Let’s say you’ve decided to start gathering groups of investors to buy investment real estate. If you followed my Roadmap to 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 choose a property to buy. You will first want to focus on the type of commercial real estate you will be purchasing for your syndications.
So what is the best type of real estate investment? In the process of putting together your groups, you will realize that not all types of real estate are “created equal” from an investment perspective. Here’s a breakdown of the property types and their appeal as syndication investments:
LAND: Including remote (currently unusable), agricultural, and “pre-construction” land.
1. “Remote” land is held for a long period of time with the expectation that growth will increase its value. Unfortunately, it is very risky and does not provide current income for investors. The biggest drawback is that investors would have to make regular capital contributions to cover the costs of taxes, insurance and possibly loan payments.
2. Agricultural land is used to grow crops for sale. It is essentially unimproved land used in a business and its value is derived from the ongoing operations of that business.
3. “Pre-builder” land is subdivided and sold to various builders who complete the final product, whether residential or commercial. Land is effectively an inventory and its value is created in the process of subdivision.
CONSTRUCTION: Includes new commercial and subdivision projects, beyond the preconstructor stage.
EXISTING: Operating residential and commercial property that generates income.
If we follow the list above, we will soon realize that as syndicators we will want to focus our efforts on just one of the main categories. This would be an income producing rental property. There are several reasons for this, some obvious and some that can get you into a lot of trouble if you don’t spend some serious time with your lawyer. You’ll also want to be clear about the benefits that both you and your co-investors will reap from your real estate investment efforts. This will help not only focus your efforts, but also promote your properties to potential investors. Are here:
– Farmland, preconstruction land, and new construction projects derive their value from the efforts of others beyond the investment in the property itself. This creates “corporate securities risk” for money investors and places the syndicate under the jurisdiction of state and federal securities laws. Ultimately, it means that you could be seriously liable to your investors if things don’t go as planned. Do not trade in these types of investments without significant prior experience and excellent legal help.
– Remote land will most likely require “equity calls” to existing investors to pay real estate taxes, insurance and debt service while waiting for its value to rise. There’s nothing an investor hates more than a call from his managing partner asking for more money. Even if it is revealed in advance and anticipated, it is not good psychologically.
With existing properties:
1. Investors’ capital is contributed without expectation of future contributions, in most cases.
2. There is a minimum participation of the capital contributors beyond providing the investment funds.
3. Owners can expect to receive expendable income on a regular basis.
4. Owners can expect an increase in equity by paying off any loans used to assist in the acquisition.
5. There is also a realistic expectation of an increase in the value of the asset due to both monetary inflation and appreciation.
6. There will also be tax benefits for the depreciation of the improvements (not the land) and the use of a 1031 Exchange rollover strategy on the sale of the property.
So as we move through this topic, we’ll focus on existing and operating commercial rental income properties. This greatly reduces the syndicate’s exposure to regulatory requirements and provides investors with regular check-ins, making them very happy to receive your phone calls!