These past few years, real estate media headlines have been filled with a word that is probably familiar to most investors: syndications, and its cousin, crowdfunding. While syndications have been around for decades, crowdfunding is a more recent phenomenon, introduced by the Jumpstart Our Business Startups (JOBS) Act in 2012.
Both syndications and crowdfunding are a way for companies to raise private money for their projects, while offering investors a way to passively participate in deals they might not be a able to do on their own.
With so much money flowing, it’s become increasingly important that you know what you’re doing, so you don’t lose your money, or worse, someone else’s!
I have been to many events lately where I’ve met brand new investors who are now syndicating deals. One man had only been investing in real estate for 3 years and had already raised over $8 million for his latest multifamily project. He was just about to syndicate another one and asked if we could partner. When I asked a few basic questions about the pro forma, it became very clear that he was only using “blue sky” projections. He clearly has not looked at history to see that rents never rise forever, as nice as it looks on paper. He also hadn’t accounted for rising property taxes and interest rates, that would dramatically affect NOI.
It’s vitally important for the syndicator and investors to keep in mind that we are at the late stage of this real estate cycle. The massive growth we’ve seen in real estate over the past 10 years won’t likely be the same over the next 10 years. Pro-formas need to reflect that.
Hunter Thompson is the Managing Principal of Cash Flow Connections a private equity firm that has helped more than 250 accredited investors diversify into recession-resistant real estate. Find out:
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