This is part three of a series on real estate syndication investing (though it has a different title than the other two parts).
In case you missed them, you’ll want to read How to Get Started Investing in Real Estate Syndications, Part 1 and How to Get Started Investing in Real Estate Syndications, Part 2 for my friend, Jeff’s, great summary of real estate syndication investing.
With that said, let’s get into how I got involved in real estate syndication investing…
Learning from the Millionaire Money Mentors
It all started with meeting Annie Dickerson in the Millionaire Money Mentors forums.
Annie is the co-founder of Goodegg Investors, a real estate syndication company, and she agreed to do our first Ask Me Anything session last September.
Previously I wasn’t really aware of the ins and outs of real estate syndication. I only thought there were big, faceless, corporate companies offering these opportunities in the form of crowdfunding sites. After my experience with peer-to-peer lending, I wanted none of that.
But Annie’s responses (both the content and her manner) made me interested in finding out more. She educated us all and explained that there are lots of opportunities for accredited investors (more on this in a moment) to invest with smaller companies who you can interact with, know, vet, and become comfortable with before investing.
She got me very interested about the concept of real estate syndication investing as another source of passive income.
So I made the next logical step in the process — I started educating myself…
Real Estate Syndication Education
After the AMA I chatted with Annie a bit via email. She sent me some links to review as well as a copy of her book, Investing for Good (which I read in a couple days).
I supplemented this with online reading to get a broader perspective on the subject.
But the most beneficial part of my education came from the Millionaire Money Mentors forums. There were several real estate syndication investors in there, and they took a lot of time to answer multiple questions for me and others.
In addition, I had a couple private forum conversations (via direct message) with two very experienced real estate syndication experts. These interactions saved me a lot of time and energy plus pointed me in the right direction on my investing journey — something they had to learn by trial and error over many years.
Networking for Success
From there, I contacted several syndicators/General Partners (based on recommendations from forums members) including:
These four all have pretty much the same on-boarding process which I will detail below.
FYI, all but Goodegg are actual investors in properties. From what I can tell, Goodegg is more of a marketing entity that comes alongside others (like Passive Investing, as we’ll see in a moment) to help them market and fund their offerings.
If you want to be on “the list” to receive offerings from each of the General Partners (GP) above, you need to follow a process as follows:
- Contact them and ask to be on their list. This could be via email or on their website’s contact page (I did both).
- Set up a call with them. I think they want to make sure you’re legit and not some yahoo. So you have to talk to them before anything else happens. This is actually to your benefit as well since you can use the call to see if they employ philosophies and strategies you support.
- Assuming all goes well on the call, you get added to the list to receive/review deals.
Now that I was on the lists, I was ready for some action.
Here’s how I’ve seen a couple deals come through now, so I believe it’s a rather general process:
- The GP sends an email to their list giving a very general deal overview. At this point, potential investors can make a “soft reserve” which basically holds you a spot to make a potential investment. You tell them how much you’d like to invest and what class of investment if that’s offered. I have generally seen two classes, one that’s simply an interest payment for X years and another that’s a lower interest payment for X years PLUS part of the upside when the property re-sells in 5-7 years.
- Once you make a soft reserve, you are sent a detailed investor packet to review (generally a few days later). If you want more information, you can call them. In addition, many GPs also offer a webinar a week or so after this point to explain the investment in detail.
- Next comes the hard reserve. At this point you need to confirm if you’re in or out. If you’re out, the process ends here. If you’re in, it continues…
- Once you commit, you are sent a formal document to sign. Imagine a complex legal document created by a high-powered lawyer and you’ll have a good idea of what it looks like. It basically says you are investing $X in X property with the estimated payouts as included in the document. You sign this electronically and it’s sent back to the GP.
- Next you have to confirm you are an accredited investor.
Here’s the law on accredited investors:
Under the federal securities laws, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The federal securities laws provide companies with a number of exemptions. For some of the exemptions, such as Rule 506 of Regulation D, a company may sell its securities to what are known as accredited investors. The term accredited investor is defined in Rule 501 of Regulation D.
And here’s the definition of an accredited investor:
An accredited investor, in the context of a natural person, includes anyone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
There are other categories of accredited investors, including the following, which may be relevant to you:
- any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, or
- any entity in which all of the equity owners are accredited investors.
- In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
Some companies will take your word that you’re an accredited investor and some won’t. More on that below.
- When this is completed, you have to send them the funds. You can do so by check, wire, etc. — the standard options.
- Once that happens, you get a formal letter of your investment, you wait for the property to close, and the investment begins according to the terms set in the agreement.
Given those, here’s the tale I have to tell…
I contacted Goodegg first, completed some preliminary info, and set up a call (which was two weeks down the road since the time choices didn’t really work with my schedule).
A week or so later, I contacted the other three companies.
As my call was approaching with Goodegg, I scratched my eye and had to go to the eye doctor (it was nothing but I wanted it to be checked out). So I canceled my call with them.
A couple days later I was sent a deal through Goodegg for an investment offered by Passive Investing. This was interesting in a couple ways: 1. I guess I was on the list even though I hadn’t done a call (not sure if this is “ok” or if I simply fell through the cracks) and 2. two of my contacts were partnering on the same deal.
I put in a soft reserve for $50k. No harm in holding a spot, right? It committed me to nothing, so I still had 100% flexibility at this point.
I was sent the info, reviewed it, and watched the video. It seemed like a decent enough offer (7% per year plus part of the upside gain when it sold in 7 years), but I had nothing to compare it against.
But I decided to proceed anyway for several reasons:
- I had $50k sitting around and earning nothing (it was actually losing value as it sat)
- I wanted to learn the ropes of real estate syndication investing (and there’s no better way than to jump in)
- Two of my recommended companies were involved. That’s better than even just one of them, right? 😉
So I committed in the hard reserve round.
Then I signed the papers (electronically) and got verified online as an accredited investor. They gave me two options for being verified as an accredited investor: I could either get a letter from my CPA or use an online service like VerifyInvestor.com. I did the latter (I had to send them credit reports and a Vanguard statement) and was certified as an accredited investor into January 2021.
Finally, I sent them a check. They received my money and at the time of this writing (early December), we’re waiting for the deal to close.
While all this was happening, I was also talking to the three other companies noted above (I never did reschedule my call with Goodegg.)
They asked me questions and I asked them some.
I liked them all and they liked me, so I’m on the list with all of them now.
I did receive two other deal options in November. One was for a storage facility with Spartan Investment Group (storage facilities are their specialties). They weren’t paying anything the first couple years of the deal and since I’m looking at this as a passive income opportunity, I decided to pass.
The second was with Life Bridge Capital and was an apartment building in Colorado Springs, my home market. I had another $50k to invest and the deal looked good (even better than my first one — 8% annual interest payments plus upside on the sale of the property in 5 years), so I jumped in.
Their signing process was much easier and they took my word for the fact that I was an accredited investor.
As of this writing the property is set to close in December.
Note that this is a VERY GENERAL overview of what I know and what I’ve done so far. I’m still very far from being an expert here.
How I Decide to Invest
Similar to purchasing dividend stocks or buying real estate, each investor has his or her own process for evaluating a syndication deal and deciding to proceed or not.
Here are the main factors I look at:
- General Partner — As Jeff said in the previous posts, who you are doing business with is as important as the details of the deal (maybe more so). After talking to all the groups above, I feel very comfortable with them and trust that they 1) know what they are doing and 2) are good people. Of course, time will tell whether or not I’m right.
- Strategy — I want to know what the GP’s plans are for the property. I want to feel it’s a reasonable strategy and one I can believe in. For instance, buying a complex that was last updated 15 years ago, remodeling the units, and raising the rents is a good strategy IMO (it’s what I did with my places) and one I can support. If it’s something else, I will evaluate those on a case-by-case basis.
- Conservative projections — I like to see a lot of margin for safety. For example, I like a low occupancy level (like 50%) to be required for the deal to still be above water. I also like to see regular and reasonable growth projections, not something like 15% growth needed per year to make things work. I also prefer shorter deals to longer ones (five years is better than seven for me).
- Health of the market — Of course you are investing in the market of the property as much as the property itself. I like to see growth in jobs, population, rent, and so on. I also like any other intangibles that could be potential positives (like being next to a major company’s headquarters that’s set to be built in 2-3 years.)
There are a few other things I might look at, but these are the major ones.
If you’re an experienced real estate syndication investor, let me know your thoughts on these as well as the criteria you use to evaluate deals.
My Thoughts on Investing
There are a few more things about real estate syndications I want to point out, especially to those who might be considering investing this way.
My situation is unique and whether or not these are right for you will vary based on your unique goals, situation, and so forth.
Some of my thoughts:
- The money I am investing here is completely AT RISK and ILLIQUID. I would probably never have invested like this earlier in my investing career though others have/do. It depends on the risks you want to take and your goals and I’m not a big fan of either large risk or illiquidity. So before you invest this way, know it’s on the upper end of the risk scale. There’s a reason they want accredited investors for these deals.
- In addition, there’s no control. At least with my own properties, I’m driving the ship. With these investments I am a fly on the wall and along for the ride, which makes these even less desirable.
- Those said, I had cash on the sideline earning nothing. I was losing money to inflation having it in “high interest” accounts. That’s a known loss, so it effectively reduces the risk a bit.
- In addition, the amount I have invested is meaningless in the grand scheme of things. If I lost all $100k I’ve invested so far, it would have zero impact on my lifestyle, future, etc. I would not lose a minute of sleep over it. (Not that I want to lose it, but it wouldn’t hurt to do so.)
- My main goal is to get more/new passive income at decent return rates and this fits nicely into that goal. If your goals are different, this may not work as well for you.
- I am planning on reducing risk in a few ways. I will be diversifying by general partner, area of the country, and type of real estate (apartments, storage units, etc.) In addition I will ladder my investments, jumping in every several months or so. That way I’ll create a cycle where (eventually) I’ll always have one deal coming up to close and will use the proceeds from it to either cash out or reinvest into a new deal.
In the end, I’m not sure how much I’ll put into real estate syndications. I’ll play it by ear for now, but will likely do at last a couple more deals, so my minimum will be $200k or so. Time will tell.
That’s the series covering real estate syndication investing as well as what I’ve done personally with it. Any questions or comments?