Have you heard the word syndication going around in terms of real estate, talking about doing bigger deals? It’s been all the latest craze over the last few years as people are raising a bunch of money and buying big deals. But it’s a little confusing. I wanna break it down this week and just give you a little bit of insight into it, what it means and how it helps people do bigger deals, but also what you should consider if you are thinking about getting into a syndication deal.

Welcome to short-term rental riches. We’ll discuss investing in real estate but with a specific focus on short-term rentals. Quick, Actionable items to Acquire, Manage and Scale your portfolio. I’m your host Tim Hubbard.

Welcome back to the Short-Term Rental Riches podcast. We’re talking about syndications this week. That is another name really for big deals. It’s a way to pool money together. The Oxford Dictionary literally says it’s a transfer of something for control or management by a group of individuals or organizations. So, the transfer of something in this case is money. So, they’re pulling money together to do really big deals. And this is the way most big deals get done. In fact, almost every hotel is sort of ran this way and big apartment buildings and complexes and shopping centers. Most of the time, these deals are put together by syndicating money. And I remember when I used to work as a commercial real estate broker in Northern California, we worked with a lot of investors this way. I remember I was just a young back back in the day, but it was really good experience. You know, we sold shopping centers, we sold apartment buildings and warehouses and land. I mean, we really worked with every sort of commercial type of real estate investment and we only worked with investors. So, I remember them flying in and we drive around looking at apartment buildings and then all of a sudden, we’re making huge massive offers on these apartment buildings that aren’t even really for sale. But that happens a lot in that side of the world. Those things usually don’t come on the market, at least the good deals anyways. So that’s what syndication is basically pulling money together. But there’s a lot of components to that. So, I want to break that down a little bit more for you. And we’re going to get to some short-term rental stuff here in just a few minutes in the end part of this episode, because syndications are definitely finding their way into the short-term rental world too, where it used to be you just bought a vacation rental, maybe you had a second home, something like that.

Now there’s some big, big deals happen. So, I want to talk about that in just a second. But before we do, there’s a couple main parts to syndication. The first part is what you call the GP or the general partner. And this is the active partner. So, you can think of this in terms of the manager, the person putting the deal together. And then you have the LP, the limited partner, and this is just the passive partner. So, they’re not actually involved in the day-to-day management or anything like that. They’re the ones just giving the money over, hopefully to a trusted GP, someone that actually knows what they’re doing. These deals can get pretty complicated. I mean, they’re really up to your imagination, right? There’s a lot of terms and different components that go into a syndication. It really can be no two have to be alike. But very often there’s some sort of guaranteed or preferred return advertised for the deal. It doesn’t necessarily mean that they’re going to achieve that, right? So, we’ve got to be really careful there. But that’s really the end of the day. Someone’s looking to invest their money and get a return back. But there’s a lot of other components that go into it. So, you might hear terms like waterfall. A lot of times the GP charges an asset management fee. A lot of times they charge an acquisition fee, so a percentage just for finding the property. There’s a lot of different ways you can do it. And of course, it has to be its own business. It’s a partnership. So, you have to file different tax returns. You have to make sure that you’re filing K1s for all the investors. There’s different legal requirements based on the person investing in the syndication. So, you’ll often hear the term accredited investor. This is someone that has a net worth of over a million dollars or I believe is making at least $250,000 a year, although this can change. So, there are different filing requirements. If you’re accepting money from non-accredited investors, then you have to go through a whole bunch of legal paperwork to make sure that that deal is legitimate before you can actually take money from those investors.

So yeah, there’s quite a bit that goes into a syndication, but this can be really beneficial. Really comes down to the fact that there’s a lot of people out there that have a lot of money, but they don’t have a lot of time. And there’s a lot of people out there that have a lot of time, but they don’t have a lot of money. And so that’s one of the beautiful things about real estate is that we can work together and we can do big deals together. But you want to make sure you know what you’re getting into. So that’s one of the reasons that syndications take place just in general. But when we get into the short-term rental world, there’s a few other reasons why this is happening. The first reason is that people or bigger companies are chasing trends now. So, it’s no longer just the single individual vacation rental. Now we have purpose-built communities being completed, being constructed. They require a lot, lot more money and a lot more expertise to be pulled together. So that’s another nice thing about syndication is you can pull people with good expertise and people that have money to invest and it can be a good combination. That is one of the things you want to double-check though. If you’re getting into a syndication, you want to check if the person, the GP, the general partner actually has some experience or do they have money invested in the deal as well? That’s always a good sign that it can be a little more trustworthy.

So, there’s trends happening in the short-term rental world. People are doing bigger projects and there’s more money coming into the space, mainly because people have realized that they can earn higher returns compared to alternative real estate investments. I’m not saying compared to all real estate investments, but you can do very well in the short-term rental world. I hope that you’ve seen that side of things. If you’ve been listening to the podcast for a while, then we’ve talked a lot about just the growth of the industry and the opportunity here, but it’s still here and it’s because people want experiences. They’re looking for alternative travel options and people are really living in short-term rentals now, which I think is amazing. It’s amazing opportunities. So, I’ve kind of snuck a few words out in some prior podcast episodes, but myself and a partner are also doing a purpose-built community. Right now, our plans are for 15 individual short-term rentals down here, Medellín, Colombia, where I’m at right now. It’s really excited for that one. I think it’s going to work out well, but those projects take quite a bit of time. So, there’s a lot of reasons for syndications. It can work out really well for lots of people. We just want to make sure we know what we’re getting into because it can be sort of complicated. Just to kind of recap here, if you have one that you happen to be interested in, you want to make sure that the person putting the deal together has experience in it. Again, if they have their own money invested in it or some of their own money, then that is a good sign as well. If you’re thinking of doing a syndication on your own, you really got to learn the ropes first, right? And we saw a lot of this over the last few years, people going out and doing their first syndication. And unfortunately, a lot of these deals are not working out, not saying that they don’t have the experience, but the economies also changed. And so, what’s happening now is they’re having capital calls. So, they’re going back to those passive investors, those LPs, and asking for more money to keep that deal alive. Hopefully you’re not in a situation like that, but that is going around. We just want to be very diligent when we go into a deal and make sure we know exactly what’s going on.

So, I’m going to leave you just with a little analogy to try to recap this syndication process. One analogy that I heard recently, and it’s about a professional horse jockey, right? There’s three components you need for a professional horse race. You need the jockey, which in this situation, this analogy would be the GP. So that’s the manager running the deal. You need the horse, which is the actual deal. And then you have the track, which the horse runs on and the jockey’s on top of the horse. The track is the market. Obviously, you have to have all three of those pieces to do a real estate deal, right? You need the market, you need a property, and you need someone to manage it. But this is the thing about a manager or a professional horse jockey in this scenario. A professional horse jockey knows how to ride an old horse. So, a really good manager is crucial to any deal. We see this with short-term rentals all the time. We can have two that are right next to each other and they operate very, very differently. One can way outperform the other. So, if you’re looking to get into one of these deals, make sure that your jockey, your manager, your GP that’s putting this deal together really knows how to operate the deal and it’s someone you can trust. And with that, I hope that gave you a little more insight into syndications. There’s a lot of money coming in the short-term rental space. We’re going to see some really big projects over the future. Until next time, I hope you have a fabulous week.

Want to get on the fast track to Financial Freedom through short-term rentals what all starts with the properties you acquire but you want to make sure that you acquired the right properties. I want to give you my e-book that will show you how to do just that. There is no charge, It’s my gift to you for being one of our subscribers. Just go to restmethods.com. That’s R-E-S-T methods.com
RELATED PODCAST EPISODES

• Episode 174: Find out why Virtual management is the future of property management