Many first time investors shy away from Commercial Investing due to the misconception that they need hundreds of thousands dollars to purchase a commercial property. Now having hundreds of thousands of extra dollars is a great position to be in however it is not necessarily the benchmark starting position for first time investors.
Historically, one of the most difficult obstacles that prevented people from purchasing commercial property is the large amount of initial capital investment or down payment— this is no longer the case.
We offer syndications to enhance an individual investor’s buying power. An investor can become part of a syndication and receive monthly cash flow and annual return respective to the amount of money invested into the property. A syndication is a vehicle that assists investors to experience the high level of returns associated with commercial properties. By utilizing a TIC agreement (Tenant In Common), multiple investors can benefit from the leverage of each others invested funds to purchase a commercial property. Syndications create larger buying power that was otherwise unavailable to an individual investor. Let’s take a look at the Smith siblings to see how they utilized the power of a syndication;
John, Jane, Joseph, Julie, and Jack are brothers and sisters. They each have $50,000 in capital to invest. John is rolling funds out of IRA and 401K accounts. Jane is pulling money from her residence through a HELOC. Joseph sold an investment property and will complete a 1031 exchange to reinvest his capital gains. Julie has pulled money out of a high risk mutual fund and Jack had a very big piggy bank, he always knew how to save. The Smith family decided to come together, pool their funds and put $250,000 down on a $1,000,000 eight unit property in sunny San Diego.
Money Tree Gardens is an 8 unit building selling for $1,000,000 with an annual positive cash flow of $15,000. There is 1 unit vacant at the property and each unit is $75 to $100 under market rent. The current owner has been the property manager and spends a good deal of money on upkeep and contracted services, services that are available at a lower cost. Money Tree Gardens has future potential to bring in $20,000 if vacancy was reduced, rents were maximized and less money was spent on expenses.
The market surrounding Money Tree Gardens commands higher rents than what Money Tree Gardens is currently bringing in. Nearby schools, shops and restaurants within walking distance make this area desirable to live in. Several redevelopment projects are in progress which will make this property attractive to future buyers.
This is a step by step breakdown of how the Smith family will acquire and benefit from their syndication.
$50,000 Per Smith * 5 Smiths = $250,000 Initial Investment (Down Payment)
$1,000,000 Property – $250,000 Initial Investment = $750,000 Loan Amount
$50,000 Per Smith ÷ $250,000 Initial Investment = 20% Interest owned per Smith
Current Yearly Cash Flow of $15,000—Monthly Cash Flow of $1,250
Annual Cash Flow $15,000 * 20% of Interest owned Per Smith = $3,000 per Smith/per year
Monthly Cash Flow $1,250 * 20% of Interest owned Per Smith = $250 per Smith/per month
After 2 years of holding the property, the Smiths decide to sell their investment property. Through effective property management, the Smiths have been advised that they can sell the property at $1,300,000. Upon the sale of the property, they each experience the following return.
$1,300,000 – $750,000 (Loan Amount) = $550,000 Sales proceeds (before tax)
$550,000 * 20% Per Smith = $110,000 gained on invested funds Per Smith
With this type of investment, the Smith family didn’t need to do any work at all. The Smiths were provided with exceptional services to locate an opportune property, management of the property and sales representation. The Smiths were then able to roll the gains into another property and experience twice as much monthly and yearly return.
If you have any questions regarding syndications, feel free to give me a call today.
“Earning You Many Fond Returns…”