Real Estate In Small Bites by Bill Roberts
Everybody wants to get in on the game, but the admission price is out of reach for most people.
It is far easier to just “save” your money in the bank, or even in a money market account with your stock broker. You know that you won’t get a good return on your “investment” but what are you to do?
You see people making huge returns on their real estate investments, but you just don’t have enough money available for investing to actually buy something. Real estate is expensive. Even the down payment (if you could qualify) is out of your reach.
What are you to do?
Well, you could continue to do the same thing you have been doing. Of course, you will get the same result. To think otherwise is just plain crazy.
Or you could be brave and make a group investment. Find a few other people that are in your same boat and agree to pool your money for a down payment, find something you all like, negotiate a good price, find a lender that will loan money on your project, and agree to how you will manage the investment. And probably the most important “issue” will be how you get out of the investment. Will the group agree to a timetable? Will the group agree to a sales price?
How do you go about putting together a group investment? You could “join” of form an investment club. They are out there. But they have to “like” you and you need to like them. How is the investment club managed? Will they “listen” to you? Will you put in your money and hope for the best? Is this really what you want to do?
What if you could make a group investment with all these questions addressed to your satisfaction? A professionally managed group, with a stated exit plan? Does such a thing exist?
Yes, the solution is called a real estate syndication. A promoter puts together a plan to purchase a piece of real estate, a management plan, and an exit plan. He (or she) lays it all out in a document called a Private Placement Memorandum (PPM). You get to read and study this document BEFORE you are allowed to commit to invest in the group. Everything relative to the investment will be disclosed in the PPM.
A real estate syndication is a security by definition. It is similar to any security. It is a “piece of paper.” You won’t get to own the real estate directly. You will “own” a piece of the syndication. Similar to owning a share of stock. The group will probably be represented by a Limited Liability Company (LLC). Your share of the LLC is called a membership. You become a member of the LLC. The LLC will be managed by either a member, all the members together, or a professional manager. This will be disclosed in the PPM and the Operating Agreement of the LLC. There should be no surprises.
Many group real estate investments made by investment clubs are setup as Tenants-In-Common (TIC). When you invest in a TIC, your name is on the deed. In most states you are a general partner with the other TIC owners. This could subject you to unwanted and unforeseen liability. Many believe that the risks and liabilities of a TIC far out-weigh the benefits.
When you invest in a syndication (in most cases) you are only liable to the extent of your investment. Yes, you could lose everything you invest. But no, you won’t lose everything you have. That is what it means to invest in a LIMITED liability company.
Where do you find a Real Estate Syndication?
Since a real estate syndication is a security, you might be able to get into one through your stock broker. Or you might find one through your real estate broker (since it is “real estate” after all). And nowadays you might find one on one of the crowdfunding platforms.
Almost all of these approaches are only available to what is called an ACCREDITED INVESTOR. So, what is an accredited investor? A high net worth individual ($1,000,000.00 NOT including your residence) or entity or a high earner ($200,000.00 in last two years or $300,000.00 joint with spouse in the past two years). This is a definition established by the investment community to limit their liability. If the investor is “accredited” then they have superior knowledge and therefore they do not depend upon the “information” supplied by the broker or financial advisor. The financial advisor doesn’t want to be sued for misrepresentation.
What if you are not an accredited investor? Does that mean you can’t invest in a real estate syndication? Well, probably not through your stock broker. But if you know the syndicator then you probably can.
If the syndication is being advertised then it probably means it is ONLY available to accredited investors. So don’t go looking for one in the WSJ or online. You need to know the syndicator.
You can “meet” a syndicator by asking your real estate broker to introduce you, or you could join a group where they might “hangout” like a chapter of The Real Estate Investors Association (REIA).
If you have self-directed IRA, your custodian might be able to introduce you.
Believe me, it will be worth the effort if you want to be able to invest in real estate in small bites.