When it comes to investing in real estate, most people know the steps required to purchase a single-family home or rental property. You choose the market and neighborhoods, establish how many bedrooms and bathrooms you need, work with a lender and a broker to tour potential homes, make an offer afterward.
From there, you schedule inspections to check the condition of the home and its mechanical systems so that you can make a sound offer. Then comes negotiation, documents, and settlement.
Many people find the process overwhelming when investing in commercial real estate such as multi-unit apartment buildings or shopping centers.
So how do you get started? How do you avoid making a mistake that could cost your family’s future? How do you earn genuinely passive income and not accidentally commit to more work?
The first thing is simple: Educate yourself. Read all our blog posts and newsletters, and if you have a question we haven’t answered yet, reach out!
Since you’re here, let’s look at the real estate syndication investment process from start to finish so you can invest confidently in your first real estate syndication.
Here are the five basic steps of investing in a real estate syndication:
- Determine your real estate investing goals
- Find a real estate investment opportunity that fits
- Reserve your spot in the deal
- Review the real estate syndication PPM (private placement memorandum)
- Submit your funds to invest in your real estate syndication deal
Step #1 – Determine Your Real Estate Investing Goals
Consider both your short- and long-term investment objectives while deciding whether to participate in a real estate syndication. Will you need to use the money within 2-3 years? Or are you looking for a longer-term investment that will grow in value over time?
Some reasons why people invest in real estate syndications include diversification of their investment portfolio and an opportunity to participate in the potential gains that come with real estate appreciation.
Maybe you’ve always wanted to “get into” commercial real estate investments but don’t have enough money on your own to buy such a large asset. Real estate syndication investments are a great way to participate in million-dollar property deals with only $100,000 of investment capital or less.
Consider the amount of money you’ll be investing, the length of time you want it to stay invested, the tax advantages you’re looking for, and whether you’re investing for ongoing cash flow to offset your salary, long-term appreciation, or a combination of both.
Step #2 – Find a Fitting Investment Commercial Real Estate Opportunity
Once you’ve determined your investment objectives, look for an opportunity that supports those goals.
There are several real estate syndication possibilities and markets to explore. If you’re searching for recession-resistant multifamily deals that generate cash flow and long-term appreciation, make sure you’ve joined the Gibby’s Investor Club so you’ll have access to our track record and any open deals we present.
During an open investment opportunity, we’ll generally provide an executive summary, a complete investment overview, and host a webinar for limited partner (passive) investors that provides a complete 360-degree look at the asset, market, deal sponsor team, business plan, and projected financials.
Make sure to thoroughly vet the sponsor and operating team’s track record, attend the investor webinar, ask them your questions, and read between the lines of any investment materials provided.
Although we conduct thorough due diligence on the operator team, market, asset, and underwriting before presenting the real estate investment deal to passive investors (like you!), we always encourage you to make sure the opportunity presented fits your own investment criteria.
Consider whether the real estate investment plan has several exit methods, if there are indicators of conservative underwriting, and double-check if the business plan makes sense in light of the asset class, submarket, and present economic cycle.
Research market trends in job and population growth. Review minimum investment requirements, projected hold time, and projected returns. Finally, attend or review the investor webinar and make sure you get your questions answered.
Basically, at this stage, look for any reason not to invest in the deal.
Step #3 – Reserve Your Spot in the Deal
Commercial real estate syndication reservations are generally filled on a first-come, first-served basis. And since there are varying yet limited spots for accredited investors in each real estate syndication deal, you want to be prepared and ready to pounce on a good one!
So, it’s critical to conduct thorough real estate market and asset research, set aside your investment capital, and clarify your financial objectives before an active real estate deal is presented. That way, you can take advantage of great real estate syndication deals as soon as they become available.
Establish a soft reserve with the deal sponsor if you’ve reviewed all of the above and feel comfortable with the due diligence performed. Submitting a soft reserve allows you to go through the investment materials in more depth before committing fully.
The soft reserve does not bind you into the deal; instead, it saves you a place in the deal as a limited partner while allowing you additional time to study the detailed projections of the real estate syndication’s business plan and do your own research.
Step #4 – Review the PPM
After deciding to participate in a real estate syndication investment, the first official step is to read and sign the PPM (private placement memorandum).
A subscription agreement and operating agreement are both included in this legal document, which goes into great detail about the investment opportunity, the risks it presents, and your responsibilities as a passive investor. Although reading legal language may be tiresome, you must understand everything about the risks involved with the investment and be aware of the language in the subscription agreement and operating agreement.
You’ll also choose how you want to hold your shares in the limited liability company that owns the asset and whether you’d like your payouts to be sent by check or direct deposit.
Step #5 – Send in Your Investment Capital
The last step is to submit your investment money after you’ve completed the PPM. In most cases, wiring instructions will be included in the PPM document.
You should never wire money to an individual or a firm. Instead, you should wire your payment to the bank account provided in the PPM document. You should send your funds via ACH (automated clearing house), through which it can take one to three business days for the funds to clear and become available for investment purposes.
TIP: Before submitting your wire transfer, double-check the wiring instructions and notify the deal sponsor so they can keep an eye out for it.
How To Become A Passive Investor In Commercial Real Estate
The process of investing in a commercial real estate syndication opportunity should now be much less intimidating.
In a real estate syndication, once you’ve signed the PPM and wired in your cash, you can sit back and relax – you’re a passive investor, remember? Your active involvement is all upfront during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading and signing the PPM, and wiring in your money.
As a limited partner in a commercial real estate syndication, all you have to do throughout the hold period is collect cash flow distributions, receive periodic updates from the sponsor team, and, once the business plan is executed, collect profits from the asset’s appreciation at the sale.
Don’t get too overwhelmed if this all seems too complicated. That’s what we’re here for, and we’ll be there every step of the way as you start your first real estate syndication. As you evaluate and invest in additional properties, the procedure will become second nature to you.