A real estate syndicate refers to a group of investors that pool their money to build or purchase property that otherwise wouldn’t be possible. In our case it’s large apartment buildings.

There is a business plan (aka Offering Memorandum) that details exactly what improvements and changes will be made along with the expected returns for the investment. This typically involves renovations and increasing rents to market rate and detailed underwriting happens as part of this.

There are two parties that make up the group of investors in a deal. The first party involved are the deal sponsors, also called general partners.

The second party are the passive real estate investors, also called limited partners.

This is the group that makes the deal happen, it’s what we do at Line Drive Capital. There’s a lot of different terms that can be used including general partners, sponsors, operators, syndicators… It’s all the same thing. The general partners have these responsibilities:

1. Finds a great deal after reviewing many opportunities

2. Creates a business plan and investment strategy

3. Does physical and financial due diligence on the asset

4. Prepare all legal and regulatory documents

5. Raises capital to buy the asset

6. Closes on it

7. Hires staffing and property management teams

8. Executes and oversees the business plan

9. Communicate with investors and distribute profits

The general partners take on the liability for the loan and the property as part of the deal. At Line Drive Capital we always invest our own capital in any deal we do.

Limited partners provide most of the capital for purchasing the assets and receive most of the profits. The responsibilities of limited partners are:

1. Know and trust the deal sponsor

2. Learn about an investment opportunity

3. Express interest via a “soft commit”

4. Meet the minimum requirements which varies deal to deal

5. Make a formal offer

6. Review and sign legal docs

7. Wire money into the escrow account

8. Wait till closing and start receiving monthly distributions

Limited partners do not have to do any work for the asset or tenants, and they are not personally liable. LPs receive other benefits like taxes that get passed through that we’ll talk about later.

These deals are not open to the general public. There are two types of real estate syndications, and we do both of them, depending on the deal. They are:

1. Accredited Investors Only (called a 506(c))

2. Accredited and Sophisticated Investors (called a 506(b))

Syndications are treated as securities and therefore must abide by SEC regulations. This means there are limits on who can invest.

The Securities and Exchange Commission (SEC) defines an accredited investor as someone who has:

1. An annual income of $200,000 (or $300,000 joint income)
OR
2. A net worth of at least $1 million—not including your primary residence.

You don’t need to meet both of those criteria to qualify as accredited, just one.

How do you prove it? There are a few ways but a simple one is having your CPA or Investment Advisor provide a letter stating you are an accredited investor. Keep in mind providing some sort of proof is required only if the deal is a 506(c) one.

Visit the SEC website for additional information and resources.

There are no income requirements for qualifying as a sophisticated investor.

The idea is that a sophisticated investor has the knowledge to understand the risks of these products, the resources to properly investigate the investment and likely the resources to withstand a higher rate of losses.

Equally important to being “sophisticated”, the investor needs to have a pre-existing “substantive relationship” with a deal sponsor (i.e. the general partner or partners who are presenting the opportunity). If the deal is a 506(c) and you are a considered to meet these criteria, then you can invest in the opportunity

When you join our investor club, we’ll setup a call to get to know you and answer any questions about us. We’ll cover your investment goals, experience, risk tolerance and more.

There’s a lot of ways you can invest but the easiest is cash / savings. If you have a large stock portfolio, considering taking some of that and diversifying into passive real estate. That was my path. One other way is a self-directed IRA. We are happy to chat about more details if you’re interested.

The most typical investments are $50,000 - $100,000.

The business plans always vary but in general we target 3-7 years for executing the plan. This usually includes a refinance in year 2-3 which returns a large amount of your original invested capital while retaining your equity.

The Offering Memorandum (OM) is essentially the business plan for an investment and provides an overview of the opportunity for investors.

OMs will include the following:

• Property information such as the number of units and mix of bedrooms, year built, amenities, plumbing, heating and cooling, current occupancy, etc…

• Location information including demographics, growth, employment and other key details about the market

• Financials including the current profit and loss, pro-forma, balance sheets, capital expenses and projected returns

• Sponsor details about the management team and their track record

• Details about the business plan including upgrades and changes to operations to achieve target goals

• Deal terms for investors including preferred returns, profit sharing, timeline.

If you’re interested in seeing an Offering Memorandum reach out and we’ll get you an example.

A Private Placement Memorandum (PPM) is a legal document required by the SEC and outlines the objectives, risks and terms of a particular investment. These are prepared by an attorney that specializes in PPMs and syndications. It encapsulates what is outlined in the Offering Memorandum into a legal document.

These are the Limited Partners portion of the profits. They may be paid on a monthly or quarterly basis and when the property is refinanced or sold.

This is a monthly or quarterly report that is sent out from the general partners to update investors on the status of the business plan. This includes things like current occupancy, average rent prices and progress on any capital expenditure projects like remodeling or adding dog parks.

This refers to the funds set aside to make major renovations and improvements to a property. Examples are replacing the roofs, re-surfacing the parking lot, adding reserved parking spots and remodeling individual units.

Underwriting is how a deal is analyzed and includes looking at all income and operating expenses. It considers the capital expenditures, interest rates, rent targets and a lot more. Underwriting is used to review a property that is for sale, plug in the financials and use projections to calculate if a deal can be profitable.

It takes a lot of underwriting to find a good deal, we’ve literally looked at hundreds of properties before making an offer. You want to be conservative in your underwriting so you can under promise and over deliver.

As a guarantee for passive investors, there is often what is called a preferred return. I wouldn’t recommend any deals that do not have this. Some sponsors say they don’t do Preferred Returns because it doesn’t align the interests and that is true... it puts the investors first. That’s how it should be in our opinion.

Preferred returns mean a certain minimum is paid out to investors before the sponsors are paid. Usually preferred returns are 5-8% per year, and it means that 100% of all profits will go to passive investors until that threshold is met.

If the deal does not perform as expected the general partners get zero returns. This provides a safety mechanism for passive investors and an incentive for the general partners to hit a home run so they can share in some of the profits.

After a preferred return is met, there is a profit split between the limited and general partners. This is usually a 70/30 split (70% for investors and 30% for sponsors) but like all deals it can vary.

Let’s say a deal has a 7% preferred return and a 70/30 split. Once investors have received the full 7% per year of their investment, they will then receive 70% or any profits over that amount. The remaining 30% goes to the general partners as compensation for making the business plan a reality and doing all the work.

Let’s take an example to see how this works in practice, we’ll assume the following:

• A syndication has a 7% preferred return and a 70/30 split.
• The total cash investment from investors is $1,000,000.
• The annual cash flow for the property is $150,000

The first $70,000 of available cash flow goes right to investors. Then of the remaining $80,000 investors receive 70% so $56,000. That means a net of $126,000 to the investors. That’s a 12.6% return. Not bad right?

The best part is we are only talking about cash flow, that is essentially rent money. This example doesn’t include when the property is cash out refinanced or sold, which we cover in the next section.

You invested $100,000 and want to know when you will get your original capital back.

There are two ways:

1. Property is cash-out refinanced.

2. Property is sold.

Let’s take an example of a cash-out refinance:

• A property is purchased for 5 million

• We invest 1 million into the property

• 2 years later it is appraised for 9 million

• We refinance the property, pull out 4 million cash out and return it to investors

In this example 80% of the principal (or $80,000) is returned and you will continue to earn returns on the initial investment. Essentially you take most of your initial risk off the table and you can go invest it another deal!

Cash on Cash is used to describe the passive cashflow you receive by the amount of money you invested in a deal. For value add projects you like to see anywhere from 7-12% CoC.

Simple example:
• You invest $100k and the deal has a 9% Cash-on-Cash target.

That means over the lifetime of the deal (typically 3-7 years) you’re getting on average 9% per year of your investment in cash flow. This translates to 9,000 per year (9% of $100k) paid to investors with monthly or quarterly payments. It’s almost like stock dividends but tax efficient.

Typically “Cash on Cash” is lower in the beginning of an investment because money is being spent on improving the asset and increasing rents. As the business plan is executed you start realizing those investments and an increased CoC.

The internal rate of return is the most accurate way you can compare investments, however it’s a bit confusing to calculate and explain. That’s because it takes into account the time value of money. A dollar today is worth less tomorrow, a month later and a year later because of inflation. This is called the Net Present Value (NPV).

A simpler version is the Average Annual Return (AAR) and is commonly used in place of IRR or together. For value add multi-family the IRR target is usually at least 15%.

This is the combination of all returns, cash flow and profit when sold divided by the amount invested and then by the number of years.

Here’s a simple example:
• You invest $100,000 into a deal
• The term of the deal was 5 years from start to finish
• The cashflow totaled up to $30,000 over the 5 years
• The profit after selling was $85,000
• $30,000 Cash Flow + $85,000 from Sale = $115,000 Total Return
• $115,000 Total Return / $100,000 investment = 1.15 / 5 years = 23% Average Annual Return

If a deal has an equity multiple of 2x and a projected hold time of 5 years, that means investors can expect to double their capital (original investment) in that 5-year period. This is a typical target and what we strive for at Line Drive Capital even with conservative underwriting.

Simple example:
• You invest $100,000 into a deal
• The deal has an Equity Multiple of 2.1x
• The projected return for the project is $100,000 * 2.1 = $210,000 total returned to investor

Certain components of a property can be depreciated on an accelerated schedule. This is called Cost Segregation. Cost Seg allows Investors to receive depreciation as a passive loss which can help offset capital gains. The end result is keeping more of your profits. This is an amazing tax benefit of real estate investing. It’s worth noting that some of these benefits are scheduled to be phased out by the IRS in 2026.