Commercial Real Estate Syndication: Property Selection and Purchase, Part 1
Let’s assume that you’ve decided to start assembling groups of investors to buy investment real estate. Here is a breakdown of property types and their attractiveness as syndication investments:
Let’s assume that you’ve decided to start assembling groups of investors to buy investment real estate. If you followed my Roadmap of a successful syndication in my previous articles (Part 1 and Part 2), then you know that the first step is to research a neighborhood and pick a property to buy. You’ll first want to focus on the type of commercial real estate to purchase for your syndications.
So what is the best kind of investment real estate? In the process of putting together your groups, you’ll come to realize that not all types of real estate are “created equal” from an investment perspective. Here is a breakdown of property types and their attractiveness as syndication investments:
LAND: Including Remote (currently unusable), agricultural, and “pre-builder” land.
CONSTRUCTION: Including new commercial and sub-division projects, beyond the pre-builder stage.
EXISTING: Operating residential and commercial income producing property.
If we go by the list above, we’ll soon realize that as syndicators, we’ll want to focus our efforts on only one of the major categories. This would be income producing rental property. There are several reasons for this, some obvious, and others that can get you into a heap of trouble if you don’t spend some serious time with your attorney. You’ll want to be clear on the benefits both you and your co-investors will derive from your real estate investment efforts, as well. This will help not only in focusing your efforts, but in promoting your properties to prospective investors. Here they are:
- Agricultural land, pre-builder land, and new construction projects derive their value from the efforts of others beyond the investment in the property itself. This creates a “corporate securities risk” for the money investors and puts the syndicator under the jurisdiction of both state and Federal securities laws. Ultimately, it means that you could be severely liable to your investors if things don’t go as planned. Do not operate in these types of investments without both significant previous experience and excellent legal help.
- Remote land will most likely require “capital calls” to existing investors to pay real estate taxes, insurance, and debt service as you wait for its value to increase. There is nothing an investor hates more than a call from his managing partner to ask for more money. Even if it’s disclosed up front and anticipated, it’s not good psychologically.
With existing properties:
So as we go forward on this topic, we will focus on existing, operating, commercial rental income properties. This greatly reduces the syndicator’s exposure to regulatory requirements and provides investors with regular checks, making them very happy to get your phone calls!
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