Where Is Your Horse – In Front of Or Behind the Cart?

Real Estate syndication is by far the most profitable aspect of the real estate industry. The reason is that it encompasses all the other areas including brokerage, lending, ownership, management and more. Each month, I host two Q&A teleconferences to help experienced people in the real estate business attain success in syndication. And with every call, I find there are two groups of people. There are those who are properly organized and ready to get started on the right path to real estate syndication. And then there are those who are having trouble getting out of their own way.

The folks who are not succeeding are the ones whose first question is “where do I find a good deal?” Early stage syndicators think they need to find a great deal, then raise capital, and they will be on their way toward success and profit. I usually counter that with some tough love and a reality check. Instead of looking for deals, a prudent syndicator needs to put the horse in front of the deal, and start with the question of how to raise capital.

Believe it or not, a bag of money is not going to drop out of the sky as soon as you find a good deal. It’s not going to happen. There are lots of good deals out there that most people can’t put together. That thinking is like putting the cart before the horse. Somebody is getting the deals done, but it’s the people who have lined up the money in advance — or it’s the ones who know where the money is and how to get it when the deal is ready.

Doing a syndication is not a one-time deal. It is a business. And with any smart business plan, the key to success is to have a plan — and that means having the capital on hand first. So on my last Q&A teleconference, I turned the tables and asked participants two tough questions in advance of the call. The first question was “How much money could you raise for a good real estate syndication project right now?”

On one end of the scale, 16% responded “I don’t know,” “it depends,” or “not enough.” On the other end of the scale one confident participant said “unlimited!” Enthusiasm is great, but it may not be bankable.

The bulk of the answers I received were fairly typical. The largest percentage, one-fifth of the participants, said they could raise $500K right now. Close behind were those who said $1-3M. The remainder was spread between $4-6M and $250-$600K.

In my experience, what you think you can raise and what you can actually raise are not the same. First, it takes time to raise money. Next, the deal has to be right. Not only the real estate deal, but how you structure the profit sharing has to work for both the investor and for the syndicator. Frequently, early stage syndicators have trouble figuring out how to create a deal that investors want to say “yes” to, and at the same time, promote a deal that works for them.

Keep your eyes open to these issues. There is a lot of money to be made. But if the horse is not positioned properly, no one will move and the deal won’t get done. There are a lot of horses in the barn that never have the opportunity to see the light of day. And one more thought: the way that investors think about investing in deals is a lot like how gamblers operate at the horse racing track too.