Mike Swenson & Mike Gengler - How To Invest In A Real Estate Syndication
Many people want to get started investing in real estate, but may not have enough money to get a property themselves, nor do they want to take on a property themselves. Today we cover how people can invest in a real estate syndication with minimal money down, while not having to manage the property themselves, and they get to leverage the experience of full-time real estate professionals. We discuss the benefits of investing in real estate vs other investment options & when a real estate syndication could be a great fit for a real estate investor. We also cover what to look for in a general partner & operator, how they do their due diligence, and the overall process of getting into a real estate syndication. If you have questions or are curious about a syndication, this episode is a great one to dig into to get your questions answered. Be sure to reach out to us so that we can go over the process with you.
In this episode, you will be able to:
- Discover the secrets to getting started in real estate investing and take your first step towards financial freedom.
- Uncover the incredible benefits of real estate syndication and learn how it can fast-track your investment portfolio.
- Master the art of choosing the right real estate syndication to maximize your returns and minimize risks.
- Unlock the mysteries of private placement memorandums and gain a deeper understanding of this vital investment document.
- Explore powerful strategies for long-term real estate investing that will set you on the path to building lasting wealth.
The key moments in this episode are:
00:00:43 - Real Estate Syndication Advantages
00:02:27 - Why Real Estate
00:05:19 - Economies of Scale in Syndication
00:08:17 - Selecting an Operator
00:10:17 - Long-Term Relationship
00:12:43 - Understanding Investment Options
00:13:27 - Due Diligence and Property Selection
00:17:00 - Subscription and Investment Process
00:18:01 - Long-Term Growth and Exit Strategies
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Read the full transcript:
Mike Gengler
You know, there's going to be less buyers in the market at that price range that you're looking at or that the syndication is looking at. So there's less competition and better deals available as well, even on the purchase price. So gives a lot of advantages of pooling money and not having to do the due diligence, the daily management and all of the hands on stuff that you would get with a smaller property.
Mike Swenson
Welcome to the RELFreedom show where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some RELfreedom together. Hello everybody. Welcome to another episode of Real Freedom. Building time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. People that want to get started in real estate often think of all the barriers and all the difficulties of getting involved. And today I'm here with my business partner Mike Gengler and we're going to talk about how to make this as easy, easy as possible for people. And so for those of you that haven't heard, real estate syndication really is a way where you can get involved. You don't have to spend a lot of time on the deal. You can invest your money into people that have, you know, gone before you and hopefully worked through some of the challenges that you're still going to learn and you get to experience the upside of that. And so we've been working on this for quite some time now. We've done a few deals with investors for minimal amounts of money down. And so it really is a great way for you to get involved. If you want to learn more about this, go to our website, relfreedom.com that's our freedom.com invest and we're going to talk about all the stuff that we're covering on the episode today. So relfreedom.com invest learn how you can get started for a little money down, not having to do your own work into the deal and experience the upside of some of these larger apartment complexes that you probably aren't going to be able to do on your own. So that being said, let's jump into it, talk about a little bit more. Mike, we're excited to have you on the episode.
Mike Gengler
Absolutely excited to get more people involved in real estate. Definitely believe in it as an avenue for financial freedom and want to get as many people involved as possible so that they can experience that as well.
Mike Swenson
So talk a little bit about when we started working with investors. We were doing duplexes fourplexes even helping people to buy some small apartment buildings. And then we came across an idea called the real estate syndication. So what are some of the benefits that you see about doing something like a real estate syndication? I should even back up half a step and say, why real estate versus other assets? Maybe we start there first.
Mike Gengler
Yeah, big thing for me is just the multitude of ways that real estate can, can pay up, pay dividends for you to take a stock term. But you know, in, in stock markets, you know, you're getting the company growth, you might be getting a dividend versus in real estate. You've got tax advantages, you've got your mortgage getting paid off, you've got the cash flow from rent, you've got, you know, rubs programs to take advantage of utilities, you've got the appreciation of the property, you've got add of adding value to your property versus on a company that you don't own, you don't really have any control over adding that value to that company. So for me, real estate, it's the multitude of ways that you can have control over the property and that you can build. How do I say that? And it's the multitudes of ways that you can have control over the property and that different ways that things get paid off for you from your tenants.
Mike Swenson
And for people listening to this, certainly you could diversify. Real estate is not for anybody. There's, there's risks involved. And so it kind of depends on your tolerance for risk, the type of investment. But for people that do like to invest in real estate, there's certainly a lot of great things there. So now if we say, hey, real estate's a way that I know I want to build some wealth. One of the ways that syndications can be beneficial versus trying to do something yourself is there's an economies of scale that you can take advantage of. You know, we worked with investors that would put down $7500,000 on a property. It might be a two unit, a three unit. And the challenges that we saw were when you've got a tenant that has a vacancy or maybe they're in there and they're not paying rent, you're losing 33%, 50% single family home, 100% of your income that month because you don't have somebody paying rent. When we do something like a syndication and we'll talk a little bit more about what that looks like, you might be able to buy a 20 unit property and you might have one or two tenants that are vacant or not paying rent, well then you've got 18 other people that are. And so you've got an economies of scale there that you can take advantage of versus trying to do it on your own. And then we'll talk about some of the other benefits as well. And two, you know, when you're working with a property that size, you're going to leverage a property manager, right? Because you might be able to go to the property and paint some touch ups or whatever on one of two units. However, when there's 20 units, you're not going to be able to do that. And so you really are leveraging your time with other people, other professionals that can do things that maybe you can't kind of hack yourself if you've got your own property.
Mike Gengler
Yeah, it's indication, yeah, it allows you to get in for a much lower price. You know, you're not bringing that full 20% down payment. And yeah, it allows you to buy something a lot bigger. You know, as you know, 10, 20, 30 people get together to buy something. You know there's going to be less buyers in the market at that price range that you're looking at or that the syndication is looking at. So there's less competition and better deals available as well, even on the purchase price. So gives a lot of advantages of pooling money and not having to do the due diligence, the daily management and all of the hands on stuff that you would get with a smaller property.
Mike Swenson
And real quick, just to kind of explain how that works, there's kind of two sides here, the general partner side as it's called, where they take care of all the details for you to be able to invest in a deal. You're, you're what's called kind of a limited partner where you're putting up your money and then you're working with somebody who is going to do the day to day stuff. So for some people it's that control piece. You know, you're not in control as much as if you owned your own property. Some might see that actually as a huge advantage. Right. Like I don't have to worry about any of that stuff. I'm not going to get any calls. I don't have to make those decisions. So then it really comes down to placing your hard earned money with people that you trust. So that's the key piece here in the deal is you're not going to just give your money to anybody. You want to make sure that it's somebody that can be a good steward of that money. And so yeah, you are hands off on the deal. As an investor, the way that it's set up is you can't make decisions because of how it's structured. And then you're really leveraging the time and the expertise of people that have gone before and done it, and people that are in real estate full time, like us, that have analyzed thousands of deals, worked with lots of investors, seen how these deals compare to other deals, what markets to target, and you're really leveraging the time and the expertise of the people in it so that you don't have to do that. And so that's where that great relationship comes in. That's really important. So, Mike, do you want to maybe talk about kind of that relationship of finding that operator or the general partner in the deal to place your money if you want to invest it?
Mike Gengler
Yeah. I mean, you want to find somebody who's, who's done this before, who's got a good track record of success in here. And you're looking for somebody who does this as a full time job. That's what we do, is we're looking at deals every day. This isn't something that you want to put your hard earned money into. Somebody who does this as a side gig. This is where the expertise of having looked at hundreds of deals a year, thousands of deals overall, comes into play, of knowing and recognizing what to pursue further and what not to, and knowing when to back out of a deal and knowing when to push forward and recognizing an opportunity to find some more of those home runs and not missing on those. So finding an operator who's done this before, who's got a track record of success, is super important. And you want somebody who's open with you, who's communicating what you're getting in each deal, what the time period is, what the risks are, what the benefits are, that communication is super important and knowing what you know, how your money is going to perform and when you can expect things to happen. Syndications can be put together in a variety of ways. There's buy and hold, where you're getting cash flow and the property value isn't going to go up that much, but you're going to be getting monthly or quarterly payouts. There's appreciation plays where you're putting your money in and you're waiting for the property value to go up over time, so you might not be receiving a contribution on those. And then there's value adds. There might be a much larger raise on those so that you can put more of that money into the property and then see a larger value increase. Down the road. And so there's preferred returns. There's a lot of different things that you can get for your money in a syndication. And you want to work with somebody who's upfront with you about how that's going to work. So with the syndications that we've done, we've, we've done all of them. So we've got one where it's just cash flow. You know, every quarter we send out the check, we've got one where it's an appreciation play, we've raised the rents, we're looking at a refinance. But the investors on that one haven't gotten anything yet because we told them it was an appreciation play. And then we've got a big value add project going on where again, no money for the first year is coming back to the investors, but then there's going to be a much larger payday at the refinance period. So knowing what you're getting into and working with somebody who's got experience is super important.
Mike Swenson
And then too, like people can invest in different types of asset classes, right? So there might be a syndication where it's an apartment. That's kind of what we've worked on. There could be self storage, mobile home parks, commercial investments. So there's all different types of syndications out there. So you're kind of looking for what's an asset class that I'm comfortable in and excited about investing in. And then where's the location of that? Do I want it to be close to where I live because I understand the market a little bit more? Do I truly just trust that relationship of the person that I'm working with? It's in a state that I don't live in, you know, and so there's lots of things urban area, suburban area, mid sized, smaller cities out in the middle of nowhere. There's so many different places you can also invest. So there's just lots of opportunities. And so you're just looking for a fit. And the one thing that I will say is for a lot of these holds, you're looking at five years plus. And so this is a relationship that you're making with somebody. This isn't just, hey, I'm putting in my money in a year from now. Now it's possible some of those are shorter term investments, but this is a little bit longer of a hold period because it's not flipping a single family house, you're maybe flipping an apartment building. Well, it takes time to flip an apartment building over the span of a Couple years. And so this is more, you know, looking for people that you like to work with. It's, it's a longer term relationship. Who can you trust? Who can you see five years from now, me still being excited to have this person, you kind of stewarding my money. So it's not just a quick decision where like hey, if I put my money in a stock and it doesn't perform well, I can sell in three months, I can sell in six months, I can sell tomorrow. Here your money is held for a little bit longer. Have you ever heard the phrase you're the average of the top five people that you hang around? Well, real estate agents, I'm excited to increase your five with you. We're launching the Real Freedom investor Agent tribe to help you get educated and connect with others to build your real estate investing journey and also to help you along the way as you're working with real estate investors. So come check it out on our website. Realfreedom.com go to the store. We have a membership, we have a mastermind group and private coaching to help you stay accountable to your real estate investing goals and to make sure that you connect with like minded people to accelerate your progress and to cheer you on along the way. Check it out. RealFreedom.com click on the store. The other thing I should mention is there's kind of two types of syndications. One is so they have this, this guideline that the securities and Exchange Commission talks about. An accredited investor. So an accredited investor is determined to be somebody that single handedly has an income of $200,000 in a year or if you're filing jointly with a spouse or significant other, $300,000 and then also $1,000,000 of net worth. So if you have that, you can invest in certain types of deals. If you don't have that, then you can invest in other types of deals. And so the person that you're working with, that operator, you need to find out do I have to be an accredited investor or not? That makes a big deal. Operators also put forth a minimum investment amount. And so the size of what you have available, you need to find out is, is that big enough for me to be able to invest with the person that I want to invest with or not. And so that's where you know lots of different variables for you to look at. So that's why we want to help you find a good f. So if I've kind of looked at people, I've talked with people, interviewed people, find somebody that's kind of A fit. After that, you know, they identify a property that might be something I'm interested in investing in. What happens after that? Mike?
Mike Gengler
Yeah, so your operator is going to do due diligence on a lot of properties. And so when they bring you a property, if they're doing their job correctly, this isn't just the first property that they found. This is the one that went through the due diligence process that they found to be a good opportunity that's going to give you the returns that you're looking for. And so you still want to look through what they did, make sure that they've gone over the financial documents, that there's been an inspection on the property, that there's plan to be one. That can often happen after you're given this information. But yeah, you're going to look through and see if that's the type of deal that works for you. If you're looking for instant cash flow. And it's an appreciation play that'll be in there of how you're going to get paid out. So make sure you read through that and you're getting the information that you need. You're also going to receive a private placement memorandum. This is going to be the legal document that describes your rights within the syndication. You want to make sure that you understand that. So they're going to be long, they're going to be very legalese. So you can send that to your own attorney to make sure that you're being protected. But make sure you understand what you're getting into and what your rights are as a limited partner and what the responsibilities are of the general partner. There are going to be, you know, if the PPM is written correctly and you've got. You're working with a operator who's on the up and up. There's going to be a lot of stuff in there about their responsibilities, their contributions, and what your rights and privileges are as a limited partner as well, and how you're going to get paid out. So making sure you read through all that, you're understanding that they're probably going to have some sort of meeting, whether it's in person or online. Going over and explaining all this, that's part of that good communication that you're looking for in an operator of going through how the deal is going to work for you. But then again, just doing your due diligence and verifying that what they're saying is matching up with what's in the legal document as well.
Mike Swenson
Yeah, for sure. And the idea here is this Operator is putting together a plan of, here's what we see happening with this building over the five years we're going to hold it, or 10 years that we're going to hold it, or forever for some people. So whatever that looks like, we're putting together a plan. So just kind of like a business plan, right? If I were to start a new business and say, here's how I think this business is going to perform, year one, year two, year three, year four, year five, an operator is putting together that same plan. So they might say, hey, year one, you know, is just kind of a level year. However, starting year two, when. When tenants, you know, start to renew their leases, we're going to increase the rents. There's. It might be a renovation plan in there. And so you're looking at, you know, how does the time when I start my investment in this real estate deal versus the time that we're potentially looking to exit or do some sort of refinance, what does that look like? And then really, that's the operator's job is to try to hold. Hold to that plan as best as possible. Now, we know life happens. We know that, you know, as much as we can put a plan in place, things don't happen according to plan. But you want to look at that plan and see, is that something that I'm comfortable with. So just like Mike laid out, that's the private placement memorandum. It lays out that entire plan after that. If you say, hey, I like the operator. I like the plan on this property. And it comes down to two things. It's, you know, there's a subscription agreement document which says, then, okay, here's. Here's what's going to happen. Am I in? And if so, here's my information. And so I decide to sign and become a part of that. And then I wire the funds. So there's really kind of two things that happen. After all the information looks good. Everything they've told me, I'm on board with. Sign the doc, wire the funds, and then after that you're in the deal. Then, you know, at some point, either the closing comes or the closings already happened, depending on the size of the deal and where you're at, and then you're in the deal. And so now we're just in the holding period. You're letting that operator operate and put together their execute on the plan that they said they were going to put together and hopefully stay on track. And so then they will keep you updated on kind of where things are at and Let you know. And so it's, it's passive to you at that point. You can certainly contact the operator, hey, how are things going? Or maybe they communicate through monthly or quarterly updates. But then it's kind of in that hold period. And so like we said, for a lot of people it's, it's probably a couple years at least, maybe 5, maybe 10, maybe more, depending on the asset in the strategy. But once they've kind of executed on that plan, what, what happens after that? Mike?
Mike Gengler
Yeah, they're going to go through their, their whole period and execute their plan. It's generally going to be some sort of renovation of the units, adding in better management. We found a lot of properties that are just being very poorly managed. And so that's a very optimal value add of just getting solid management in there. But yeah, they're going to go through that. Let's say, you know, you've got a three year plan on how you're going to handle the first three years. Year one, you're not going to get any cash flow. Year two, you're starting to see a little bit of that cash flow, so you're getting those quarterly checks. And then year three you've got a refinance. So you'll see in a lot of these PPMs that there's going to be either a refinance or a sale option. And so understanding what both of those mean, if you're getting in with a trusted operator, they're going to look at the market at that time and figure out what the best option is for your money. And for their money as a trusted operator, they're likely putting money into the deal themselves as well. So they want to make the best decision that will make them the most money. And if they've set this deal up correctly, the decision that makes them the most money will also make you the most money as well. So the refinance, what that means is you're going to go in just like a home refinance. You're going to refinance the apartment building, probably about a 75% loan to value ratio on that. So if they've increased the value enough by the time they do the refinance, they might be sending you back anywhere from like 50 to 100% of your money that you put into the deal, but it doesn't affect the amount that you own on the property. So you could be getting all of your money back at that point and then you'd still have the same ownership stake in the property. So you would then Be still cash flowing on the property. The value, the property value would still be appreciating. All of those benefits are still there, but you've already been returned that money that you invested into the property. So you can then go invest in another option. If they go with the sale option at the time, again, ideally the property value has gone up. You'd be getting much more than the money that you've put into the property. Plus the cash flow that you've already received. There's a lot of options at that point. Ideally you're putting that money into another investment to avoid capital gains taxes. We can do something called a 1031 exchange. So there's a lot more details that go into, you know, how we roll the snowball down the hill at this point and really get the cash flow going for you that we'll talk about in a future episode. But yeah, the refinance or the sale are the two options at that point. Or just holding and doing nothing because that's what the market dictates.
Mike Swenson
And one more thing, on the sale, this will be future. As Mike alluded to, a 1031 exchange is a way that you can take the money that you've made on a real estate deal, pour it into another deal and not have to have a taxable event. And so if you're looking for this as your nest egg for retirement, you can do that and not pay the capital gains taxes on the time of a sale. Which if you were buying your own duplex and you sold it at some point for a profit, you can do the same along with that. But that's a way where hopefully you avoid paying taxes too. And so that's kind of the long term growth we talk about with real estate is you've got this nest egg that builds and grows and grows and trying to find ways where Uncle Sam can hold off collecting in the future. So there's strategies there where you can do that. So that's all the stuff that a good operator will talk through with you. Ideally, at the time of that sale, maybe they've got something else lined up that you can put that money directly right into. When we're deciding to sell a property, we're looking at can your money grow faster in the existing property or can we find another property where we can kind of add that value and boost and help you grow your money faster? So that's what a good operator does. So all this stuff can be passive to you. You don't have to, like I said, find the tenants, repair the property Answer the no toilet working call in the middle of the night and still have your money invested in real estate with full time professionals. And so there's a lot to that. But hopefully this episode shared a little bit about how that syndication process works. If you guys have questions, you can reach out to us. Our information's on the website real freed.com invest. So that's R E L freedom.com invest. We'll lay out that plan, have a call to action for you to, if this is something you're interested in, we'd love to help out, answer questions. You know, Mike loves talking to investors. We've, we've answered a lot of questions in our day of how does this work? Tell me more about it. And so we're certainly happy to do that. And so that's the spot to do that if you want to reach out and potentially invest in our deals. You know, we're looking for people that our goal is to make this barrier as low as possible for people to get their money into real estate if they want it, invest in real estate. And this is a plan of a strategy to be able to do that for you. So put your money into real estate. If it's something that resonates with you and you want to invest with us, we'd love to be able to partner with you. So reach out and let us know. Mike, anything else that you want to add?
Mike Gengler
Oh, excited to work with everybody. Excited to help everybody out. Like Mike said, I love talking to people about investing and how it can help you in the future. So looking forward to hearing from everybody.
Mike Swenson
Thank you guys. Hope this was educational. Reach out to us, see if they have questions.
