Becoming a commercial real estate syndicator is a great way to help you and others achieve their financial goals. However, commercial real estate syndications are not for everyone. In this blog post, I will outline some of the reasons why you might decide to forgo becoming a commercial real estate syndicator and pursue a different active real estate investing strategy.
What is commercial real estate syndication?
A commercial real estate syndicator raises money from passive investors to acquire and manage a commercial real estate investment. The syndicator (sometimes referred to as the operator, sponsor, and general partner) actively finds, manages, and sells the asset, and the passive investors fund a portion of the project costs. The profits from the commercial real estate investment are split between the active and passive investors.
5 Reasons You Should NOT Become a Syndicator
1. You have anxiety over managing and/or losing other people’s money.
Once you enter the realm of commercial real estate syndications, you are managing other people’s money. There are other investment strategies that involve other people’s money. However, for syndications, the other people who invest their capital are entirely passive (i.e., limited partners). They are entrusting you and your team to preserve and grow their capital. Like all investments, there are no guarantees in commercial real estate syndications. It is unlikely that a passive investor will lose their money, as long as they adequately vet the syndicator, market, and deal. However, it is possible. Therefore, if the thought of managing and potentially losing your passive investors’ money gives you crippling anxiety, commercial real estate syndications may not be for you.
2. You have no real estate experience.
There are two main requirements to becoming a commercial real estate syndicator. The first is that you must have real estate experience (more on the second requirement in the next section). You don’t need to have a track record investing in the specific asset type you plan on syndicating or in commercial real estate. However, you must have success investing in some sort of real estate. You will have a difficult time getting someone to trust you with their capital if you have zero real estate experience or haven’t invested your own capital. Even if you’ve only purchased a handful of single-family rentals, you can leverage that experience to raise capital. If you’ve never done a deal before, or haven’t worked in real estate in some form, you may not be ready for commercial real estate syndications.
3. You have no business experience.
In addition to real estate experience, you should also have business experience before you become a commercial real estate syndicator. By business experience, I mean starting your own company (hint: it could be a real estate company) or being promoted within a large corporation. As I will detail below, a commercial real estate syndicator is running a business. Therefore, they must have adequate business experience. If you haven’t started your own business or haven’t been promoted within a large corporation, you may not be ready to become a commercial real estate syndicator.
4. You want to work part-time in real estate.
There are many real estate investment strategies, like buying single-family rentals or small multifamily, wholesaling, or fix-and-flipping, that can be done part-time (although there are people who do these strategies full-time). However, most commercial real estate syndicators are doing it as their full-time job. Managing other people’s money, a multimillion-dollar commercial real estate portfolio, and a team requires a lot of attention. If you don’t have the time or don’t want to work full-time hours on your business, commercial real estate syndications may not be for you.
5. You don’t want to be liable if something bad happens.
A commercial real estate syndicator, as a general partner, can be personally liable in certain situations. For example, if they secure recourse debt and default on the loan, secure non-recourse debt, trigger a carve-out and default on the loan, or if they are sued by a resident, vendor, etc. Lawsuits and loan defaults are not the norms, but they are possible. Therefore, if you don’t want to be liable if something bad happens at your property, commercial real estate syndications may not be for you.
5 Reasons You Should NOT Become a Syndicator
The five reasons above should not be interpreted as black and white. I am sure there are commercial real estate syndicators who are anxious about managing other people’s money or who got started without real estate and/or business experience. However, if any of these five reasons apply to you, do some reflecting on your goals and preferences before pursuing a career as a commercial real estate syndicator.