered any building with 4 or fewer living units in it. It is not exclusive to single family homes or condos which is great for investors if you want to get into small multifamily!

5 units and above multifamily is considered commercial, even though it’s residential living space. Also, all commercial office space, retail, etc is considered commercial real estate. This includes single occupancy buildings such a standalone pharmacy or restaurant.

The biggest difference to know about is how the price of real estate is determined. Residential real estate is based entirely on comparable sales and you can estimate the price based on a comparative market analysis. Conversely, commercial property is based entirely on the net operating income and capitalization rates in that market.

For residential property, to improve the value you need to improve the condition as compared to other similar properties in the area.

For commercial real estate, to increase the value you need to increase the income or lower the operating expenses.

It’s important to understand the difference between the two before choosing a niche. Each has it’s pros and cons and I invest in both types of real estate. But, you need a different approach depending on the type of real estate you choose.

Creating an Entity

Before you start shopping, you need to know how you will take ownership. If you are shopping for residential property, you will probably buy it using your own name. If you are buying commercial property, you will most likely need an entity to take ownership. This could be an LLC or Corporation.

Fortunately, foreigners can set up an LLC and the process is very simple.

The reason why creditors might want you to take ownership inside an entity is to protect the asset from liability elsewhere in your portfolio. Each LLC is a unique entity and the debts and liabilities in one are shielded from debts and liabilities in another.

So, if you do something silly in one property and a tenant gets hurt and sues, your other assets in separate LLCs are mostly shielded from this lawsuit.

The costs are slightly higher to own and operate a company, but the asset protection is well worth it both for you and for the lender.

Pick a Market

The US is massive and has hundreds of cities to choose from. You’ll need to pick one and focus on it if you want to have any chance of ever picking an actual property to purchase.

There are dozens of factors you might want to consider, but you’ll want to narrow it down to a few big factors first, then keep narrowing it down from there.

At first, you’ll want to consider the following major items:

Population Growth

You want to buy into a metro area and state that have positive population growth. This shows you that people want to live here and will move here from other places

Job Growth

You want to see new businesses opening and moving here from other areas. This shows the state and population have what businesses want – smart, educated, and hardworking employment base.

Employer Diversity

Generally, you don’t want to buy into a city that derives most of its jobs from one source. Good examples might be mining, oil, tourism, shipping, etc. If the majority of workers are employed in one industry, and the rest of the employment supports that industry, then you are set up for big problems if there is any issue in that industry.

diversification of job industry for real estate

Building Your Team

Once you’ve got all the admin stuff out of the way such as qualifying for a loan and establishing your entity, you’ll want to build a team in the city you will purchase in. Before you start looking for property, you will want to build your team.

You’ve already built some of your team, but there are still others you need to find. You should have already found a mortgage broker/lender, but now you need a good property manager, real estate broker in your target city, insurance agent in the target state, and contractors as well as inspectors.

You’ll need each one at some point and it’s good to build relationships with them before you actually start searching for property and need them. This way you won’t be scrambling around at the last minute.

But, be mindful of their time. You don’t want to take up a ton of their time asking questions when you have no business to offer them yet.

Searching For a Property

It’s finally time to start searching for property. If you’re looking for residential property, your agent will provide you suggested listings or set you up on an automated service that delivers listings to your email.

Commercial real estate is a bit trickier and will require you to know several brokers as well as use a service such as costar or LoopNet. In general, if you are buying commercial real estate, you need to get on the email list of the commercial brokers. So, you’ll need to call them all and ask to be on their distribution list.

Making Offers

Don’t be scared to make offers! Determine the value to you and make an offer based on that. If you are under the asking price, that’s OK. If you are over, that’s OK too.

The key is to make sure you get accurate financial information before making an offer. If possible ask for tax schedules or a trailing 12 month profit and loss statement. Smaller properties often don’t have these details so you’ll have to guess a bit more.

Next, take your numbers and put them into a real estate calculator so you know the cash on cash and overall return on investment. Once you know your returns and offer price, contact your broker and they’ll walk you through the process to making an offer.

Doing Diligence

Real estate is all about making assumptions then verifying those assumptions through diligence. In other words, it’s about taking risks then mitigating those risks.

What I mean by this is that you don’t have all the information available to you when you are putting together an offer. Sure, you’ve seen the general condition, some tax information, and rent roll/expenses, but you haven’t seen every unit, talked to every maintenance person, know your interest rates, etc.

Once your offer is accepted, you need to go through every line item and verify it’s accuracy. If it’s inaccurate, you need to adjust your calculator with the new information.

Once you’ve adjusted every item, you need to go back and consider if the deal still works for you or not. Don’t be afraid to back out at this point, but don’t get upset over small differences either.

At a minimum, you will want to verify the:

  • Total Income
  • Operating Expenses
  • Overall Condition
  • Upfront Cost of Repairs
  • Cost of Insurance
  • Property Taxes
  • Property Management
  • Current Rents
  • Potential Rents

It seems like a lot, but that’s why you’ve built a team. Each one of those people will help you verify a piece of information that will help you make a good buying decision.

One Thing About Banking

To help avoid financial crime, there is a law in The United States called the “know your client”  law which requires the bank to know who they are working with. In general, someone at the bank needs to know you in some capacity. This could be with an ID and an in person conversation, or it could be more or less.

Some banks allow you to do everything electronically. They may require you to fax or email copies of your ID or talk to them on the phone to establish that relationship.

Another way to open a bank account and work within the law is to establish a US account with a bank that operates or has a partnership in your home country as well. You can open the bank account in the US but verify your identity while being overseas.

Another way to avoid this hassle is to hire a property manager and just pay the costs of an international wire fee every quarter. They can collect your rents, pay your bills, and wire the profits to you every 3 or 6 months.

Income Taxes

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They say only Death and Taxes are certainties in life. In other words, the IRS always collects what’s due to it, so don’t try to avoid it. It’s better just to understand the requirements and do it.

Taxes are complicated, and they can be especially complicated with real estate because the tax laws of more than one country might apply. This is because different nations have different tax treaties with the U.S., so it’s really important to consult with a tax expert in your country as well as one in the U.S. to understand everything and make sure you are in compliance.

No treaty allows you to avoid taxes in the US, but some treaties allow you to pay just taxes in the United States. Other treaties require you to pay taxes in both the US and your home country. Additionally, the tax rates may vary depending on your nationality.

So, read the treaties, understand them, and consult with a tax professional or two.

Tax Benefits to Real Estate

In the US, real estate has some of the best tax benefits of all. You can offset the vast majority of your income and often pay little to no taxes for at least 10-15 years.

This is because the U.S. tax code allows deductions for mortgage interest, depreciation, all repairs and maintenance, property taxes, and more.

Often, you can find yourself with a ‘negative income’ on paper even though you collected rent all year long and have a profit. You can carry those ‘losses’ forward to the next year and offset even more profits.

The only catch is the IRS will capture these taxes back when you sell. They’re pretty smart over there at the IRS and know that you’ll defer most profits until sale, so all foreign owners of real estate will have an automatic 10% of the sale price withheld by the IRS until taxes are filed.

Don’t worry, they will refund the difference if you overpaid, but you will also owe any difference if that 10% wasn’t enough to cover your taxes.

Other Ways to Invest in Real Estate

There are a lot of nuances to know and it can seem overwhelming. Nothing we laid out is any more challenging than investing anywhere else in the world (in fact, it’s probably easier in the US than elsewhere). But, if owning your own property is too difficult, there are other ways to have real estate in your portfolio without actually purchasing any physical property.

Real Estate Crowdfunding

Around the year 2014  real estate crowdfunding came alive. Crowdfunding is where you can pool smaller amounts of funds together with other investors to purchase real estate.

In general, you need to have a US based entity with a local bank account. That’s because the deal sponsors don’t want to withhold 10% of the value upon sale to meet the IRS requirements for withholding.

So, create your LLC and set up your bank account and you can invest in real estate via crowdfunding.

ETFs and REITs

Another way is to buy into Exchange Traded Funds or Real Estate Investment Trusts via the stock exchange. These are generally traded on the open market and you’ll need to meet the requirements that all foreign investors in stocks need to meet.

You’ll be buying a fund that invests in real estate without having the purchase the real estate for yourself. You won’t earn as much because of the management fees they charge, but you also won’t have to jump through all the hurdles of buying real estate.

Private Lending

There are few laws about conducting business in the US as a foreigner. As long as your company is set up, you have a bank account, and follow the law, you can do business.

So, you could become a private lender. Basically, instead of buying real estate yourself, you could be the ‘bank’ that lends on the deal. Investors are often looking for short term loans at a high interest rate to fund their deals.

If you know some investors, it may a good option for you.

Don’t Be Intimidated

Real estate investing is a big undertaking regardless if you are a US citizen or a foreign national.

You just need to know the steps, understand the risks, build the right team, and work hard at it. If you do all that you can achieve anything, including buying real estate in the US.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Real Estate Investing

How To Put That Extra Space In Your Property To Good Use

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A lot of investment properties have something we call bonus space.

It’s space that isn’t quite a bedroom, maybe not really living space, but doesn’t have any one specific use.

So, how do you use this space to create value for your investment property?

Well, that depends…

Can It Become A Bedroom?

A bedroom is almost always going to be the highest value use of any bonus area, so let’s try that first. So, it’s time to look up your local health/building codes to determine the requirements for a bedroom.

The International Residential Code, which most states follow, has several requirements to be considered a bedroom. States and municipalities are free to add on top of this, and some areas don’t use the IRC as their code.

Most places have a square footage requirement and also require a window and a closet. But, different states/municipalities may have different requirements so look them up.

Note About Egresses

Basements and Attics are notoriously bad places to be during a fire. There may be requirements for additional egresses for any living space that is in these two areas. Make sure you know all of the requirements before trying to make a bedroom.

Once you know the requirements, you can determine if a simple project can convert this random bonus space can be used as a bedroom.

For example, if it just needs a larger window, simply hire someone to install it. If you need a closet, get one put in.

It becomes more challenging if you need another egress added to a basement though.

It Can’t Be A Bedroom, Now What?

Most bonus space can’t be used as a bedroom, so don’t feel bad about that. The next thing is to figure out exactly what you can do with the space.

Determine What Kind Of Space You Have

The first step is to figure out exactly what you’re working with and what it can look like when you’re finished.

Regardless if it’s in an attic, basement, porch area, or whatever, it’ll need to be finished with drywall, paint, floors, lights, and heat/ac. Your bonus space probably has some of these already, but often not all.

Keep in Mind The Location

Basements are usually cool and damp, so you may need extra heat during the winter and a dehumidifier in the summer.

Attics are really hot, so you’ll need to add extra air conditioner. Also, you need to make sure your roof is ventilated properly before completely finishing an attic so take that into consideration before adding drywall to the rafters.

Every area will have it’s own unique considerations before starting the project.

Figure Out Its Highest and Best Use

This is really open to interpretation, but you need to figure out it’s best use for other people.

The best thing to do is to look at comparable sales in your market area. Look at what most other people are putting into their properties, then just copy them.

Here are a few common ways people use their bonus space

Den Or Media Room

The most common way people use their extra space is by using it as a second living room, den, or media room. These are all different words for similar things.

Basically, one living room will be a bit more formal for having guests over. The den or media room will be for watching TV or movies mostly.

If you are outfitting a room for this use, it might be beneficial to install speaker wires around the room (this is very cheap), and make sure there is cable and internet hookups.

Game Room

If your investment property already has an area dedicated as a den, you might want to consider outfitting it as a game room.

A Game Room is a room in the house for relaxing or socializing. It is typically furnished with a Pool TablePing Pong TableDart Area, or other recreational amenities.

Storage

A lot of people just need extra space for storage. Having a clean and dry area to toss junk is the lowest value use, but still important. Having this finished space will most likely make it more valuable anyhow.

Advertising Bonus Space

The next step is to advertise your bonus space. You’re either listing this property for sale, or listing it for rent (it’s an investment property, right?).

It’s important to bring attention to the bonus space, especially if it’s not listed in the square footage or other information about the property. This is really common for basements and attics.

In this situation, bring attention to it and make people image what they could use it for, but don’t specifically say it can be used for things that it shouldn’t be used as (such as a bedroom). People will often use the space however they want, including as a bedroom, but you should not encourage this if it’s not a legal bedroom.

So, you’d could potentially say something like:

There is an extra 400 square feet of finished bonus space in the attic that could be a game room for you and your friends, media room for late night movies, or whatever else you can imagine! It is heated, cooled, and has everything you need to enjoy it day and night all year long.

But you’d never want to say something like

There is an extra 300 square feet of finish bonus space in the basement that could be used as a media room, den, game room, or even an extra bedroom when friends come visit.

…assuming the bedroom is not legally a bedroom in your jurisdiction.

Charging For The Space

It’s hard to say what bonus space is worth, but it’s worth something.

The only way to figure it out is to try to sell it or rent it out, and see what the market will give you.

This article originally appeared on IdealREI.  Follow them on FacebookInstagram and Twitter.

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10 Mistakes Homebuyers Must Avoid At All Costs

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Buying your home can be quite daunting, and if done wrong, it can bring with it enough financial regrets for the homebuyer. Here are 10 mistakes to avoid when buying your home.

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How To Make Real Estate Syndication A Success Without Using Your Money

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Have you ever driven around your city and seen all these apartment complexes, shopping plazas, or even office buildings? I always used to think they were all owned by rich billionaires.

…some of them are, but not all.

The reality is that a lot of these large properties are actually owned by regular people like you and me to generate passive income.

But how?

The answer: with real estate syndication.

It’s what I used to recently close a 192 unit deal in San Antonio with my partners.

But what exactly is real estate syndication?

Syndication is a way which multiple real estate investors pool their funds together in order to purchase a property that is more expensive than any of them could have afforded on their own.

Generally, there are two types of partners in these deals: 1) General Partners (GPs) who accept additional risk, put the deal together, and operate the asset 2) Limited Partners (LPs) who have limited risk and invest more passively.

Real estate syndications are an effective way to spread risk. Since each investor can allocate a smaller sum to each deal, they can effectively spread their risk across multiple property types and diversify by geographic region.

Real Estate Syndication Structure

Syndications in real estate are amazingly diverse in their structure so it’s impossible to cover everything. In general, there are four components:

  • Return of investor capital – Limited partners should always get paid back first, and this ensures they get paid first
  • The preferred return – Not all deals have a preferred return, but when they do this is where it pays out. Investors get the first portion of the deal before the general partners.
  • The catch-up – Many deals don’t have a catch-up tier but this is where the sponsor will get 100% of the profits after the preferred return until the predetermined split is met.
  • Carried interest – profits are split based on the agreed amount (such as 80/20 or 70/30)

Let’s break it down further…

Real Estate Syndication

What Is A Preferred Return In A Real Estate Syndicate?

According to Mark Kenney over at ThinkMultifamily, a preferred return is “a return that investors received BEFORE the general partners receive a return.” In essence, after the investors receive their initial capital back, they received a preferred rate of return before the general partners get any payout at all.

Mark, an investor and real estate coach who owns over 2,000 doors in Tennessee, Georgia, and Texas, says that he doesn’t like to use a preferred return but has in the past on deals that didn’t expect any distributions for 12 or 18 months.

The preferred return would accrue and give incentive for people to invest in the deal.

Andrew Campbell, the co-founder of Wildhorn Capital, a multifamily operator based in Austin, Texas has a different opinion. He said he likes to have an 8% preferred return for the majority of his 450 door portfolio.

It “gives some certainty to investors about their overall returns. Plus, 8% also happens to beat the historical stock market return of 7%.”

What Is A Waterfall In A Real Estate Syndication?

The waterfall refers to the overall distribution of funds and tiers that were mentioned above, but it is often referred to as how profits are split after the preferred return is met. Andrew Campbell explains it perfectly:

Profits generated above any preferred returns are generally split between investors (Limited Partners) and deal sponsors (General Partners). In our case, above the 8% pref we split profits 70% to Limited Partners and 30% to General Partners.

Some deals and sponsors will have additional “waterfalls” where at 18% IRR (for example) the split would go to 50/50. The general idea is that the higher the returns are to investors, the more the sponsors make, and everyone is happy.

The downside of multiple waterfalls is that sponsors can sometimes be incentivized to return investor capital early (to boost the IRR) and trigger these waterfalls.That can sometimes put unnecessary risk on the asset if they are being to aggressive.”

Kenny Wolfe, the founder of Wolfe Investments who has been involved in over $91M in real estate transactions doesn’t like the complexity of the waterfall structure many syndicators use.

“We have steered clear of preferred returns mostly because those are usually accompanied with up-front fees charged to investors. Our investment structures are tied to the performance of the investment, and not just closing deals like the typical preferred return strategy.”

He continues,

“If we make our investors money, then we’re rewarded. If we don’t then we aren’t rewarded.”

I originally didn’t plan to dive into the fee structure at all, but since Kenny brought up some great points, I think I’ll dive into the fees and how some different structures affect the incentives and performance of deals.

The Fees When Syndicating Real Estate

There are a lot of different types of fees used in syndication. Some are more common than others but all have their pros/cons. Here are the most common ones

Acquisition Fee

I’ve seen this anywhere from 0 to 5 points with 2 being the most common. Acquisition fees in a syndication are really common and most have them, but not all.

Syndicators are running a business and that has costs. Acquisition fees help pay for the operating costs, staff, flights, hotels, diligence, and other costs that are needed to run the business.

On the other hand, acquisition fees can be enormous on large deals and can drive some deal sponsors to be short-sighted and focus on closing deals rather than operating deals profitably.

Think about it, a $10M deal with 2 point acquisition fee is $200,000. That adds up fast! You can see how some sponsors will lose track of buying good deals and focus on just closing deals, regardless of how good they are.

Asset Management Fee

This generally ranges from 1-3% of gross rent revenue. This may or may not go to the deal sponsor and it goes to cover the cost of managing the asset and management team that was hired.

Construction Fee

Since the syndicator only gets paid when the asset is cash flowing, there isn’t much incentive to take on difficult projects. That’s where the construction fee comes in. If there is a major rehab project a fee can be imposed to compensate the project manager while the asset isn’t producing income.

It can vary but is often 1-2% of the construction cost.

Aligning Interests

There are a lot of competing interests in a deal and it’s difficult to align everyone 100% of the time – that’s why trust must be built with anyone that you’re investing with.

But, a few major points to consider are how all the fees and the preferred return and waterfall all fit together.

Deals with high preferred returns and high fees create incentives for the sponsor to find and close deals, but not a lot of incentive to maximize cash flow. As Andrew pointed out, deals with huge benefits to the sponsor at certain levels can cause them to sell early to bump the IRR artificially and trigger that waterfall distribution.

But, deals that compensate the sponsor more will create more incentive to produce high returns.

That’s why there are so many different ways to structure deals! Every sponsor and investor pool is different so they can create deals that work for everyone.

Structuring a Syndication Deal – Example

Similar to how Andrew structures deals, let’s say that in this deal there will be an 8% preferred return, 70/30 split thereafter, and have a 2 point acquisition fee and 2 point asset management fee.

The limited partners will get 70% of the returns after the 8% pref and the sponsor will get the other 30%. The sponsor will get 2 points up front and 2 percent of the gross revenue.

Example 2 – Syndication Structure

Kenny, on the other hand, keeps it simple. He might charge an 80/20 split with no acquisition fee, no waterfall, and no preferred return. The asset management fee is 2% as well in this example.

So, the limited partners get 80% of all the profits and the general partner gets 20%. If it does well everyone does well and if it does poorly everyone does poorly. There are very limited fees except for the asset management fee.

Example 3 – Hybrid Structure

Mark kind of does it a third way. He said he generally does the 80/20 split, but he does charge an acquisition fee and asset management fee but rarely does a preferred return.

The acquisition fee is more similar to Andrew but his split is more similar to Kenny.

It’s interesting to see how 3 different real estate syndicators have three entirely different ways to structure their deals.

How To Find Real Estate Deals to Syndicate?

These are large deals and you don’t typically see them on the MLS, so how exactly do you find deals for a syndication?

Well, three different deal sponsors had three different answers:

“Now that we’re established as a solid buyer we get off-market deals across the US.  We look at the on-market deals as well. These days the off-market deals have been much more attractive.”– Kenny Wolfe

Andrew Campbell appears to have a more holistic view for finding deals.

“It’s a full-time job, and it all comes back to relationships. Meeting and networking with brokers, talking to owners, title agents, insurance providers, property managers. Leads can come from anywhere, and in this market, you want to make sure you can see as many properties as possible, and the earlier and more off-market/limited market they are the better.”

Mark Kenney has seemed to be extremely successful working directly with commercial real estate brokers.

“We generally work through brokers to finds deals.”

What About LoopNet for Commercial Real Estate Syndication?

I’ve known about LoopNet for a while, so I was curious about it. Kenney put it simply though:

“Loopnet is where deals go to die.”

But, David Eldridge of NAI Glickman Kovago & Jacobs, a commercial brokerage firm in Worcester, Massachusetts, said,

“Loopnet is far from dead. We do a ton of volume on it and use it almost exclusively for smaller listings.”

How Do You Find Commercial Brokers and Get Them to Take You Seriously?

Commercial brokers are dealing with a lot of big players in the market, and it can be difficult to get them to take you seriously if you are a new player.

Mark pointed out that “a market generally only has a few major names. The top 2 or 3 people have access to virtually all the deals, so you just need to identify them.”

He continued, “it’s not hard to get yourself onto their email list, but it can be more difficult to get people to take your offers seriously. It’s important to have some experience in the field and if you don’t, then partner up with someone who does have the experience.”

In the end, money talks and the highest offer usually wins. So, you can make up for experience with higher offers.

The Cost To Syndicate A Real Estate Deal

Now that we’ve got past the “what is a syndication in real estate” and the “how to syndicate in real estate” part of the article, we can get into the costs and money aspect.

The first logical question is about the cost of a syndication.

There are several major fixed cost items that every syndication requires, including – SEC attorney, earnest money deposit, diligence, private placement memorandum, loan application fees, and more.

So, let’s break them down. As some fees are percentage based, I’m going to create a hypothetical $2,000,000 deal.

  • Attorney for Contract – $3,000
  • SEC Attorney for PPM – $12,000
  • EMD – 1% – $40,000
  • Diligence – $25-$50 per door – $2,000
  • Loan Application – 1% – $20,000
  • Other Financing Costs – 0.5% – 1% – $20,000

Total Costs – $97,000 to get the deal done, of which $40,000 goes toward the purchase.

So the total fixed costs are $57,000 or 2.85% of the total deal price. As you can see, this is not cheap!

The syndicator has to front all the money and if the deal doesn’t close most of that money can be lost. So, you can see one reason why syndicators are compensated pretty well.

How Big Do Syndication Deals Need To Be?

We are talking some pretty big numbers here overall. Realistically though, how big or small does the syndication deal need to be in order for it to make sense?

Universally, all of the deal sponsors wanted to do larger rather than smaller deals. Both Mark and Kenny said they want deals over 80 units which allows for full-time on-site property management. Andrew prefers to look at it as a dollar figure and prefers to do deals over $8 million to keep the fixed costs as a small percent of the total costs.

How Do You Find Investors?

Most people reading this are probably wondering how you can find people to invest so much money. Most people can save up $50-100k, but you are talking about raising hundreds of thousands, or even millions of dollars for a deal. How?

Andrew says it’s a “second full-time job” which comes back to relationships and marketing. He does at least 5 sit-down meetings a week to grow those relationships.

Kenny is so well established that most of his new investors come from referrals though he also does a meetup, podcasts, and general outreach.

Example Syndication Deal

You might be wondering how much a syndicator can actually earn from one of these deals. So, I put together this example based on the knowledge I gained.

Let’s assume we found a property somewhere in Texas with a 6.5% capitalization rate. It’s about 70 units and is selling for $60,000 per unit. That’s $4.2M total.

A 6.5 cap rate means the property has a net operating income of about $273,000 per year before finance costs.

With about $875,000 as a down payment, that’s about $190,000/year in finance costs (I’m rounding).

So the cash flow is about $83,000/year.

Of course some of that goes toward principal, and eventually, the deal will be sold and that will get distributed back to the investors. For now, though, let’s just focus on cash flow and not the entire return.

What The General And Limited Partners Earn In A Syndication

I’m going to keep the numbers super simple so I can do it all in my head. Let’s take the 1% asset management fee out of the gross rents. We don’t have a number for gross rent (only NOI). Let’s say it’s $8,000. If you were the asset manager, great you get to pocket that. If not, someone else does.

The rental income is now $75,000.

Of that cash flow, let’s say the syndicator is doing a 90/10 split and will earn 10%.

And let’s say he also put in about $100,000 into the deal, they would have a total equity of 21.4% and would get about $16,050 in cash flow. That’s about a 16% cash on cash return for the principal (excluding the asset management fee). Don’t forget, they earn the same returns as other LPs on the cash they invest, and then get their split just for doing the deal.

Realistically, this example doesn’t include any growth in value and is a very simple example.

Now You Know The Basics

…and it’s time to download your deal calculator to help you start analyzing your next deal.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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