One of the most curious trends for 2019 going into 2020 was the rise of the “Real Estate Syndicator.” Specifically, capital raisers. It felt like someone stoked an anthill, and these capital raisers started to come out of every crevice. What sparked this?
Per a study published in March 2020, Americans had a total of $14.97-trillion in disposable personal income in 2019. A lot of this capital was invested in stocks and a surge was placed in real estate syndications.
There’s no doubt the passive nature of real estate syndications are attractive. I am a huge fan myself. I am friends with some very well known operators and have been an active participant in putting a couple of projects together.
Here are three ways you can spot an expert or just a trend follower:
“Couldn't say a fly rhyme if there was one right under their noses” – Gang Starr “Mass Appeal”
First, how well do they know the deal they are pitching? Or are they just reciting what they’ve been told? Brad Sumrock and I crossed paths at a recent event this past December and he told me that this is what keeps him up at night. There are a lot of syndicators out there treating this as a multi-level marketing product, arming a bunch of capital raisers to go out and recruit investors for a piece of the pie. These “capital raisers,” are not educated on the underwriting or any other financial aspects and just pass-through their investors directly to the syndicator. Most times they're not even well versed in real estate investments at all. They are possibly risking themselves, the syndicator, the investors and the deal to potential SEC violations.
“With my unique skills, nah, you can't compare me” – Gang Starr “Mass Appeal”
Second, there is an art form to capital raising. On a recent conversation with my friend and mentor, Lennon Lee, he pointed out that a true capital raiser treats his investors’ capital as if it were their own. He has a very thorough process for vetting out operators/syndicators before he will bring his investors to their deal, and it includes some high-level due diligence. Ask the capital raiser, what due diligence have they done on the Operator you are partnering with? Have they done a background check? Have they confirmed previous projects completed or vetted out their previous partnerships? Have they mystery shopped the asset? Have they performed their own underwriting and projections?
“And you'd be happy as hell to get a record deal” – Gang Starr “Mass Appeal”
Lastly, “you cannot get compensated for bringing capital to a syndication. Period.” Kim Lisa Taylor is the top SEC attorney in the nation and has a skill of telling it like it is. She has completed well over 300 syndications, has written a best-selling book and is a highly sought out speaker on SEC offerings. Myron McNeil and I were chopping it up recently with Kim (she’s our syndication attorney) and she pointed out that she had seen a big uptick in syndicators compensating capital raisers depending on the capital they brought to the deal. This a clear SEC violation since only securities brokers can be compensated in this fashion.
“Because I don't need gimmicks, Gimme a fly beat and I'm all in it” – Gang Starr “Mass Appeal”
In conclusion, there are correct ways to be part of a capital raise. There are professionals like Lennon that create and manage funds while partnering with syndicator/operators that they’ve created relationships with. In order to protect yourself from any possible violations, review and ask the above questions prior to committing to an investment. The world of real estate investing is vast and lucrative, but also has very strict guidelines.
Protect your investment.
Don’t get burned.
Make sure you’re playing by the rules.
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