Investing in Real Estate When Banks Aren’t Lending – Using the Real Estate Syndicate
The recession has caused a significant drop in property values, and interest rates remain at historic lows. This would seem to indicate an optimal opportunity to invest in income producing real estate, so why isn’t everyone out scooping up bargain investments? Unfortunately, just because interest rates are low does not mean that banks are eager to lend. Those banks that are willing to invest in real estate are requiring significant loan documentation, excellent credit, and most importantly, are requiring investors to put a minimum of 25% down on the purchase price. Unless you’ve got cash stockpiled, this real estate investment market seems out of reach to all but the big players.
Are there any opportunities to get into the real estate market if you don’t have the cash?
A real estate syndication allows individual investors to pool their money to invest in real estate when other financing opportunities are not available. The typical syndicate combines the money from investors with the experience of a manager, and usually has a three phase cycle. Phase one consists of organizing the syndicate, acquiring the property and marketing the property. Phase two consists of management of the property for the benefit of the syndicate members. Finally, in Phase 3, the property is liquidated and the investment profits are distributed to the syndicate members.
Most aspects involved in creating your own real estate syndicate can be accomplished without a lawyer. Real estate syndicates typically operate as limited liability companies (LLC’s) because LLC’s permit flexibility in the management and capital structure which may be helpful if members of your syndicate will be contributing services or other non-cash investments as part of the capitalization of the company. Setting up an LLC is typically accomplished by filing articles of organization with your state’s corporations department, and then having an operating agreement prepared, all of which you can do yourself.
Once the entity is established, you will need to prepare a prospectus/business plan and have a private placement memorandum prepared in order to raise capital from investors. Selling securities typically requires complicated filings with the SEC and the state corporations department. However, in order to stimulate small business development, both state and federal law provide limited exemptions for the sale of securities to capitalize your syndicate.
For example, under Section 3(a) the U.S Securities Law, you can use the intrastate offering exemption if: (1) your syndicate is organized in the state in which it will offer the securities, (2) the company will carry out a significant amount of its business in that state, and (3) only offers the interests in the syndicate to residents of the state. Under California’s limited offering exemption, you can raise up to $5 million if your offering satisfies California Corporations Code 25102(n) and you comply with the regulations concerning your marketing and sales methods. In addition, in California, licensed real estate brokers are allowed to sell interests in real estate syndicates without a broker-dealer license from the California Department of Corporations, although turkey property citizenship using a broker eliminates the ability to use the limited offering exemption under California law.
Having a lawyer guide you through this process of selling securities is typically advised, since the state and federal laws and regulations governing the sale of securities can be complicated. Having an understanding of the exemption you will rely on before you see an attorney can save you time and money.
After the syndicate is established and capitalized, the manager of the syndicate can begin looking for a suitable investment property. Having sufficient cash on hand to make a 25% down payment and to pay the anticipated first year operating expenses will go a long way towards satisfying the concerns most banks have regarding lending in this real estate market. More importantly, if you’re successful in raising the cash to acquire an investment property without the need for outside financing, the syndicate which will generate immediate cash flow plus the possibility of profit from the property appreciation will present a highly attractive investment option.
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