By James Furlo on
Exploring the Basics of Real Estate Syndication
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- 00:00 Introduction and Welcome
- 00:40 Understanding Real Estate Syndications
- 01:43 Roles in a Syndication: Sponsors and Limited Partners
- 05:33 The Value of Communication in Syndications
- 07:10 Why Invest in Real Estate and Syndications
- 13:11 Types of Properties for Syndications
- 18:10 Conclusion and Wrap-up
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Read the Transcript
James: We are live. So so let's do it. And what I'd like to say is welcome to the Furlo Capital Real Estate Podcast. And this is where we dive into the intricacies of passive real estate investing. And our mission is to equip people so that they can invest wisely, both in property and in people. And so that we can build wealth and improve housing together.
And I'm James, and this is my wife, Jessie. Hi, I'm glad to be here. Yeah, it's fun to be here.
Jessi: Yeah, so tonight I actually get to quiz you Which is awesome. Usually you get to ask questions, but I get to ask the questions. So We're just going to go back to the basics. Okay. And maybe take a step back and talk about a big word called syndications.
James: Ah, yeah. Which is like hard for me to spell sometimes , so it's not a spelling bee. Yeah. Thankfully you can, you can. SSYN Ds. Yeah. You
Jessi: know, syndications, vacations, whatever. Anyways. Yeah. Not vacations, but syndications. Yes. So. So, I know that you're getting into syndications, and this is kind of a new endeavor so what are they?
Just tell us kind of the details, give us the rundown, what is a syndication?
James: Yeah, so there's a legal side of it but fundamentally what it is, is a group of people pooling funds together to go off and buy something. And typically that something is larger, because if it was small, you wouldn't necessarily need to pool funds together.
And, and it's. A group of people, not necessarily two or three, something like that would be more like a, a joint venture and would be relatively straightforward from a legal structure standpoint. But this one really is just bunch of people. And, and usually there's two sets of people who are part of it.
There's as myself, which would be like, I go by all sorts of different names. It's the sponsor. It's the general partner, sometimes also called the operator. It's the person. Doing the work and the thing or it doesn't have to be and person. It could be a group of people who are actively Managing buying funding finding whatever doing all this stuff.
Okay, and so and then there's the second group I guess Right, which would be the limited partners and they are typically bringing the funds to the table. So what
Jessi: are like If you were to break it down into like, here's what I do and here's what limited partners do, like give me the like top three jobs that each of those people
So the sponsor myself, my main job again at a very high level is to do the active piece. So it's Finding a property is probably the big one and doing all the negotiations around that doing the underwriting to make sure that the deal makes sense. And, and then the other piece of it, I would say is the actual acquiring side of things.
So it's raising funds from individual meeting with banks and getting, if you're lender involved, having them. Do the financing piece going through and doing all of the due diligence process during the purchase piece and checking in on the The previous expenses when like the previous income and expenses from the previous owner Going to Oh working with a lawyer to get the legal documents all set up putting together the property prospectus
Jessi: So it's pretty much everything related to buying the property except putting money into it Which correct do you put money
James: into it?
Yeah, it can happen. I would say most sponsors do put some sort of money in. It kind of makes
Jessi: sense. It shows that you're willing to purchase this property with your
James: own money. Yeah, you're like, I think it's good enough. Yeah, it's kind of interesting. I've had this conversation with people about Like, should you put money in, should you not put in?
And honestly, there's, there's two things that the sponsor is risking. The first one could be their own cut, their own capital, their own money. Then the second one is their brand and reputation, because if I find a bad deal or don't manage it well and turn it into a bad deal, that it's probably the last deal that I will ever do.
Yeah. And so that's actually a huge one. That's even a bigger one than losing money because money can be re earned and got back. stuff like that. That makes sense. By the way, you asked if there's like, what are the top three rules? So it's finding the property, actually acquiring it, going through that process.
And then there's the asset management stage. So now I own it. I am not personally going to manage the property on the day to day stuff, but I will manage the manager. I will manage through the bigger capital expenses. I will also make decisions on, okay, do we like. When does it make sense to sell or refinance, do that kind of stuff.
And then they'll see it on the back end to that final transaction that happens working with a broker to get it listed, doing all that stuff. And so that's primarily what the
Jessi: sponsor does. So then the limited partners. Just give you cash.
James: Yeah, primarily. Yeah that is their job, right? And that's, they are passive investors.
And interestingly, legally, they are not allowed to be involved in the day to day operations. Interesting. Yeah, that is what, so to be limited means that you have limited liability. That's the key here. So, if for whatever reason the property goes under, or they lose everything, Or it gets sued. They cannot go after that limited partner.
Now they can lose all of their funds. That can happen, but they will never go after their own personal house, their other assets, those are wholly protected, as long as they are truly limited, in the sense that they went, here's my money, I trust you, go do it, and, and that's it. They get reports, they should probably read those, but I'm sure they don't have to.
Okay, yeah, one
Jessi: of your jobs is to communicate to your investors what it is they're putting their money towards, and why they might put it towards this versus that, or, You know, whatever you find. Correct.
James: Yeah. Yeah, that's the other thing. I will regularly, as a sponsor, I will give regularly, quarterly updates.
Here's what's going on with the property. Here's its performance. Here's maybe some repairs we're doing. Here's some questions coming up. You know, whatever. And how would
Jessi: someone expect to get those? Like, do you call every individual investor? The quarterly
James: reports? The updates, yeah. Is that like an
James: A podcast? Interesting. Yeah, at a bare minimum, it's an email. Okay. And it's just like text, maybe some numbers, maybe some attachments, spreadsheets or something, that kind of thing. And depending on if it's complicated or if there's a nuanced piece there, I could potentially make a video that goes with it that says, hey, this is just easier if I show you the spreadsheets and explain it to you in video.
And then if there are questions, I'm always happy to hop on the phone, hop on Zoom. That was
Jessi: my next question, was like, I'm guessing that you would be available if investors did have questions or wanted to follow up or even just wanted to know more. about the numbers or how it
James: works. Yeah. Yeah. Like I've talked to some people who they just don't know a lot about investing and how real estate works.
And this is an easy way for them to get in and start learning. And so they are curious about how it all works together. Cause everything I described that the sponsor does, like that's what an active investor does, no matter what size the property is. And so. If you just pay attention and ask a lot of questions, you can learn a lot about the entire process and some, and some passive investors choose to do that.
Jessi: So that leads really well into my next question, which is why would someone want to join a syndication if they could just do it themselves or. They can learn how to do it. Like, why would someone join a syndication? Like, A, in general, but then B,
James: with you. Yeah, because I was going to say, I think there's two levels to this question.
There's the first, why real estate? And then there's, okay, within real estate, there are all sorts of strategies and types of real estate. And then why a syndication specifically? And, that's a great question. Real estate, we'll start with a general run. Real estate has some advantages and disadvantages over alternative investments.
And there are really just four types of investments that are out there. There's, there's the commodities. Silver, gold. That kind of stuff. And you can, you can buy those, like you can buy physical gold and silver and call it an investment. Some people put Bitcoin into that category. I think they're dumb if they do, but that's, that's an option.
Yeah. Another one are what they call paper assets. And so these are, I think, stocks and bonds. You are owning. The paper of another type of company, and that's all the stuff we see traded on the stock market is fairly liquid, which is one of the nice parts about it. There can be some volatility. Some of them pay dividends.
Most of them don't. You have, as an investor, unless you own a significant piece of it, zero say into how it is being run. And commodities are kind of like To go back to that, like, depending on what you go, like, physical gold, it could be hard to sell, it could be hard to store, there are definitely that, like, all sorts of questions around that.
There are some people that they will buy, like a paper version of gold in the sense that they own a company that owns gold. Okay. Yeah. Interesting. Or they're, like, trading gold futures or something like that. They don't actually own any physical gold, which still puts it in that paper. asset category.
Alright. Same thing with oil. People don't, a lot of
Jessi: people don't. It's like a paper asset backed by
James: gold, I guess. Yeah, essentially. Yeah. The, so, you got commodities, you got paper assets, and then you have businesses, which is kind of fun, right? And so this is Like a car wash. Yeah, so I, yeah, car wash. Or a laundromat.
Yeah, those are small businesses. Yeah, no, they totally are. Like, I would say, like, okay, I used to work for Arby's when I was in high school. That was a franchise. You can buy into that franchise. Who owns that? Run the business. There's some cash flow. Sure. I know a guy. He owns a bunch of the subways in the area.
Cool. And so that's another example of a business or Yeah. You own a construction company or a nail salon company detailing business or whatever. You are a lawyer. Yeah. Our
Jessi: daughter currently wants to own a hair salon or she wants to do hair. So however that works. Yes, yes, yes. We're trying to convince her to own the
Yes, exactly. And so that's another like. Business is another type of investment. And then you have real estate is a fourth kind that's out there and you can kind of see how they're they all kind of pull together. And Oh, the nice thing about a business is that usually has pretty decent cash flow. It's really illiquid.
If you want to sell, it's hard to sell because I. Because it's often very dependent on that single operator to do it. Now, if you can grow the business enough, when, you know, then things change. If it runs by itself. But that's hard. Yeah. Sure. And it's just not, it's not easy to get there. And so, that's some of those things.
And you gotta like, there's like, entering a business isn't just, like with a paper stock, you buy it, you're done. Yay! No, like I've, we've got another friend, he bought a steel business. And I was asking him, I saw him this week and we were just chatting, I was like, yeah, how's it going? And he's like, Oh, you know, I'm working like 60 to 80 hours.
This is a hundred percent of my time. This is all that I think about, but they're growing, they're doing cool stuff and it is all consuming. And he used to do real estate stuff. He goes, yeah, I'm out. I just, I can't. I can't even focus on that. I am all in on this right now because he doesn't have a choice to make it.
Yeah, he's got to make it work. Yeah, exactly. And then there's real estate, which in some ways feels like a hybrid, right? It's a bit of a business because you got people paying rent, you got a P& L. It's a bit of bit like a commodity because it is based on this real you know, real land. Yeah. That kind of thing.
And then syndication specifically, people aren't buying the property. They're buying a mini business. That then owns this property. Interesting. Yeah. And so Kind of like a paper asset. Yeah, exactly. Okay, so that was a really roundabout way of saying there's these four types of investments you can make.
Four types of assets you can buy. And why real estate? And the government wants you to own real estate at the end of the day. And so there are some advantages. The income from rental income and from selling is less than if you worked a job. And That's nice. Another nice part about real estate versus, like, say, stocks.
Wait, the income, the income tax? Yeah, the income tax. Oh. Sorry, yes. for clarifying. I was like, the income is less? Let's hope not. Sometimes it feels that way. No it's the income is taxed less. Yeah. So there's some tax advantages, especially with things like depreciation. That's huge for real estate. Unlike stocks, oftentimes there are, like, there's cash flow from it.
Again, some stocks pay a dividend, but we're talking Very small percentages, whereas real estate can have a more significant percentage. It can be a meaningful part during the hold of that asset. Another part that I like in real estate versus, say, stocks is I can personally add value to this investment. I can do something to make it better, more valuable.
How I market it, how I fix it up, I can make decisions. And as a passive investor, yes, you cannot be involved in the day to day operations. But we can get on the phone, and we can talk, and you can have a say, have an influence, have a, and, you know, ask pointed questions, and kind of change the directory, change the trajectory indirectly by being involved.
Because you know who I am, and you have access to me.
Jessi: Just, like, I'm sure you'll get into this on other podcasts and, you know, down the line, but do you have kind of a general type of property you're looking for or a general plan as far as like, we like to buy this type of property and we like to do this to it.
Yeah. And here's what you can
James: expect to get. So there are types of properties that work very well with a syndication and some that don't. As a general rule, larger ones work better because if you're going to syndicate it, that means that you're going to get a lawyer involved and those fees are usually a minimum of 15, 000 to get it all done.
So you need a property that has It's that kind of buffer in it, which kind of bumps you into that larger category. As a general rule, you also want something that has some sort of value add, some sort of opportunity to make the property better and move it up. You're not just going to buy it as is. I think you should always buy real estate that way, but syndications are especially tuned for doing things like that, for holding it for three to five years.
In some ways, it's a long drawn out, fancy flip. Interesting. Okay.
Jessi: Yeah. That's a neat
James: way to think about it. And so, because the flip is, you buy a property that is in bad shape, you do a whole bunch of improvements, maybe you get a tenant in, maybe you don't, and then you end up selling it to someone else.
And this was, same thing, property's got something wrong with it, it's in some bad shape, and you fix it up, make it better, and because it's a larger building, the way the math works on the value of the building is all tied to the income of it, and so you can very quickly You can easily say, oh, we added value and then sell it.
It just doesn't happen overnight. And like a flip, you can get it all done in like six months, maybe a year. This is more like three to five years. Interesting. And yeah, and so. Those are the kind of property. So I'm looking for a little bit larger, looking for multi family because you have, it reduces a whole lot of the vacancy risk because you just have more people who are paying.
You can hire a property manager to do it, things like that. I could see self storage being another very easy one because they're a little bit bigger for all those exact same reasons. Industrial, probably not as much because you just don't tend to have as many tenants. But it depends on the type of industrial.
Like maybe you find More of a complex where you do have a bunch of smaller industrial businesses who are taking up say 2, 000 square feet in a 26, 000 square foot area. So you actually have whatever it is 13 different Tenants sure that could totally work same thing for office or retail I wouldn't necessarily go and buy and a building with an tenant I would look for something that has a little bit more just for that vacancy risk piece.
Like a mini mall. Yeah, and I personally like multi families just because there's a lot of them. They're easy to value. There's typically a lot of buyers, so it's easier to exit on.
Jessi: Seems like I can wrap my head around that too, because it's like I have a place where I live. Yeah. And so does everybody else.
Yeah. Whereas, like, I don't have a mall. I don't know.
James: I don't know. Having said that, I view myself as an opportunistic investor. Like, at the end of the day, if there's a cool property where the numbers make sense, I'm gonna buy it. I'm gonna ask about it. Having said that, I fear I've Strown away? Strown Straight away?
Stayed away? I don't know. And, I have, I've avoided, thank you, that's a good word. I've avoided some, like, recreation type of stuff. Like, for example, I looked at a, a campground. At one point in time. Super
Jessi: interesting. What? You passed
James: on a campground? Yeah, well, so, it was, it was a campground that had turned into, like, long term, super low income.
type of place. I know. Like mobile homes. Yeah. Interesting. But there's people in trailers hanging out. But it was near a cold river. It was a vacation spot. And so. That sounds
Jessi: great. People in trailers hanging out by
James: the river. Yeah. Totally. So the idea would be go in there. Rehome everybody. Aww. And, which is hard.
Like, and we will eventually have that conversation. Sure. But, and then turn it into like a traditional campground. Like an Airbnb. Interesting. Essentially. But I had like all sorts of questions, like I have no idea how to operate this thing, how to advertise it. I could see if it was, if I had started out with like a single family home or a studio and kind of got my feet wet on doing vacation rentals to then say, Oh yeah, I could totally do this 50 slot RV, like campground.
But I was like, I just don't know anything about this. And I didn't know anyone who I could potentially partner with who could be that operator to go in and do it. And so I stayed away from that. But I mean, in theory, it could work.
Jessi: Cool. So you have told us what a syndication is, essentially a group of people pulling their money to buy a property.
Yep. And you have told us why it's maybe a good choice. It's passive
James: and you don't have to be involved. Yeah, and it's not the only choice and it's not the be all choice. Sure. There are a lot of other things that could fit people, but this one's a really good choice. Because it's really well rounded.
Right. And especially as a passive person, it's, it's nice. Yeah. Because you don't have to mess with it. Yeah.
Jessi: Someone, and, and you kind of pointed out like. If someone's interested in real estate, this is a good first step because they're not doing all of it, but they can learn along the way.
James: Yeah. Which is honestly the reason why a lot of people don't get involved is they either don't have the expertise or they don't have the time.
Sure. And even if you own a single family home, as we know, and we will in our next episode talk about our very first property, which is a duplex, like there's a huge learning curve just for something small. Sure. Yeah. And this avoids most of that. Awesome.
Jessi: Well, thanks for explaining that.
James: And thank you for listening.
And if you found this helpful, please like this podcast on wherever you listen. And if you're able to leave a review, we would absolutely love that. Have a great day.
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