Real estate syndication. How to get started

Find and connect with sponsors, the best way to get started with real estate syndication

My name is Perry Zheng and I am the founder and CEO of Cash Flow Portal. I created Cash Flow Portal to help people achieve financial freedom through real estate investing.

Perry Zheng

A bit about me: I started my real estate syndication journey about 7 years ago when I bought a condo in San Francisco while working as a software engineer. I then bought seven house-hacking single families in the Bay Area and Seattle over the next few years.

Having maxed out my single-family quota, I went into multifamily. I syndicated my first multifamily deal in 2019, a 172-unit apartment complex in Dallas, TX. That deal went full cycle and generated a 100%+ return for investors in 2.5 years. Now, I have syndicated a total of 850 units and have been a passive investor in more than 3,000 units. In this article, I will share my insider tips on how to get started with real estate syndication. Click on the links below for quick navigation:

How does real estate syndication work?
How to start your real estate investor journey
Barriers to being a passive investor in real estate syndication
Real estate syndication benefits for investors
Why trust small dogs?
Real estate syndications vs commercial real estate firms
Tips for vetting real estate syndication deals

First syndication deal - 172 unit Class C property in Dallas, Texas

Out of all forms of real estate investing, I truly believe real estate syndication is the most accessible, easiest to start, and has the highest upside for those getting started.

How does real estate syndication work?

Real estate syndication is the process of pooling money together to buy a larger real estate project that a single individual cannot buy on their own. It consists of two groups — one group is the general partners or syndicators or sponsors, who do all the work. The other group is the limited partners or passive investors, who simply invest money and enjoy the upside.

The heart of real estate syndication is the quality of the syndicators. The competence, passion, and integrity of the syndicators determine the success of the deal. A great syndicator can turn a mediocre deal into a good one, and a good deal into a spectacular one. Real estate is not a creative industry — the jockey is 100x more important than the horse. So then how do you find the best jockeys in the real estate syndication industry?

A bonus video by Adrian from our team comparing real estate syndication to house flipping:

How to start your real estate investor journey

Real estate syndication marketplace

  1. Go to our Marketplace
  2. Filter by criteria to narrow down sponsor search
  3. Once you’ve identified sponsors, click “Connect”
  4. They will send you their Calendly link  to set up a call with them
  5. You can ask them questions, feel them out, learn, and network
  6. You will be added to their future multifamily investment opportunities

For the rest of this article, I’ll explain the barriers to real estate syndication, what the benefits are, how they are different, and why it is important.

Barriers to being a passive investor in real estate syndication

Access to syndication deals

This is probably the biggest barrier. You haven’t heard of real estate syndication mostly because 95% of them are done through 506(b) offerings. Under SEC regulation 506(b), the investor must have a pre-existing substantive relationship with the syndicator. That’s why it’s often referred to as a “friends and family raise.” These days, passive real estate investors meet real estate syndicators through conferences, mentorship groups, and their local meet-ups, where they develop such relationships. 506(b) only started in 2013 and wasn’t recognized by the SEC until 2015 – it is only a 7-year-old industry.

One note — to invest in real estate syndication, we assume you are relatively well off and have sufficient financial and intellectual resources. If you are investing $50K, it should not be the last $50K you have saved. All real estate syndication investors we know are relatively well-educated and have additional money to invest.

Time educating yourself

Every industry has its own language, and real estate syndication is no different. It does take time to familiarize yourself with the real estate syndication terminology. I would say it takes about 30 minutes to learn the basics and 2 hours to learn the advanced stuff.

Consider this: 56% of the US population invests in stocks — but what percentage of them know what EBITDA is and how it relates to the share price? I would say less than 1%. I would venture to say that you have more transparency investing in a real estate syndication than investing in stocks.

In that respect, spending 2 hours learning the jargon of real estate syndication is time well spent – it will build tremendous financial literacy for the rest of your life.

Time networking

The last barrier is the amount of work. Here comes the caveat: in order to meet syndicators, passive investors need to put in time networking, learning, and evaluating.

If that sounds like too much work for passive investors, consider the alternative: it is an equal if not greater amount of work to find, network, and make offers on residential real estate properties across the US — not to mention the hassle of managing and maintaining the properties yourself.

Finally, my meta point is this: returns are directly proportional to the amount of work one puts in. Real estate syndication simply shifts the work from maintenance to evaluation, which has the highest return for your time per unit.

The difference is that once you invest in a syndicator’s deal, there is nothing required of you afterward — so you do the work upfront, and there is no maintenance after that. Your only job is to vet sponsors and identify real estate investment opportunities to participate in.

Real estate syndication benefits for investors

No maintenance

In the same way that not everyone can start Tesla or Apple, not everyone can run a large company. It takes certain economies of scale to save on costs, operations, and personnel. Real estate syndicators take all the management and ongoing operations of the real estate assets off your hands, so you do not need to make daily operating decisions. The decision you make is purely business oriented, and that is selecting the best jockeys to perform these tasks.

Specialization

Real estate is highly local and fragmented. I have always wanted to invest in an Airbnb in Austin, but I do not have the resources, time, or network to know what property to buy, let alone find an Airbnb operator to manage it.

You could argue that real estate firms can take on that task. However, I would not trust a real estate firm in New York City to think they understand much about the Austin market. It takes an Austin operator to fully understand the nuances of the local market.

Higher than average returns

Individual real estate syndication compares to REITs (real estate investment trusts) as hedge funds compare to mutual funds – syndicated deals tend to have lower fees and less bureaucracy, and generally higher returns, than REITs. Another advantage of real estate syndication is that returns are not correlated to the stock market. REITs are publicly traded. So they are highly correlated with the overall market and can experience large drops in value — even when the intrinsic value of the real estate properties they own has remained steady or increased.

It may be an understatement to say real estate syndications produce higher-than-average returns because in my experience I have seen spectacular returns. For example, I invested $50K in a real estate syndication deal in Minneapolis. They raised $500K for a 48-unit apartment complex. 3 years later my $50K turned into $150K – 3x what I put in. The amount of time I spent in those 3 years: less than 2 hours reading their monthly emails / checking my bank statements.

I made that investment because I saw something in the sponsors, Dan Brisse and Mike Roeder. They are articulate, passionate, and just plain go-getters. I wish there was more money in the universe that could belong to them so they could put it to good use.

Better markets

Most of my friends are highly successful tech workers in Seattle and the Bay Area. They save up $200K to buy an $800K rental property in Seattle. I can almost guarantee that $200K will have a better return on investment elsewhere with a good operator. People only buy in Seattle and the Bay Area because they are safe markets and it’s really, really difficult to develop expertise in other markets.

Make money in tech cities and invest in secondary and tertiary markets with experienced sponsors

Why trust small dogs?

Real estate syndication is commoditizing and democratizing real estate investing. Why not let the people who are passionate about it do all the work, while you enjoy spending time with family and doing the things you are good at? Let the best capital allocators do the work, and you enjoy the benefits (steady cash flow without the landlord’s duties). It shifts the attention from doing all the active work yourself, to finding the best allocators who can do work on your behalf.

Real estate syndications vs commercial real estate firms

Large commercial real estate firms make money mostly from raising a lot of capital, and they are generally bureaucratic organizations. They are like the McDonald’s of the world. It is a well-oiled machine, and the returns are stabilized and relatively low. Real estate syndications, on the other hand, are like boutique restaurants, that could have way tastier menu options and have a story behind them. True, it may not have the consistency of Mcdonald’s, and you have to put in some sweat equity and effort to find it.

What I can say is for every large commercial real estate firm you can think of, I can name 10 real estate syndicators who specialize in their own local markets, work hard to find great deals, attend conferences, constantly learn, and perfect their craft to get the best returns possible for their passive investors. I, myself am a real estate syndicator and I know hundreds of sponsors like them.

That’s why we created Cash Flow Marketplace. It provides access to real estate investors who want to know the best operators in the markets they want to invest in. Access is something technology can unlock. That’s why we created a marketplace for like-minded investors like you to meet sponsors all across the US.

I want to leave you with some tangible and helpful tips as you find sponsors to connect with and diversify your real estate portfolio.

tips for passive investors in real estate syndication

Tips to consider to find great sponsors

Foundational tips

  1. Syndicators are more important than the deal. Anyone can make the projections look rosy and green. There are many unforeseen events that may impact the longevity of the real estate syndication deal. But ultimately the quality of the sponsor has the most significant influence on its success or failure.
  2. Access is key. Visibility to all real estate investment opportunities and information on operators lead to better decision-making so you get the best returns possible.
  3. Spend time educating yourself. Connect with any sponsor and you will learn more about syndications, deals, and real estate investing than any book or blog can teach you. That’s because you’re in proximity to sponsors that syndicate and invest as a passion.

Tips for vetting syndicators

  1. The top 10% of syndicators execute – not all sponsors hold merit to their words but the top do. Sponsors show integrity through actions and execution which inevitably lead to results.
  2. The top 10% of syndicators are formidable – sponsors show that they are strong and resilient. Acquiring large-scale real estate assets isn’t easy but investors want to trust sponsors who are not easily defeated in battle.
  3. Top 10% of syndicators master communication – communication is key since passive investors can be located all throughout the U.S. Sponsors should be able to explain using the fewest words possible which shows an understanding of concepts and/or situations.
  4. The top 10% of syndicators are responsive – sponsors should available and accessible. This means that the sponsors value their investors as important and are well organized to move quickly.

More than 50 sponsors on the Marketplace to connect with

Tips for vetting real estate syndication deals

  • Terms of the deal – read the subscription docs which will include all information about the deal. Understand the sponsor and investor split, sponsor promote, acquisition fee, disposition fee, and all other fees associated with the deal.
  • How professional is the communication? Great sponsors send out newsletters on a consistent monthly or quarterly basis to inform investors of the status of the real estate property. This contains financial documents and is generally a report so that investors are aware of how their investment is doing.
  • Best deals prioritize growing together over absolute returns. We can prioritize money and profit but the best deals are ones where sponsors and investors can learn together. Of course, the sponsorship team has an obligation to achieve their projections. However, beyond the surface level, every deal is a learning opportunity whether you are a novice or experienced sponsor or investor.

Happy to chat as well! In a typical fashion, the best way to get in touch with me is to add me here. 🙂

 

 

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About The Author

Perry Zheng
Perry Zheng

Perry Zheng is the Founder and CEO of Cash Flow Portal, a modern real estate syndication software. He was an engineering manager at Lyft for 5.5 years, and worked as a software engineer at Twitter and Amazon. Perry is also a lead sponsor on 850+ apartment units, having raised 20M+ for real estate projects and generating 30%+ annualized return for investors.

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