Thread by @9to5REPE

Had some time on this lovely Friday to make a thread for you all.

How to make money in real estate via syndication:

A Thread 👇

So, you found a deal, negotiated the price and got it tied up for a purchase price of $4M, congrats!

Your underwriting says you need $500k worth of deferred maintenance work and rehab dollars to upgrade the units and raise rents to market.

Your all in for the deal is now $4.5M.

However, you don’t have $4.5M in the bank to drop on this deal.

Now what?

You need to finance the deal now between a lender (usually a bank on an interest only loan), an equity source (investors), and yourself (sponsor).

You’re in luck, a bank has agreed to finance your deal at 75% Loan to Value! You just got a commitment for $3M!

Now, to bridge the $1M gap on purchase price and $500k rehab costs you need to find investors and structure a deal that makes everyone happy.

As the sponsor of the deal you need to have skin in the game and can afford to put up $150k (10%) of the $1.5M equity required to do the deal.

Awesome now you really only need to raise $1.35M! You’re almost there!

You reach out to a couple of accredited individuals you know and within a week you are able to raise the remaining equity for the deal – but these investors want a return on their money so you gave them an 8% preferred return on their investment.

Let’s assume the timeframe of this deal is 3 years. You will need to pay the investors 8% on their money (yours too, you are also an investor!) before you as the sponsor gets paid. This comes out to $360k of pref that needs to be paid out by the end of year 3.

Taking a step back now and looking at the deal from a high level:
$4M purchase price
$500k rehab
$4.5M total cost
75% LTV loan ($3M)
$1.5M of equity with an 8% pref

Your equity is split up as a 90/10 - Limited Partner %/General Partner % (you, the sponsor)

Still with me?

This is a smaller deal so you can probably make your promote split pretty healthy for yourself. Let’s assume a 70/30 split.

Boom! Time flies and you have just sold your repositioned asset in the 3rd year for $8M!

How does this look for you and your investors? Remember, you need to pay back your loan and your investors and their preferred return first.

$8M sale
-$3M to pay off loan
-$1.5M payback of equity
-$360k preferred equity payout
= $3.14M left over

Now, remember our 70/30 split? After the preferred return is paid the remaining profits are now split 70% to the LP, and 30% to the GP even though the equity split is 90/10! This is where the juice is for you as the sponsor.

That $3.14M now turns into $2.198M that goes to the LP and $942k that goes to the GP (you)!

Lets further breakdown the money in your pocket as the sponsor.

$150k principle invested
+$36k preferred return payout
+$942k promote
= $1.128M in YOUR POCKET!
And that ladies and gentleman is how you get rich.

*Please note that this is an extremely simple example that does not factor in the cash flows from the 3 years while you operated the asset and other factors, this is to give you an idea of how this works and how easy it can be to make money in RE using other people’s money.