Although not necessary for doctors to reach financial freedom, both active and passive investing in real estate are great vehicles for physicians to build wealth. While I really love active real estate investing, passive investing, largely through something like a real estate syndication, remains the more common route taken. However, investing in something like this can still feel a bit daunting.
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Since Selenid and I have not yet invested in a syndication, I asked Harry Zegarra MD to share this process of investing in a real estate syndication. Harry is a practicing physician who has used real estate syndications (as both an investor and sponsor through Nima Equity, a key resource here at PPS) to create financial freedom for him and his young family.
The process of investing in a real estate syndications
Most doctors are familiar with the process of buying a single-family home or rental property. That is the bread and butter of Real Estate Investing in the US. (I’ve also covered this in depth in this post…) You choose the market and neighborhoods, determine how many bedrooms and bathrooms you’re looking for, get together with a lender and a broker, tour potential properties, and then make an offer.
However, when it comes to investing in a real estate syndication (group investment), the process can be unknown, especially if you’ve never invested in syndications before. I have talked with many doctors, some of them have invested in real estate for years, and a good number of them tell me they haven’t heard about syndications before.
(Here is a great primer on the two most “passive” real estate investments – REITs and syndications…)
This is a matter of education and becoming familiar with this type of investment. For this reason, let’s explore the syndication process, from start to finish.
That way, if you feel it is a good investment option for you, you can invest confidently in a real estate syndication.
Here are the basic steps of investing in a real estate syndication:
1. Education, education, education
2. What are your goals when you invest
3. Find an investment opportunity that fits
4. Reserve your spot in the deal
5. Review the PPM (private placement memorandum)
6. Send in your funds
Step #1 – Educate Yourself
As I mentioned before, many doctors are not familiar even with the term “syndication.”
It takes some time and effort to learn new things. You must understand how the investment is designed and how the business plan works. There are many options nowadays to learn; you have webinars, YouTube channels, podcasts, audiobooks, etc. The critical part is; after spending some time getting educated (usually takes 3-6 months for someone to get comfortable with a new investment), you should consider moving forward.
A useful advice is also to talk with other people who have invested before. Then talk directly with syndication sponsors and ask for references.
Most people who invest outside Wall Street like to share their experiences. They usually are willing to help others who consider entering this space.
Harry’s website has some great educational resources specifically geared towards syndications…
Step #2 – What are your goals when you Invest
Once you have a better understanding of these investments and have decided you want to participate in a real estate syndication, consider both your short-term and long-term investing goals. This is the only way that you can be sure to find investment opportunities that best fit your personal goals.
Consider the main reasons why not to invest in a syndication:
- Illiquidity,
- Minimum investment (usually 50,000 dollars or more) and
- Not being able to take decisions on the day-to-day operations
Again, think about the amount of capital you have to invest, the length of time you want that capital invested, tax advantages you’re looking for, and whether you are investing primarily for ongoing cash flow, to help offset your income, long-term appreciation, or a hybrid of those.
Like anything, you need to have a very clear picture of your “big why” before proceeding!
Step #3 – Find an investment opportunity that fits
I really like this mindset. It’s very much like what I encourage for active real estate investors. Make investment decisions based on your goals and numbers (Deal analysis guide can be found here). If a syndication (or rental property) meets your criteria, great! Move forward. If not, move on. No hard feelings or FOMO…
Next step, find a deal that aligns with the goals you defined before.
Full disclosure: you can buy anything through a syndication. From an apartment complex, to a restaurant, self-storage, ATM machines, a movie theater, etc. The same applies for real estate syndications. There are real estate syndication projects available ranging from ground-up construction to value-add assets, and even turnkey syndications.
Deal sponsors most often share an executive summary, full investment presentation, and sometimes an investor webinar. This provides a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.
You don’t need to invest in the first syndication that is offered to you
Take time to properly vet the sponsor team, ask them your questions, and read between the lines of any investment materials they provide.
Take a look at things like whether the business plan has multiple exit strategies (refinance, holding or selling), whether there are signs of conservative or realistic underwriting (for example rents in surrounding similar assets), and double-check whether the proposed business plan makes sense given the asset class, submarket, and current economic cycle.
This is why I don’t consider any real estate investment truly “passive.” There is still legwork to be done by the investor on the front end in the form of due diligence…
Review minimum investment requirements, projected hold time, and projected returns.
Finally, attend the investor webinar (if one is offered) and ask any questions you have. Basically, at this stage, look for any reason NOT to invest in the deal.
Even if you have decided not to invest in a project, review the full summary and get more educated and comfortable. That way, if in the future you find a project that you really like you can invest with confidence.
Remember your first years in Medical School? Don’t be afraid to ask questions.
Step #4 – Reserve Your Spot in the Deal
After you’ve found a sponsor and an opportunity you want to invest in, it’s time to reserve your spot in the deal.
Usually, syndications fill on a first-come, first-served basis. So you’ll want to take the time to ask questions and do your research BEFORE a live deal opens up.
Sometimes, investment opportunities can fill up within mere hours or days. That’s why it’s important to have completed research, solidified your investment value, and have clear goals.
That way, when the opportunity opens up, you can jump on it right away.
The option for a soft reserve may be available. This option holds your spot while you take time to review the investment materials. So, you might combine Steps #3 and #4 by reviewing the executive summary, reserving your spot in the deal, then reviewing the rest of the materials. This allows you the opportunity to back out or reduce your investment penalty-free. When you make a soft reserve, you are telling the operator that you are interested in participating in a deal, but this is not legal binding.
However, if you are late in putting in your soft reserve, the deal may be full by the time you decide you want in. At that point your only option is to join the backup list or wait for the next deal.
Step #5 – Review the PPM or contract
Once you’ve decided to invest in a deal, the first official step is to review and sign the PPM or Private Placement Memorandum.
This is a legal document. It provides in-depth details about the investment opportunity, the risks involved, and your role as an investor. Although reading legal jargon may be no fun, it’s very important you gain a full understanding of the risks, subscription agreement, and operating agreement pertaining to the investment. Heads up! Sometimes these documents are over 100 pages in length. Read it or have an unaffiliated lawyer review it!
As part of signing the PPM, you’ll also decide how you’ll hold your shares in the entity holding the asset. In lay terms are you participating as a single individual or joint (with your spouse or partner) or through and entity (LLC, solo IRA, solo 401k, etc)?
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Creating an Asset Protection Plan for Real Estate Investments
Finally, you need to specify whether you want your distributions sent via check or direct deposit. The PPM is signed by both parties – you and the sponsors. Then, you can request a copy or download it from the investor portal.
Step #5 – Fund Your Investment
Once you’ve completed the PPM, the final step is to send in your funds.
The usual options are a wire or a check. It is recommend sending a wire as it is safer and traceable. Typically, you’ll find wiring instructions in the PPM document or the investor portal. Before wiring your funds, double-check the wiring information. And let the deal sponsor know to expect it so they can be on the lookout!
Final Thoughts
Hopefully, by now, the process of investing in a real estate syndication should be clearer. And also perhaps a little less intimidating.
Syndications are more of a passive type of investment. Your active participation is upfront, during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading and signing the PPM, and wiring in your funds.
It is normal to have some hesitancy and concern initially. After all, it is your hard-earned money. And you are handing it over to someone else to invest for you. This is why the due diligence cannot be skipped or taken lightly.
But remember, the more you learn, the more comfortable you get and the less likely you are to commit mistakes. As you review and invest in more deals, the process will become second-nature.
Although syndications are not for everyone, they are a great alternative if you want to invest in real estate, start creating wealth, and feel that a more passive approach is best for your investment plan.
I think Harry does a great job here a sharing the details of investing in a real estate syndication that maybe can get “glossed over” at times. These are the nuts and bolts that are necessary to understand. I can’t emphasize enough how important due diligence is when it comes to this type of real estate investing. It’s also why I take time to vet different sponsors to introduce to you for your own due diligence. For more educational resources from Harry or to learn about syndication opportunities, check out https://www.nimaequity.com/!
And here are some additional real estate focused posts!
- The Real Estate Flywheel Effect for Physicians (***This is my favorite post and required reading for any current or future real estate investors!***)
- In Depth Analysis of a Bad Real Estate Deal
- Buying, Renovating, and Renting Out an Investment Property
- 5 Biggest Downsides of Real Estate Investing
What do you think? Have you thought of investing in a real estate syndication? What questions do you have about the process? Let us know in the comments below!
