Summary: If you’ve ever dreamed of buying a large, multi-million dollar property, you may have considered becoming a general partner in a syndication. But for many, it seems like a distant dream. Just how do you become a general partner in a syndication? How do you position yourself to buy one of these large multi-million dollar assets? In this article, we share the two main paths you can take to become a general partner in a syndication.
[Disclaimer: We are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
Bigger is better.
That’s the theory anyway.
When it comes to real estate, many are drawn to the bigger properties. Why wouldn’t they? Not only is it more exciting to own a large apartment complex, the sheer scale means that even a small percentage increase in value still represents a large sum of money.
So naturally, many people are drawn to the idea of acquiring one of these properties using a syndication model. A syndication is where you raise money from passive investors to acquire one of these large properties.
We covered the basics of leading syndications in a prior article. We also covered just how much money you can make as a sponsor (also known as a general partner) of one of these deals.
So you might be wondering, how do you become a general partner (GP)? What are the requirements? What are the common paths to becoming a real estate syndicator?
Let’s dive into these questions and more!
Requirements for Becoming a General Partner
There are no real requirements for becoming a general partner, also known as a deal sponsor. We know people of various backgrounds who have become a GP: lawyers, doctors, people working in IT, bloggers, you name it.
Of course, you need to learn how to invest in real estate. You need the right connections. You need the confidence to take on one of these big deals.
It also helps to have a high income and net worth. Many of these loans require a net worth equal to the amount that is being borrowed.
Also, as a high-income professional, you’re surrounded by colleagues who also have high incomes. This makes it easier to raise capital because the people you raise money from usually have to be accredited. Which means they need to have a certain level of income and net worth to invest in a syndication.
So let’s say you want to lead a syndication. What are the paths to becoming a general partner in one of these deals?
The Two Paths to Becoming a General Partner
While there are numerous ways people can get started as a general partner, we believe they can be broken down into two main paths.
Capital-Raiser Path
One common path to becoming a GP is to start as a capital raiser (described above). This is someone who is invited to join a GP team by the main deal sponsor for their access to high net worth individuals. Their main role is to help raise the money needed to acquire the asset.
While you start as a capital raiser, you can ask the lead general partner to give you the opportunity to try other roles. Eventually, after filling multiple roles, you can then lead a syndication yourself. However, the reality is, this path may not be as great as it sounds.
The first reality is that the Securities and Exchange Commission (SEC) strictly prohibits lead sponsors from bringing someone into the GP team for capital raising alone. Instead, you must have a true operational role in the syndication. You can’t just be a fundraiser. As part of this requirement, your compensation cannot be tied in any way to the amount of money you raise.
The second reality is that capital raisers often get a small percentage of the deal. How much you get is ultimately up to the lead sponsor but the reality is that you are an apprentice in an apprenticeship. Part of your compensation is the training you get. So don’t expect that you’ll receive a portion of the fees or a significant portion of the equity split (to read more about how general partners are compensated, CLICK HERE).
Finally, you will likely have little or no control over the deal. The lead sponsor usually makes all of the decisions. You don’t have control over when to refinance or sell. When you sell, you’ll likely pay capital gains taxes. Whenever you pay taxes, your wealth grows slower than if you defer them using 1031 exchanges.
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Direct-Ownership Path
This is a less common path to leading syndications but one that we believe has many more advantages.
This path involves starting with your own portfolio of properties. From there, you scale up to the larger properties.
You might think this would take too long, but we have a number of students who are looking at bigger properties within 12 months of taking our Zero to Freedom course.
One of the main upsides of the direct-ownership path is that you acquire a level of confidence in your ability to buy, operate and finance properties that is probably much higher than you would with the capital raiser path. There’s just no substitute for being hands on and doing things yourself.
For example, one student bought a 14-unit followed by a 16-unit. So within 6 months of taking our course, she already had 30 units. Since she was involved in all aspects of these properties, this gave her the confidence to jump up to the next level.
The other benefit is the ability to shelter W2 or 1099 income that only comes from owning your own properties. Many of the graduates of our courses claim a status called real estate professional. When you have this status, you are able to take the paper losses from your properties to shelter income. This is a huge benefit for high income professionals in particular, who are taxed at the highest rates.
So if you take the direct ownership path, you can acquire the necessary properties to claim this status. Then, when you progress to a larger property, you can use these losses to shelter income as well. You generally would not be able to achieve this status with the capital raiser path.
Yet another benefit of the direct-ownership path is the level of control. Since you are the lead sponsor, as opposed to being an apprentice as a capital raiser, you have control over the deal. You decide when to refinance and when to sell. You can explore options for 1031 exchanging and efficiently growing your money.
[Want to learn more about sheltering your hard earned income with real estate professional status? Be sure to download our free Real Estate Professional Status Guide]
Which of These Two Paths is Best For You?
There’s no right or wrong in terms of the choice of path. We know people who are successful capital raisers. We know many who own their own properties and have gone bigger.
One way to understand the best path for you is to be clear about your end goal. The following are a couple of goals you might consider.
Build Wealth Quickly
If your end goal is to build wealth as fast as possible, we believe direct ownership will get you there faster than the capital-raiser path.
There are many reasons for this.
First, the direct ownership path will allow you to immediately make moves to grow your wealth. You can probably go out and buy a small duplex a lot faster than the time it takes to build the necessary relationships to be invited to join a syndication as a capital raiser.
Second, the returns from buying your own properties using The Fast FIRE System is likely going to be far greater than the amount of money you can get as a capital raiser in your first several syndications.
Third, because you’re accumulating assets that you fully control, you can grow your portfolio tax efficiently using a 1031 exchange. In contrast, you pay capital gains taxes on the money you earn from syndications.
Fourth, direct ownership allows you to be maximally tax efficient by creating a tax shelter for your W2 or 1099 income using real estate professional status or the short-term rental tax loophole.
Get the Best Training
If your goal is to be as well trained in leading syndications as possible, then we believe direct ownership is far superior to the capital raiser path.
Having led our own 160-unit syndication, I can clearly see that what you learn in a minority GP role is far less than what you learn being hands-on with your own properties.
There’s no substitute for going out and acquiring your own properties, getting loans on those properties, negotiating with the seller to get a discount, renovating those properties, refinancing loans on those properties and 1031 exchanging those properties.
As a minority GP, your exposure to the above will be minimal.
We personally went from owning a single duplex to acquiring a 160 unit property. In between, we acquired multiple mid-sized properties (13-unit, 16-unit, 32-unit, 42-unit). We can clearly see that the experiences we accumulated over the years managing our own properties couldn’t possibly be acquired as a capital raiser.
Accumulate Assets
If your goal is to build wealth by accumulating assets, not sign up for another job, then you’ll want to pursue the direct ownership path.
As a syndicator, you aren’t accumulating assets. You’re accumulating capital gains.
This might surprise you. You might think that you’re growing your wealth but remember that your investors expect you to eventually sell the property. When you sell, all you’re left with is capital gains. Capital gains is a form of income, it’s not an asset. So being a syndicator is much more like having a job than investing.
If you’re a high-income professional, you already have a high-paying job. The question for you is, do you want to replace your current high-paying job for another one? Or do you want to build wealth?
On the other hand, when you buy a cashflowing asset, you could hold onto that asset for the rest of your lifetime and it will continue to pay you month after month. You don’t ever have to incur capital gains because you could either hold onto the property or use a 1031 exchange to defer the capital gain.
These are just some of the end goals you’ll want to think about when considering the best path for you!
Want to learn how to build a significant source of income from investing in real estate while reducing your taxes? Join us in one of our courses, Zero to Freedom, or Accelerating Wealth.
