Syndications Explained

Last week I talked about what the wealthy invest in.  To recap, they like to invest primarily for cash flow but also enjoy tax benefits and appreciation along the way.  All of this is accomplished by investing in a real estate syndication. 

Most people have not heard of syndications…  What is it?  In the simplest terms it is when a team of experienced people find a commercial property, for us that property is usually a value add (more on that later) apartment building.  This experienced team finds a good deal, negotiates and gets it under contract.  They do a comprehensive due diligence and then secures the financing.  Then the team hires me or someone like me to find people interested in being passive investors in the opportunity. 

So there are active managers who run this deal from start to finish and the investors get paid a monthly preferred interest rate on their investment as well …. We look for deals that pay monthly.  There is a game plan to increase the value of the asset and sell the property.   As I mentioned above the investors also get paid when the property is sold. 

The really cool thing about these VALUE Add properties is they appreciate in 2 ways.  Natural appreciation which is just finding a market that is expected to grow in population and the local economy and that causes an expected appreciation. 

But the REALLY cool thing is the property goes up due to forced appreciation.  I mentioned we look for value add property.  That just means the property is not running efficiently.  The rents are not at market rent, the expenses are way too high, or they haven’t been charging for pet fees, trash fees etc.

The value of a commercial property is based on the net income it produces.  So when the income goes up or the expenses go down the value of the property increases.  Let’s say for example we have a 100 unit property we raise the rent $50 a month.  That generates $60,000 a year more in income.  Let’s say the cap rates in this area are trading at 5% that means we’ve added 1.2 million dollars to the value of the property.  Pretty powerful huh?   So I’m hoping you can start to see why this is such an amazing tool to build wealth.