Syndication School’s recent lesson covers the important matter of raising capital by lining up passive investors. This is one of the more challenging aspects of syndication for new syndicators. Finding investors is one thing. Convincing them to invest with you is another thing. How can you establish solid credibility with these individuals so that they are willing to put their money on the line?
One idea is to establish one or more thought leadership platforms. The Best Real Estate Investing Advice Ever Show and Syndication School are great examples of platforms. Other similar ideas are to publish a blog or to start a YouTube channel. These all present you with the opportunity to showcase your expertise in a professional way. On a more personal level, you can host a meetup group in your area or online. The downside associated with using a thought leadership platform to gain credibility is the amount of time and energy that you must put into developing the platform. It may take years before you can use such a platform to showcase your expertise fully.
Another idea that may require less time is to create a strategic partnership. This may be with a person or an entity, such as a property management company. Even if you have not yet closed your first apartment syndication deal, your partnership will indicate that other major players in the industry know and trust you. Ideally, the property management company will have a great reputation and will be the company managing the new project after closing. Another idea is to partner with a multifamily professional, such as a consultant or a property owner. This person may not work in the same market or be affiliated with the project. However, he or she may be well-known and have credibility.
Your best option may be to rely on a property management company to generate credibility. This is because the management company will directly be involved in the deal after closing on a daily basis. There are four distinctive ways that a property management company may partner with you. One of these is to get the management company to take on a general partner position and to sign onto the loan. This option may work well if you lack the personal credentials to be approved for the loan and need more experience behind you. The property management company may also add liquidity and net worth to the loan application that facilitates loan approval. Generally, a property management company will be compensated in the form of a one-time guarantee fee or an ongoing ownership fee.
Another idea is to sign up a property management company as a limited partner rather than as a general partner. With this strategy, the property management company would have a financial interest in the property and would receive compensation based on the compensation structure for other limited partners involved in the deal.
A third option is for the property management company to bring on its own investors to add to the deal. With this option, the property management company may either be a limited or general partner. Often, the other investors have a passive or limited interest. This option is great because it brings more capital into the deal and adds another layer of credibility. Any time a property management company signs on a deal, it has a vested interest in running the multifamily project optimally. When it brings other investors on board, the management company’s reputation and relationships are at stake. This serves to further align the management company’s interests.
If you are unable to establish a good relationship with a property management company in these three preferred options, a final option is to simply give the management company equity in the deal. This is less ideal, but at least the management company has an ownership interest in the deal. By taking this approach, you are putting an experienced entity on the loan. If you proceed with this option, it may be most advantageous to give the management company a general partner interest. This is because it puts an experienced entity in direct control over the project’s operation.
Once you have established one of these methods and have a property management company on board, you can fully leverage the relationship. As you discuss your opportunity with passive investors, you can indicate that you are a credible person to invest with because of your relationship with an experienced management company. That management company is also a direct owner and investor in the deal. Because of this, the management company has a direct interest in the success of the investment as well as a direct role in its daily operations. More than that, if the management company will be a general partnership, it can strengthen your credit profile when you are applying for a multifamily loan. Often, those who are new to apartment syndication have trouble finding investors who are willing to sign on and with qualifying for a mortgage. These strategies cover both challenges.
You should be aware of the fact that your selected property management company will essentially be married to you on the loan. If you are unhappy with how they manage the property, your only options would be to buy them out or to sell the investment. With this in mind, it is crucial that you research management companies carefully before proceeding.
For more on apartment syndication, check out the Best Ever Apartment Syndication Book.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.