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Maricela Soberanes Thursday September 22nd, 2022
When we mention we are real estate investors, most people think we buy houses. Well, that is how we got started over a decade ago.
Then we invested in mentorship and cracked the code of building generational wealth. We
learned from our mentors and are now laser-focused on investing using the Syndication model.
The shortest explanation of a syndicate, as defined in Investopedia, is a temporary alliance of
businesses that joins together to manage a significant transaction, which would be difficult or
impossible to effect individually. This strategy makes it easy for companies or individuals to
pool their resources and share risks.
While syndications can be the best strategy to scale your portfolio and increase your net worth, there is due diligence you must complete before joining one.
Here are five things you must pay attention to before investing your capital in a syndication.
1) Know the market. Location is key when choosing your investment. It is also the only thing you cannot change once you own the property. So, ensure the property is in a growing market and has and is projected to have population growth. Also important is job diversification, meaning the jobs are not single industry dependent.
2) Study who your client is. Who will live on your property, and can they afford it? What is the median household income within a 1-3-5 miles radius? Use third-party data that show trends and values. This will be valuable information to plan for your rent increases. Traditionally, rents are around one-third of the monthly median household income.
3) Familiarize yourself with underwriting. Be able to identify areas that show aggressiveness or are conservativeness. One area is the projected rent increases year after year. If the projected year rent growth is too aggressive, this can show great investor projected returns, but very less likely to achieve. Exit CAP rate is another area that can assume being able to sell the property for higher value, but when the time to sell comes, that might not be achievable. Again make sure third-party data is being used. You do not have to know the entire underwriting process, but you can ask your sponsors for these underwriting assumptions. If the opportunity shows a profit with conservative underwriting, it is more likely to exceed the projections in reality or reach projections faster in the real world market.
4) Familiarize yourself with the business plan. When you purchase a Commercial Real Estate asset, its value is measured by how well the asset performs financially (what is its trailing NOI). The Net Operating Income (NOI) is the direct result of the business implementation. There are various ways to increase the NOI, which are presented in the business plan. Most importantly, the capability of being able to implement those. Ask the sponsors for their experience with similar projects and their rate of success.
5) Speaking of the sponsors! The sponsors, also known as General Partners (GPs), are one part of the risk you are investing in. Make sure to do your due diligence on the sponsors and their experience. They are the ones that will be making the day-to-day decisions about the property and the business plan implementation. Syndications are long-term investing strategies (3-5 years). A strong team can make a sweet deal even sweeter.
There are many other areas that you need to familiarize yourself with when you invest in a syndication, we will continue to share those with you as we also continue to invest as General Partners as well as Limited Partners (Passive Investing). Now that we have seen the power of syndications, we can’t stop talking about how it has helped us grow our business, net worth, and partnerships exponentially.
If you want to know how to get started, please reach out, and we will handle it from there.
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