Real estate syndication is a great way to access larger deals and provide a solid return for all investors involved. But inexperienced syndicators can make costly mistakes that can ruin a deal or even land them in hot water with the SEC.
One of the most important things to keep in mind when putting a deal together is to build in a margin of safety. It’s rare for things to go exactly as planned, so make sure to account for unexpected setbacks in your bottom line numbers.
Here are 5 common mistakes syndicators make and how to avoid them:
- Choosing the wrong partners: The general partnership should have experience in the specific asset class you’re working on. For example, if it’s a rehab, one partner should have construction expertise. Also, look for partners who have navigated past downturns and can help mitigate risks. Make sure everyone on the team is on the same page and that expectations are set early on.
- Skipping legal diligence with the SEC: Keep in mind that syndication deals are considered securities and must comply with securities laws. Before taking any money from investors, have the necessary documents drafted and registered by a securities attorney and have them sign off. Additionally, advertising a deal before it’s registered with the SEC is not allowed, unless it’s a 506C or crowdfunded deal.
- Forgetting to do proper due diligence on the property: Before investing in a property, make sure to thoroughly investigate it and understand its potential and any risks. Research the location, the condition of the property and the potential for appreciation.
- Failing to properly structure the deal: The structure of the deal will determine how the profits and losses are distributed among the investors. Make sure that the structure is fair and legal, and that the expectations of all parties are clearly outlined.
- Not properly communicating with investors: Keep your investors informed of the progress of the deal and any changes to the original plan. Transparency is key to building trust and keeping investors on board.
By avoiding these mistakes, you can reduce the risks of failure and increase the chances of success in your syndication deals.