I often speak with investors who have questions about syndications, how they are structured and how it all works. I’d like to take this opportunity to explain our process and how syndications can be beneficial to both new and experienced investors.
What is a syndication? The purpose of a syndication is to pool together capital from several investors and use it to leverage them into larger properties than they would be able to purchase alone. We can put together syndications on small multi-family properties and large commercial properties. Our intent is to place investors that have similar investment goals, risk levels and capital and with other like-minded investors. Since we do syndications on several types and sizes of buildings, you can always take a step up from your average investment property to expand your portfolio.
What is a TIC? We structure our syndications on a Tenants In Common (TIC) agreement; tenants in common is a method of holding title to a property. The owners on a TIC agreement have an undivided fractional ownership interest in the property and ownership shares do not have to be equal. The TIC agreement covers the entire life span of the investment and outlines how the relationship is created and will function. The TIC agreement also allows an investor the option to complete a 1031 exchange if
desired. The IRS recognizes a TIC as a group of individuals versus a business and therefore allows TIC investors the option of completing or not completing a 1031 exchange.
Do I get cash flow? Absolutely! The amount of your cash flow depends on your percentage of ownership. Cash flow is delivered to our owners on a monthly basis. We can structure properties to produce an approximate 10% to 15% cash on cash return. Yes these are properties located in southern California that have very positive cash flow.
How does the property operate? We will conduct all aspects of property management to ensure your property achieves its maximum potential. Our detailed analysis will spell out the management plan and you will receive monthly progress reports. All accounting, leasing, maintenance and management issues are taken care of. You will never need to hear a resident complain or worry about a leaky pipe or paying a bill. The property itself will generate enough money to pay for all of its operating expenses, the mortgage and the remaining cash flow goes to the owner.
What Internal Rate of Return can I expect? In addition to the cash flow, our investment properties will produce an estimated 25% plus internal rate of return. Because we are able to secure excellent financing products we are able to increase the leverage. In some cases we have used 80% or more loan to value which creates high returns for our investors.
What is the minimum investment? We do not have an established minimum or maximum investment amount. The minimum investment amount will be different for each syndicated property. Again, we align “like” investors and create small, medium and large investment opportunities to meet a wide range of investment goals.
Can I sell my ownership? Yes. We generally hold syndicated properties for a two year period and this is agreed to by all owners before closing. The TIC agreement allows you to sell your ownership shares in the property if the need ever comes about.
Can I have an example? For the example, we will use a real property that we are currently syndicating. It has a 14.99% cash on cash return and a 29.17% internal rate of return (there is still some room if you want to get in on this one!). We plan to hold the property for two years. It will have an increase in income by the 6 month mark and another increase by the 18 month mark.
The total initial investment is $749,616. This amount includes the down payment, closing costs, loan fees, due diligence inspections etc.
Our example investor is Hank. Hank is a smart guy and likes the idea of getting into a high return, hassle free investment and decides to invest $150K into our property. $150K of $749,616 makes Hank a 20% owner.
For the first six months, we expect the total cash flow to be $56,202. Hank is a 20% owner so he will receive $11,240 over the first six months or $1,873 monthly. By the 6 month mark, we will have increased the rents and over the next 12 months we expect $127,560 in cash flow. That is another $25,512 to Hank or $2,126 monthly for 12 months. At the 18 month mark, there will again be room to increase the rents. For the last 6 months of the investment period, the property will generate $70,696 in cash flow.
And to Hank, who has long forgotten where this property even is, will receive another $14,139 or $2,356 for 6 more months.
Now we place the property for sale and sell it at the average market CAP rate for that area which happens to be 5.53%. Our sales proceed (including all costs of sale) is $1,286,397. I call Hank to tell him that he just turned his $150K into $257,279.
Total Cash Flow over two years = $50,891
Total Sales proceeds to owner = $257,270
Total in = $150,000
Total out = $308,161
Happy Client = Priceless.
Feel free to contact me if you have any questions about our syndications.
If you have any questions about our syndications, please give me a call today.