Passive Income with Syndications – Mauricio Rauld | PREI 092
Robert Kiyosaki once said, “Finding good partners is the key to success in anything: in business, in marriage and especially in investing.” On this show, we talk a lot about passive income and passive investments and how to create wealth through those vehicles, especially real estate. What about partnerships or syndications?
Today, I want to explore the world of investment partnerships, they’re also known as syndications, and how you can potentially participate and profit from them as well. What is a syndication? In its simplest form, a syndication is just a pooling of investor money where the investor is typically a passive limited partner. The other partner to the deal is really a general partner or an active partner. That’s the person that puts the deal together. They manage the business plan. They provide the return and the benefits to all investors. You’ll hear general partner or GP often. They’re also referred to as the syndicate or the sponsor. These terms are used interchangeably. At the end of the day, a syndication is nothing but a group investment. It’s a pooling of investment capital to put into an investment opportunity that is managed by a syndicator.
We have an amazing guest on today’s show, someone who I’m getting know quite well. In fact I’m meeting him for lunch here in a couple of weeks. We had a great opportunity to get to know each other recently. His name is Mauricio Rauld.
If you missed our last episode, be sure to listen to Deferring Taxes for Decades (and the Dangers of 1031 Exchanges).
Enjoy the show!
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Passive Income with Syndications – Mauricio Rauld
It’s my pleasure to welcome Mauricio Rauld to the show. Mauricio is the Founder and CEO of Premier Law Group, a boutique securities law firm. He’s a licensed attorney with over seventeen years of experience. His expertise is in private placements. He has helped clients raise well over $100 million in capital. He frequently shares the stage at conferences with world-renowned authorities such as Robert Kiyosaki, Ken McElroy, Tom Hopkins, Simon Black and economist, Peter Schiff. Mauricio, welcome to the show.
Thanks for having me, Marco. I appreciate it.
It’s great to have you on. I had the privilege of finally meeting you at a video recording studio in Phoenix where you and I are part of a curriculum for an upcoming Wealth Training Program along with some big names like Ken McElroy and Tom Wheelwright among several other high-profile names. Honestly, I felt like a small fish in a big pond there. It was my opportunity to just actually get to know you and invite you on the show because I know you’re a wealth of information.
I appreciate that. That makes the two of us being a small fish in a big pond. Our good friends have some pretty impressive names and it was just a pleasure to be among those. It was great just to share some time at the backstage and we had a chance to chit-chat and get to know each other. That was really good. It was really great.
I’m actually looking forward to get to know you better and actually doing some work with you. Let’s start off with a little bit about you. Why don’t you tell us how you got into the world of real estate syndication?
I’ve been doing this for a while. After I graduated from law school, I did basically what every lawyer dreams of doing, which is I went to work for a fairly large law firm down in Southern California. I did a lot of securities work back then, but it was really litigation. I was doing all the court cases, depositions, trials, motions, all that fun stuff. Anytime somebody got into trouble, that’s when they call our firm and I would defend them from their securities violations. I realized early on that’s not what I wanted to do for the rest of my life. I didn’t like the law firm life. Unfortunately for me, I was exposed pretty early on in my law career to the Rich Dad coach, Robert Kiyosaki and his little purple book, Rich Dad Poor Dad. That got me on a path to meeting certain individuals which have got me out of law firm and into in-house with some of the real estate guys.
I was in-house with them and I did all of the securities and working with all the syndications when they were raising back in the day. That was my gateway out of the law firm and into the real estate world. Shortly thereafter, I started my own firm and my own practice. Now it’s been twelve years since I’ve had my own firm. Just got me at it now for that much time and really focusing on helping other individuals, other real estate investors to do better deals to the vehicle of syndication.
I am in the process of underwriting three opportunities right now that may eventually be available to our audience and our investors. I know you do a lot of work with syndications. I think the best place to start here is with the basics. Let’s just break it down into its fundamental components and then we’ll build up on that. What is a real estate syndication? Or maybe even more generally, what is a syndication?
A syndication is simply the pooling of resources. Most of the time you think of money, but it can be credit, it can be relationships, it can be time. It can be pretty much everything. Anytime you’re pooling those resources and you’re managing those resources for a goal, that’s a syndication. The example that I’d like to give, the simplest example, a really simple real estate syndication: You get together with four of your buddies to take down a deal that’s $100,000. You get $25,000 with four of your buddies and then you become the fifth partner because you’ve put in all of your time, your knowledge, your expertise of finding the deal because your buddies don’t have time. You pooled $25,000 for a friend of yours. You’ve got $100,000 in the door. You run the specification. You split the profit five ways. That’s a syndication.
That’s synonymous to a group investment or a partnership.
Most people don’t realize sometimes that you can have a syndication with two people actually. As long as any time you’re responsible for pooling those resources and managing that money or managing those resources, you are engaged in a syndication.
For purposes here, we can refer to as a syndication, a group investment and a partnership as one and the same?
Here’s a loaded question. Why would someone want to invest in a group investment or a syndication? In other words, what are the pros and cons?
The big pro is most people at some point in their career, even if they’re real estate investors already, at some point, you run out of your own money. You run out of your own money or you run out of your own credits especially if you’re starting off with single-family homes, you’re maxed out after ten Pretty Penny Loans these days. At some point, every real estate investor gets to a point where number one, they need to run out of their money and you have two options at that point. You can either soft investing and wait until one of your properties liquidate so you can get another deal. Or you can continue to invest by utilizing the resources that’s basically other people’s money. The other reason to do it is if you’re playing at the space where you’re doing single-family homes if you want to jump into a larger bay. You’re doing single-families and you want to jump to multi-families which obviously is a lot more money and you don’t have all that money, then that’s the time you tap into other people’s money and improve investment.
Sometimes the way I like to look at it is when you as an investor want to participate in a much larger deal that you couldn’t do on your own, whether it’s because you don’t have the expertise or you don’t have the capital to participate in a larger opportunity, this is a way for you to participate with other real estate investors to take part of and benefit from these bigger deals. Is that true?
Yeah. Marco, you made a great point. My job is I represent syndicators. I typically represent the individuals putting this deal together and gathering all the investors. It’s also the other side which is if you’re one of those investors who’s looking to invest in a syndication, then one of the beauties of the syndication is that you can get started with a lot less money. If you have $50,000 to invest, you’re not going to go out there and buy a multi-family apartment complex. You’re probably not going to buy even a single-family home. You can pool that money with other investors and get into a much larger deal and be able to benefit from the economy of scale and the beauties of multi-family. You’re able to do that with your $50,000 investment. Sometimes it can be as low as $25,000 investment. You can do something that ordinarily you wouldn’t be able to do.
There’s also the question of deal flow. Most investors don’t have access to deals on a consistent basis, whether it’s monthly, weekly or even daily, which is the case for me sometimes. When you have access to these more exclusive or unique deals, we can take advantage of that and then bring in these other investors to participate.
Another good reason is just expertise. You’re just starting in the real estate world for example and you had never purchased a multi-family 200 or 300 apartment complex. You can now partner with somebody who does have that expertise, it’s not their first rodeo, they have a team in place. You could piggy back off that expertise, provide the capital or whatever portion yours is, and you get to participate in the deal itself. It’s a great way to learn.
When it comes to syndications, there are some terminologies that are thrown around. It’s good to get this out of the way as well because this is that fundamental building block. We talk about syndicators, and that’s essentially the sponsor or the person putting together the syndication. We also hear about the accredited investor, who is that? Then we hear about PPMs and Reg D in Rule 506. Maybe you can touch on each of these without going into too much detail so we don’t let people’s eye glaze over.
Let’s keep it really simple. One of the important things to understand when you’re doing a syndication is a difference between what’s called an accredited investor versus a non-accredited investor. The reason that’s important is that sometimes eligibility-wise, only an accredited investor can actually participate in the deal. In its simplest format, an accredited investor is anyone who has over $1 million in net worth excluding your primary residence or earns $200,000 a year, or really technically earned $200,000 a year for the last two years . That’s what an accredited investor would be and then obviously a non-accredited is one that does not fall to either one of them. You don’t have to be both. It’s either one or the other.
PPM is an abbreviation for a Private Placement Memorandum. It sounds like a very important document. For the most part, it is. What is a PPM?
PPM is very critical. One thing to understand, just taking a step a back, anytime you are involved in a syndication, anytime you’re handling other people’s money; if you’re a syndicator, you’re the sponsor, you are dealing the securities. That’s why the securities law comes into place. Anytime you’re starting security, you need to provide your investors with all of the risk factors and all of the disclosures necessary for your investors to make an intelligent decision. The Private Placement Memorandum is just that. It’s a document that outlines all of the disclosures and all of the risks, all the ways you can lose your money, all the information that you require in order to make an intelligent decision whether this is an appropriate investment for you.
I always analogize it to when you go to the doctor’s office and you have some type of minor surgery or surgery, they give you what’s called a medical consent form. They tell you in that form all the dangers of this surgery. I remember I had my wisdom tooth taken out that I had to go under. You can die from having your wisdom tooth taken out, all the risk factors you have in the operation or the procedure. That’s what the PPM is.
I jokingly say that the PPM is a list of all the reasons why you shouldn’t invest in an investment.
It’s funny, a lot of investors themselves, they want to see the PPM and that informs their investment decision. I always joke, nobody invests in your deal based on the Private Placement Memorandum. If anything, you’ve got to convince them above and beyond through your other means, through your marketing, through your conversation so that by the time they read your PPM, they don’t get too scared away and don’t investment in the deal because it certainly is going to give them all the worst case scenarios.
At a very high level, these offerings can be either registered, exempt or illegal. I know you talk about that. Just touch on that and then maybe slide into what’s referred to as Reg D and why that’s important to know.
Anytime you deal with a security, you fall under the security laws. As I always say, there are three you better worry about. Number one, you need to register your security with the Securities and Exchange Commission, the SEC. Or you can find an exemption to registration. We almost never want to register the syndication for a couple of reasons. The main one being it takes forever. It takes a year or two years to get through that registration process. If you’re in contract to pose in a property nine days, you don’t have time to wait a year and a half or two years for the government to approve your syndication and it costs a lot of money. It costs well more than six figures and sometimes seven figures.
We want to avoid the registration fees. We also want to avoid doing illegal offering. Nobody’s going out there with the intent to defraud people but you certainly have an illegal offering, for example by failing to provide Private Placement Memorandum. That is a requirement and you fail to provide that PPM, then you have engaged in an illegal offering. Because we don’t want to do a registration and we don’t want to do an illegal offering, we’re always looking for an exemption. One of the most common exemptions out there is what you referenced, which is a Reg D or Regulation D, which as long as we follow those six or seven things that are included in that regulation, we have satisfied one of the exemptions to Regulation D.
Basically to summarize what a syndication and offering is, it’s really made up of an investment opportunity that is being filed with the SEC typically as an exempt offering. What you as an investor would receive would be a PPM, a Private Placement Memorandum, which are all the disclosures and risk factors, along with some sort of presentation material, it might be a slide deck or brochure. Finally, A final document which is called a subscription agreement, which is what allows you to express your interest or make the investment in that deal. Did I miss anything?
There are a couple other things that you can probably will see in what I call an offer package. One is an investor questionnaire, which is just trying to figure out whether you fall into the accredited or not accredited status. That’s going to be important for a syndicator because sometimes they’re not allow to take non-accredited and sometimes they’re just limited in the amount of non-accredited they can take. That’s one mechanism that we use to keep track. The other document you will see is depending on the structure, in real estate most of the time they’ll be investing in some kind of an entity, probably a limited liability company. They will be providing you with the operating agreement or the entity documentation because you’ll actually be signing the operating agreement in becoming a member in that LLC or a shareholder in the corporation or whatever the structure is.
Let’s just talk about investments in general here. I know when I ask you this question, the answer will likely be, “It depends,” as most attorneys like to say. What are the “typical returns” that you see today in offerings? I know this is just really more of a frame of reference than what should be expectation. What are you seeing out there? I’m asking for my own curiosity too.
Because I’m not like most attorneys, I would give you a direct answer. I typically see double digit returns from my clients. I don’t want to say they would be the minimum double digits, but you certainly on average end up getting somewhere between 10% and 15% return on capital over the life of the project. Annualized cash-on-cash, you’re seeing 8% to 12%. By the time you add whatever equity at the end of the project, you can probably add another 4% or 5% to that. It’s definitely much more lucrative than putting your money in a CD or buying some publicly traded companies because you just don’t have that upside potential.
Often, syndicators will put in what is referred to as a preferred return. What is a preferred return?
A lot of people have misconceptions of that. Preferred return is not a guaranteed return. If I were to give you for example an 80% preferred, all that means is that 100% of the money that comes in from the company will go to you as the investor until you reach that 8%. Above and beyond that, we’ll figure out how we split above that, whether it’s a percentage or how we do it. I prefer to to see you eat first up until you hit that preferred return and then we’ll split the rest of what we agreed.
I know distributions that come from syndications can either be monthly or quarterly. Those are typically the two most common way that distributions are paid. Minimums I know are all over the place but what I have seen in years past is $25,000 is a typical investment. I’ve seen it as small as $5,000. That’s brain damage as a syndicator because you’re dealing with potentially hundreds of people at very small amounts and so that’s a lot of admin work.
You got two issues there. Number one, again representing syndicators, investors typically, especially if you’re first one in the deal, typically like to invest in minimum. If you tell them the minimum is $25,000, they’re going to put in $25,000 even though they may be able put in $35,000 or $45,000. Number two, the lower that number is, the more investors you get in the deal and there are some limitations on the amount of investors, especially non-accredited investors that you could put in. The lower that number just means the likeliness that you’re going to hit that number. If you’re dealing with an accredited investor, typically they’re not interested in $5,000 investment. They want to put a little bit more chunk with that type of work.
Typically, the range I see is $25,000 on the low-end and $100,000 on the high-end. That’s what I’ve been exposed to. Let’s talk about holding periods. This has a range, and I’ve seen the low-end of that range is three years and the high-end is ten years. Is that typically what you see on syndicated deals?
Yeah. The typical syndication I’ve seen is three to five years, the whole period. I would say until the first exit occurs. When I say exit, it doesn’t necessarily mean a sale. It maybe a refinance of the property, that’s one way to get your money back or maybe it’s a sale or maybe it’s another mechanism. The first one is three to five years. Then it will just depend on the structure of the deal whether you’re saving in after that, to refinance it then or you get your capital back and then refinance. Do you stay in the deal or do you continue to ride the deal?
The nice thing about investing in real estate particularly single-family homes, duplexes, fourplexes is they’re very tax-favored. There are probably people out there wondering if syndications are tax-efficient. You want to make any comment on the tax impact from a syndication investment?
As a syndicate, if you invest in syndication, what you’re doing is you’re investing in a company. You become a part owner of that company. Most people will say that’s held in LLC so you would become a 2%, 3% 10% member of that LLC, owner of that LLC which then in turn owns the property. For all of the tax benefits from real estate, flow up through that LLC up to its ultimate owners and get paid what’s called a K1 at the end of the year that shows you what your profit or losses in the year. Primarily, the depreciation, which is probably the greatest tax benefits from real estate, all that depreciation flows up through the ultimate owner and you get to participate in that depreciation just like if you own the property directly.
There are a lot of similarities to a syndicated investment as there are to direct ownership in single-family homes or fourplexes?
Yeah. The other great benefit from real estate is what we call a 1031 tax deferred exchange. I’ve been doing quite a few of those lately in a syndication structure. There’s even ways to structure it where if you’re coming out of a 1031, you can put that capital to work in a syndication. Actually at that point right now doing a 1031, we did a syndication, had a group investment, they bought the property, it’s doing well. Instead of refinancing or flat selling it, they’re going to 1031 exchange it to a property.
That’s very interesting because a lot of what I’ve read has told me that it is difficult to do a 1031 exchange from residential property into a syndication. Is that not true then?
I didn’t say it’s difficult but it can be done. It’s much easier to come into the syndication because it’s brand new and we can structure it properly. It may be difficult to come out of it if it’s not structured properly ahead of time. Let me give you an example. As you know, when you do a 1031 tax deferred exchange, you have to do what’s called the like-kind exchange, which means if you don’t tie those to the property and you do the 1031, you need to end up with the title to the property. You cannot for example have a direct title to a property like a single-family home and then exchange that into a membership and LLC. That’s not a like-kind of exchange. You’ve got a direct title, over here you have LLC title. A syndication, you’re not married to a particular structure, so you don’t have to have an LLC or an entity for syndication. You can actually have ten people having direct title to a property in a TIC arrangement, a Tenants in Common arrangement. That’s also a syndication.
Let me give you an example as simple as I can. Let’s say you own 100% of the property in a single-family home. When you sell it, you’re going to have $100,000 worth of profit that you want to defer. If I put in a syndication together, I just need to make sure that when you come over to my syndication, that you have direct title to the property. You’re not a part of my LLC, my own investment but you, yourself, actually have direct title to my multi-family and my single-family property. That way for you, you go from direct title in your single-family into direct title with my syndication. That’s how you do the 1031.
It’s important to let everyone know if they don’t already that syndications are not considered a liquid investment like publicly traded securities are. I think that’s a very important point because if you get into an investment and it’s a three to five maybe even a seven to ten year whole period, there’s very few ways if any to get out of it. My question to you is how liquid are syndications? Can investors get out if needed? Is there a workout clause typically in a syndication deal?
Yeah, there’s always a workout clause. That’s one of our big disclosures in the PPM, the lack of liquidity. Unlike a stock that’s traded in a major stock exchange, there is no stock exchange through your LLC. That doesn’t mean you can’t get out. Typically, the way you would go out if something really happens in terms of an emergency or needed liquidity is you would simply have to go find somebody else. It’s your responsibility to go find somebody who would want to come in and purchase your interest from you. In certain circumstances, I know a lot of syndicators, they always want to keep their investors happy. It doesn’t hurt to ask, “Are you buying me out? Could you find somebody who is interested in buying me out?” You may have to do a little bit of discount to get a deal or make it attractive. There is a mechanism to get out. It just means that the syndicator itself is not attending to either sell the property or refinance the property that will cause a liquidity event.
I assume the syndicator or the syndication itself could buy out or purchase the interest from that person, right?
There is more than one way to get out?
Yes. The only real restriction you have, and that’s also a disclaimer, is think of when you buy into a syndication, the syndicator sells the security to you. When you turn around and try to sell to somebody else, you’ve got to remember that’s also you’re selling a security to somebody else. Remember you’ve got to register that syndication. You’ve got to find an exemption or it’s illegal. Fortunately, there’s an easy exemption as long as you wait one year. There is a specific exemption that addresses that. If you wait a year, you can then pretty easily sell your security. Until that, you actually have a total restricted security, which means you cannot sell that security for the first year unless you could find an exemption, which would be in the PPM and everything we’ve been talking about. I would say at least a minimum of one year hold.
I know you’re going to love this question. Industry experience is clearly important. You want to be dealing with honorable people who have years of experience in the industry in question, not necessarily in syndications per se but they have experience in their industry of choice. When it comes to doing due diligence, what are your tips or suggestions in terms of vetting out an opportunity?
You hit it on the head. I don’t think experience is important. I think it’s everything. That’s one of my top five or top six things that I think about when I’m doing due diligence. Who is the sponsor? What’s their experience? Do they have a team? Is this their first rodeo? What is their success? What is their track record? That’s probably one of the most important things you should be looking at. That’s one of your number one due diligence items. I actually ended up putting a little due diligence checklist that I’ve been handing to some clients. That’s probably at that top, is who you’re dealing with and what is their experience.
Another one which I tend to see in terms of a lot of red flags would pop up is if you’re doing your due diligence, it’s just simply taking a look at the documentations itself, having a lawyer even take a look at it. I do sometimes review syndications for clients. It’s not what I do all the time. If somebody wants me to take a look at a syndication, I’ll do it for them. You’ll be amazed to see how many red flags you can see, at least for me being a trending eye, from looking at the PPM, looking at the documentation, you can see if there are things just doesn’t add up. Sometimes in all honesty, Marco, they don’t even have a PPM, which is really red flag in the event that it’s required. You’ll hear all kinds of excuses to why they don’t have it but at the end of the day, they just don’t want to send money and they don’t know what they’re doing. That’s another huge red flag. The lack of documentation or just documentation that’s not really up to speed.
I agree with all that. The syndicator, the team that you’re working with is probably the most important thing. In my view, that’s top of the list. I try to keep this episode at a fairly high level without making it too complicated. We could certainly go on and we might end up doing another episode another day. Syndications are great. They really are for many different reasons but they’re certainly not for everyone. My wrap-up question here is, when should someone consider investing in a syndication and maybe when shouldn’t they?
I think they should consider number one if they don’t have enough money to really go do something on their own. I’ve got $25,000. I’m not going to go buy a multi-family apartment complex. That’s a great opportunity to go into one of these investments. Going back to the expertise, if you’re competing against experts in the multi-family deal, this is the first time you’re looking into it and it’s something you want to get into. That’s when you want to ride the coat tails of an experienced team and sponsor as opposed to trying to do this one on your own and learn from the experience. I have a lot of people, all the clients actually who got involved in syndications first by investing in one so they can see how it works. You can always talk to the management team and you can learn from them. If you’re just getting started or you don’t have that capital, syndications are a great way to get your foot in the door.
Mauricio, I want to thank you for your time. Please tell our listeners how they can find you or get more information. You mentioned the due diligence checklist.
I’m happy to do it. The best way to get a hold of me is probably either through my website which is www.PremierLawGroup.net, or they can shoot me an email at [email protected], so either one of those will get in touch with someone of my team. I’m happy if you want the due diligence checklist, shoot me an email. I’m happy to send that out to you.
Thank you for your time. We’ll certainly be talking again real soon.
Thanks for having me. I appreciate it.
That wraps it up for today’s episode. I hope you enjoyed it. There will be more to come in terms of syndications in future episodes. For now, if you haven’t downloaded my free 42-page report or guide, The Ultimate Guide to Passive Real Estate Investing, please do so. You can do that at PassiveRealEstateInvesting.com or our parent site, NoradaRealEstate.com. Also, if you’re looking to invest in real estate in any way, shape or form, feel free to take advantage of our free strategy session with any one of our numerous investment councilors. We’re here to help and answer your questions. If we can help you, great. If we can’t, we’ll let you know that too. Do you have a question about real estate or real estate investing? I would love to answer those in an upcoming episode of Ask Marco. Just go ahead and click the Ask Marco button on PassiveRealEstateInvesting.com. Let me know what you’re thinking. Let me know what your questions are. I am more than happy to cover those in monthly episodes of Ask Marco.
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