Ever wonder what it takes to be a real estate syndication? In this video, we’ll give you the lowdown on what it means to invest in real estate syndications.
We’ll also cover how to find the best deals, and how to make sure that your investment is protected.
Transcript:
Chris Bounds 00:00
The focus of this is more so on the passive investors, the investors that are looking to invest in multifamily, from a limited partner standpoint, or however it’s structured, but basically they’re not the operators, they’re the ones providing the cash, the equity, what should investors look for when considering investing in their first syndication?
Nick Moore 00:24
I’m going to skip right past the obvious of look at the board and the managers and the operator and their work experience and track history and go straight into the distributions to see how is your money going to make you money. You need to pay attention to the preferred return and see if you’re already entitled to compensation through a preferred return that’s paid before other distributions. And that can be helpful.
Second, is to look and see what is the return of capital profile for this investment. So of course, we have return on capital that your distributions, whether that’d be a preferred return or common equity, where you just get your pro rata distribution. In a refinance or a sale, particularly in a refinance and even in some circumstances with cash available for distribution, what is considered a return of capital. It’s very, and the reason I brought up the preferred return is it’s very important to consider how the return of capital is predicated so that, you know, if the operator can pay you your capital contribution back where you’d otherwise expected in the inner return, which would reduce the amount of return you get from your preferred return.
Okay, so that was a lot, a lot of return words, the term work, but what we’re saying is this, if you if you invest $100,000, and you have a 7% per if you make $7,000 per year on that, okay. If the operator can send you capital contributions back that reduces your capital account, your 7% would be assessed on that reduced capital account. If they sent your return of capital back of $50,000, and you may have thought it was distributions or otherwise, your 7% is now only predicated on that $50,000 And can wildly change that investment. So just see, most of the time, you want to see that return of capital happen at a refinance or a sale. Okay, but after you have met certain distribution thresholds, like like an average annual return, internal rate of return or cash on cash return.
Chris Bounds 02:22
I guess further clarify that if, say, you’re looking to deploy $100,000, and you want to make sure that’s at work for the next five, seven years, or whatever the projected timeline is, they do a refinance event on year three, and then decide to pay you 25% Or half, say, half make it easy. So 50 grand back, well, now your overall return is affected. It’s not that that’s a bad thing. It’s understanding that life possibility and how that flows within the operation.
What you’re saying is, an investor should have a firm understanding of how that’s going to impact the returns, if that happens, is that the plan talking with the operators? Hey, what do you plan on doing we refund, so you’re gonna give us our money back? Or, you know, how does that play out?
Nick Moore 03:13
That’s exactly No, that’s, that’s spot on. You just want to know, because look, operators can put crafty things in there where they could just pay your capital contribution back early, and then they’re responsible or obligated to a lower return. And you want to know that so you know that there’s not an event that they can cash you out. Basically, when you haven’t realized the full potential of the investment that you were expecting, or anticipating on the front end,
Chris Bounds 03:36
Then this is where a good having a good attorney on your side like yourself, can help make sense of the devils in the details. And it’s not that operators are maybe trying to do anything malicious or anything like that, but it’s just you got to understand it. I mean, those are the terms those were how they’re going to be operating and Abiden by. That’s what you should expect. And, you know, how’s it going to affect your expectations?