“How many millionaires do you know who have become wealthy by investing in savings accounts?”  Robert G. Allen

Most people are familiar with the steps involved in acquiring single-family homes or rental property.   However, many people find the procedure overwhelming when venturing into commercial real estate, such as multi-unit apartment complexes.  So, how do you start this journey?  How can you prevent costly mistakes that might impact your family’s future?   How can you generate truly passive income?  The initial step is straightforward, equip yourself with knowledge by doing your research.  Since you are already here, let’s look at the real estate syndication process from start to finish! 

 Here are the basic five steps of investing in multi-family real estate: 

1.      Determine your real estate investing goals.

2.      Find a real estate investment opportunity that fits.

3.      Reserve your spot in the deal.

4.      Review and sign the real estate syndication PPM (private placement memorandum)

5.      Send in your investment capital.

Step #1 – Determine Your Real Estate Investing Goals

When contemplating involvement in a real estate syndication, it’s essential to assess your investment goals, both in the short and long term.  Are you anticipating the need for these funds within the next 2-3 years, or do you seek a more extended investment horizon with the potential for gradual value appreciation?  

People invest in real estate syndications for various reasons, including the desire to diversify their investment portfolio and the opportunity to partake in potential gains arising from appreciation.  Perhaps you’ve harbored a longstanding aspiration to enter the realm of commercial real estate, yet lack the individual capital required to purchase the assets.   Real estate syndication investments offer a way to purchase a part of a multi-million dollar apartment building for as little as $50,000. 

Take into account the amount of capital you intend to invest, the length of time you want to invest it, the specific tax advantages you are seeking, and whether you are looking for passive cash flow, long term appreciation, or a combination of both. 

Step #2 – Find a real estate investment opportunity that fits.

Once you’ve determined your investment objectives, look for an opportunity that supports those goals.  There are several real estate syndication possibilities and markets to explore. If you’re searching for recession-resistant multifamily deals that generate cash flow and long-term appreciation, make sure you’ve joined the Leading Edge Investor Group so you’ll have access to our track record and any open deals we present.  During an open investment opportunity, we’ll generally provide an executive summary, a complete investment overview, and host a webinar for limited partner (passive) investors that provides a complete 360-degree look at the asset, market, deal sponsor team, business plan, and projected financials.

Make sure to thoroughly vet the sponsor and operating team’s track record, attend the investor webinar, ask them your questions, and read between the lines of any investment materials provided.  Although we conduct thorough due diligence on the operator team, market, asset, and underwriting before presenting the real estate investment deal to passive investors (like you!), we always encourage you to make sure the opportunity presented fits your own investment criteria.

Consider whether the real estate investment plan has several exit methods, if there are indicators of conservative underwriting, and double-check if the business plan makes sense in light of the asset class, submarket, and present economic cycle.  Research market trends in job and population growth. Review minimum investment requirements, projected hold time, and projected returns.

Step #3 – Reserve Your Spot in the Deal

Commercial real estate syndication reservations are generally filled on a first-come, first-served basis. And since there are varying yet limited spots for accredited investors in each real estate syndication deal, you want to be prepared and ready to pounce on a good one!  So, it’s critical to conduct thorough real estate market and asset research, set aside your investment capital, and clarify your financial objectives before an active real estate deal is presented. That way, you can take advantage of great real estate syndication deals as soon as they become available.

Establish a soft reserve with the deal sponsor if you’ve reviewed all the above and feel comfortable with the due diligence performed. Submitting a soft reserve allows you to go through the investment materials in more depth before committing fully.  The soft reserve does not bind you into the deal; instead, it saves you a place in the deal as a limited partner while allowing you additional time to study the detailed projections of the real estate syndication’s business plan and do your own research.

Step #4 – Review and Sign the PPM

After deciding to participate in a real estate syndication investment, the first official step is to read and sign the PPM (private placement memorandum).  A subscription agreement and operating agreement are both included in this legal document, which goes into great detail about the investment opportunity, the risks it presents, and your responsibilities as a passive investor. Although reading legal language may be tiresome, you must understand everything about the risks involved with the investment and be aware of the language in the subscription agreement and operating agreement.  You’ll also choose how you want to hold your shares in the limited liability company that owns the asset and whether you’d like your payouts to be sent by check or direct deposit.

Step #5 – Send in Your Investment Capital

The last step is to submit your investment money after you’ve completed the PPM. In most cases, wiring instructions will be included in the PPM document.  You should never wire money to an individual or a firm. Instead, you should wire your payment to the bank account provided in the PPM document. You should send your funds via ACH (automated clearing house), through which it can take one to three business days for the funds to clear and become available for investment purposes.

TIP: Before submitting your wire transfer, double-check the wiring instructions and notify the deal sponsor so they can keep an eye out for it.

In a real estate syndication, once you’ve signed the PPM and wired in your cash, you can sit back and relax – you’re a passive investor, remember? Your active involvement is all upfront during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading and signing the PPM, and wiring in your money.   As a limited partner in a commercial real estate syndication, all you have to do throughout the hold period is collect cash flow distributions, receive periodic updates from the sponsor team, and, once the business plan is executed, collect profits from the asset’s appreciation at the sale.

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Don’t get too overwhelmed if this all seems too complicated. That’s what we’re here for, and we’ll be there every step of the way as you start your first real estate syndication. As you evaluate and invest in additional properties, the procedure will become second nature to you.