Tag Archives: Self-Directed IRA

My First Real Estate Syndication: Lessons Learned

I recently closed on an 18-unit apartment in my town using money from a syndication I put together. There were so many unexpected twists and turns getting to the closing table that I realized others just getting started could benefit from my experience. Perhaps my story will help you better anticipate, and therefore avoid, some of these bumps in the road.

This article won’t address finding or analyzing your project. You’ve gone through the home study course, attended a bootcamp (or two) and hopefully have a mentor who can help you with all that. This will start with the assumption that you will need to pool funds from investors to make the deal happen.

First of all, when writing up your offer, try to put the closing date out further than you think you’ll need. Try for 75-90 days, and if you can only get 60, add in an option for a 30 day extension, even if you have to pay for it by letting part of your earnest money go hard. Unless you already have the down payment in the bank, count on ┬ádelays that will have you sweating bullets and losing sleep.

As a corollary to this rule, examine the calendar and try to avoid going through major holidays before closing. I first started working on this apartment deal in early October, and was thrilled when I had a signed contract by October 26. Little did I realize, a 60-day closing put us at December 26, the day after Christmas. Not only was this a holiday, since Christmas fell on a Sunday, but people start taking time off in the week before. Not much gets done between Christmas and New Year’s for that matter. You may be willing to give up family time to get the deal done, but it’s just not as critical for lenders, title companies or brokers. Also, Thanksgiving was in there and took at least another five days off the schedule. Luckily for me, the seller was willing to push the closing to mid-January, but you sure can’t count on that.

If your investors will not be actively running the project with you, but will depend on your efforts to make a profit, you’ve probably created a security. In that case, you’ll need to hire a securities attorney to draft your Private Placement Memorandum, Subscription Agreement and Operating Agreement. You won’t begin that process until you have a signed contract and the clock is ticking. Count on 30 days to get that back. With a 60-day closing date, you’ll only leave yourself a month to get these to your investors, with barely enough time to read through and understand the docs, run them by their accountant or financial advisor, make a decision and get the money into your account.

It’s very important to have more investors interested in working with you than you’ll actually need. I had a list of 26 folks who had expressed interest in being commercial real estate investors, but in the end, only six actually signed up and sent in their money. If it had only been five, I would have been in a tough spot. If you don’t close, you not only lose your upfront cash, you also lose credibility with the investors who now get their money back. Good luck in getting them interested in your next project, and try not to think about how they may represent their experience with you to their friends.

One way to mitigate some of this is to have a range of funds you’re going to raise. Your PPM can let you break impounds (start spending your investors’ money) when you’ve raised enough to cover the down payment and closing costs. Then you have an upper limit you can continue to raise, even for several months after closing. That’s the money that will pay your syndication fee and build reserves. I’m still waiting on one investor’s money to come in, but at least I had enough to close.

The reason his money hasn’t arrived yet is because he recently found out his so-called self-directed IRA custodian wouldn’t let him invest in real estate. So at the last minute, I had to help him roll his IRA to a new custodian that allows this kind of investment. If any of your investors will be using their retirement fund to get into your deal, make sure you know the custodian allows full self-direction of funds, and expect it to take longer than just writing a check. The custodian won’t give their OK until they’ve seen your PPM and Operating Agreement (at the very least).

Finally, when you’re recruiting investors, see if they’re fine with submitting their financial statement and tax returns to the lender, and then signing personally on the note. Most banks will want this from you, as well as anyone who will own 20% or more of the LLC. Even if everyone is below that threshold, they may want at least one of them to sign as a guarantor on the loan. Don’t be surprised if they want their spouse, and yours, to sign personally on a full-recourse loan as well.

I wish I had know all this back in October when I put this together. I would still have done it, and plan to do it again, but at least I wouldn’t have had so many surprises coming at me so quickly. I hope this will help you as you move into your first syndication. Good luck!