We’ve been diligently writing articles that will help sponsors understand the best practices when it comes to real estate syndication. This page serves as a summary and navigation guide to all of our articles covering the how to’s of sourcing deals and getting them ready to be shared with your investors. With each section below, there’s a link to an article that goes into further depth on the topic.
How to find properties to invest in
The first step in the real estate investing process is finding an investment property. Every investor must learn how to consistently locate ideal acquisition targets to be successful. It’s common to hear about these properties through word-of-mouth from brokers, wholesalers, and other real estate specialists in your network. As the real estate industry becomes more technologically advanced, we’re also seeing a rise of online deal finding.
With the emergence of the proptech sector, investors now have new ways of discovering potential acquisition deals. Online marketplaces are a popular method for many investors who have yet to build deal flow through word-of-mouth. Another useful resource are the online property database on market metrics and ownership information, which help with prospecting. Check out more in-depth information about the various strategies and some named examples of marketplaces and databases to find potential investment properties here.
How to conduct due diligence on real estate deals
You’ve now found an acquisition deal with potential; at a high level, it meets your investment thesis and you’re starting to get excited. But not so fast! Before buying, you must conduct due diligence. A comprehensive due diligence procedure includes help from a team of real estate specialists who do financial, physical, and operational due diligence.
The first step is to form a team of (competent) real estate professionals who can successfully complete the deal and execute your chosen investment strategy once ownership is transferred. This team might consist of your attorney, lender and property and leasing management. These professionals can help you fact-check the information you uncover. Your team should be able to help with financial due diligence by researching the property’s historical information, doing market analysis, and determining the rent roll. Your group should also consider leveraging third-party inspectors to carry out physical due diligence to uncover issues under the surface such as environmental issues. Additionally, operational due diligence must be conducted to understand how the investment strategy and capital expense budget will work together. It is vital that you understand how to conduct your real estate deal due diligence and how to spot signs of deal killers before you’ve become fully committed. The article linked in the last sentence is one of our most popular, and goes further in depth on the best practices of due diligence.
Structures and fees typically employed by real estate sponsors
Deal syndication is an enticing path for real estate investors hungry to invest in ever-growing deal sizes. As you prepare offerings for your investor base, it’s important to have a fundamental understanding of deal structures and fees that you can use in your business model as a deal sponsor.
Several types of deal structures are common in real estate syndication businesses. The most basic structure is a single purpose entity. The defining feature of the SPE is that it contains all of its equity under a single entity. When an LLC cannot produce enough equity to acquire a property, it is common to set up a joint venture. In a joint venture structure, two distinct LLCs pool their capital together to buy a property. Another structure, which is currently trending due to its ability to access the widely popular 1031 exchange marketplace, is a Delaware Statutory Trust (DST). Additional structures and more details available in the article linked in the paragraph above.
It is also important to understand the types of fees a sponsor takes in a real estate deal. The sponsor of the deal, who usually invests anywhere from 1% to 10% of the equity, makes money off of the various fees throughout the execution of an investment. An acquisition fee is the first payment to the sponsor once the property is acquired. The sponsor will generally receive asset management, property management, and disposition fees as well. For more information, check out the fees section of our article on deal structuring and sponsorship fees.
How to create an offering memorandum to pitch your deals to investors
If you are still satisfied with the deal after all the previous steps, then it’s on to the fundraising execute the deal. Once you reach this step, you will want to create an offering memorandum to market the offering to your investors. An offering memorandum is a legal document that states the risks, objectives, and terms of an investment; this document will also contain marketing information on the property, market, financials, and other information related to evaluating the feasibility of the investment.
The investment summary section of the document contains quantitative information on the terms of the investment as well as a description of the distribution structures. Your offering memorandum should give an estimate of the sources and uses of the capital stack. Loan terms should be incorporated to describe the annual fees due to debt servicing. The document should also contain a section giving an overview of the market and industry so your investors understand how these macro factors play into the risk and reward of the opportunity. Creating an offering memorandum is a complex process that shouldn’t be taken lightly. For a detailed guide on the best practices, sections and details that go into an offering memorandum, click here to see the full article.
With these resources, you’re ready to improve the first steps in your syndication business, from finding a deal to being ready to pitch it to your investors. We’ll continue to expand this guide to eventually cover real estate syndication end to end, so stay on the lookout for future articles by subscribing to our newsletter or following us on LinkedIn or Twitter!