4 Mistakes You Better Not Make in Apartment Syndication
Syndication is a multifamily real estate investor’s chance to move from the minor league to the majors. read more
But with millions of dollars on the line, it’s easy for rookie syndicators to get distracted and make a mistake that tanks the deal or lands them in hot legal water.
In this post, I want to help you succeed by showing you four of the most common mistakes I see in multifamily real estate syndication:
The easiest way to get yourself into trouble with syndication is to bungle your paperwork, violate SEC guidelines, and/or accidentally mislead your investors.
The Securities Acts of 1933 lays out the rules for whether and how a syndicate gets registered, who you can approach for investment, and what paperwork needs to be filed.
That law is Gospel; get to know it like the back of your hand.
Above and beyond legal process (operating agreements, subscription paperwork, etc.), sponsoring a syndicate puts you in a fiduciary relationship with your investors. That means you have to work for your investors with honesty, diligence, skill, and care.
Let them down, and you could open yourself up to civil and criminal liability.
How to Avoid Legal Trouble:
You don’t need your securities license to set up a multifamily syndicate. What you do need is an excellent lawyer with experience in syndication to help you navigate the process.
Don’t try to go it alone.
For beginning syndicators, it can be hard to know whether you should start with the deal or the investors. I often see rookies go wrong by looking for the deal without lining up their funding first. By the time they find the money, their contract is toast.
Here’s a scenario I talk about in my book:
An investor finds a 50-unit building. It’s in a great location, has a low vacancy rate, and good income growth potential. He offers $2.5 million, and it’s accepted.
At a 70% LTV, he’ll need $750,000 down, plus $200,000 for Cap Ex and operating capital. He has $150,000 but needs $800,000 more to close the deal.
He’s agreed to a 90-day close. Assuming he takes 30 days to do his due diligence, that leaves 60 days to find enough investors to cover the $800,000 needed.
If this investor waits until 60 days out from his closing deadline to begin looking for potential investors, he’s almost certainly going to come up short and lose the deal.
Worse, he’ll be tempted to accept anyone at all with money to invest. That makes for a dirty pool of investors and serious potential for trouble down the road.
Don’t wait until you’ve got a deal under contract to line up investors.
Non-Existent or Inconsistent Marketing
This mistake usually comes in tandem with #2. Rookies either take an inconsistent approach to marketing their syndication business or they don’t bother at all. Then, when an opportunity comes along, they don’t have anyone to reach out to for funding.
How to Ramp Up Your Marketing for Multifamily Syndication:
So many syndicators get this one wrong that it deserves an extended response.
If you’re in syndication, then you’re in marketing. Take charge of your investor pool by developing an intentional plan to put yourself out there, attract potential investors, and keep them engaged as you search for a deal to bring them in on.
That plan should include digital media (web and social), email marketing, direct mail, and phone. The time to establish yourself as an expert syndicator is now, not later.
In addition to those attractional items like a website and a blog, get proactive. Clarify your criteria, develop a list of potential investors, and start reaching out. Join your local REIA, go to an investing meetup, and troll your local Rotary club. Tell everyone you meet about your syndication business and what kind of opportunities they can enjoy.
As you do, work with your lawyer to prepare offering documents in advance so that they’re ready to go once you find the right deal. Keep building up your portfolio, and you’ll have no trouble finding investors to partner with you on your next deal.
At the end of the day, a syndicate is a promise. As the sponsor, you’re telling your investors that they can trust you to take their money and deliver the advertised return.
One of the easiest ways to wreck a deal and your reputation is to break your promise. But even if you do put up the numbers, you can still leave a bad taste in your investors’ mouths by offering unclear communication, faulty expectations, and lack of formality.
Happy investors are long-term investors. They’ll dive in with you on the next deal, and they won’t be afraid to bring others with them. Alienating your current partners and investors will ensure that doesn’t happen and your syndication business goes nowhere.
How Not to Alienate Your Investors
If you want to impress your investors, start with this tried-and-true strategy: under-promise and over-deliver. Analyze conservatively, understate your returns, and let your diligence and persistence generate a positive surprise for your investors. If you promised 15%, 12% is a disappointment. But if you promised 10%, that 12% is a huge win.
Second, communicate regularly. Keep investors in the loop. Let them see you doing everything you can to make the deal as profitable as possible. Even if you do post weaker numbers than expected, regular communication will keep your investors from putting all the blame on your shoulders.
Over 90% of all apartment transactions are syndicated right now. If you’re not getting your feet wet in syndication, your multifamily business is going to hit a ceiling… fast.
So, grab my book and flip straight to the chapter on syndication. There, you’ll find a whole new world of deals available to you, if you’re willing to take the time and learn.
As always, if you’ve got questions—or, if you want to connect with high-powered investors across the country (see #3 above)—join us on our Facebook group.