While it is often thought that real estate syndication can only be done with large properties such as apartments and commercial real estate buildings, it is in fact possible to pool smaller capital from investors to purchase a smaller property such as a six-unit multifamily. Aaron Fragnito, co-founder of Peoples Capital Group (PCG), has found success with smaller syndication and has shown that this model can work with a range of property sizes.
In a recent podcast conversation, Aaron shared that some of the best deals he could find within his state were smaller six-unit multifamilies which he initially considered unsuitable for syndication. “I was talking to an attorney years ago and he said, ‘If you don’t have $50,000 and millions of dollars, you can’t start a real estate fund. And for years, I thought that was the case,” Aaron said. But it certainly was not the case. Aaron eventually transitioned from being a realtor into syndication, and now his company, PCG, owns and manages more than 25 properties with more than 140 rental units.
I’d like to share some salient points from our discussion and I’m sure you’ll gain some knowledge from his experience in syndication. If you want to listen to the full podcast, click here.
Why Syndication and not a Joint Venture (JV)?
“I do syndicate six-unit properties. I just did one recently, raised $165,000 from one accredited investor and started a 506(C), and bought the property. You can do that. You don’t need 50 grand to start syndication. I figured out, by talking to my SEC attorney, how to start small syndication and buy less than two-million-dollar buildings and start a small fund for each,” shares Aaron.
He further explains that since those who contribute money are not actively involved in the deal and are considered passive investors – while he and his business partner are the sponsors who play active roles responsible for the ROI and overall success of the project – their business model is essentially syndication and not a joint venture (JV). A joint venture requires all business partners, regardless of whether they put money into the deal or not, to be actively involved and contribute significant skills (construction management, property management, due diligence, underwriting, capital raising, etc.) to the overall success of the project.
“In syndicating, the investor does not have a right in the LLC. It is an investment contract and I’m technically selling securities. Because of that, the SEC has to be notified and they have to know basic information about my investors and me as a sponsor,” adds Aaron.
Lessons from Syndication
By being a licensed realtor, Aaron says that he had a great tool for getting started in the real estate syndication business. “It gives you a title and credibility when you don’t have one right off the bat. It’s also a great way to make some money and if you can work with the buyers, you can get the listings and if you list, you last. Being a realtor allowed me to put together some cash to buy some small commercial real estate,” says Aaron. Here are some lessons he learned from his syndication experience.
#1 Find a team or a partner
Partnering up in a real estate business gives many advantages and benefits. The wider pool of resources, knowledge, skills and contacts that joining forces with like-minded individuals can bring to the table can help your business get off the ground or expand it more rapidly than you could on your own. Successful real estate investors are quick to admit that they aren’t excellent at everything and that the key to a thriving and lucrative business is to focus on what you do well and let someone else – your partner or your team members – assume the roles of their expertise.
“We’ve built a great team in our company. My business partner’s great in managing the daily operations while my skills are in managing branding and client relations,” shares Aaron. Not only should business partners complement each other’s skills and attributes, but they should also share the same goals and vision for their business.
#2 Talk to people about what you’re doing
Aaron realized early on that he needed to talk to people about what he was doing in real estate. This prompted him to hone his skills in public speaking and to speak at as many events as he could. Through this, he built both his credibility and the strong network that he still draws on today.
“Even as a beginner, I’ve always enjoyed getting up and speaking in front of a crowd. I kind of had a knack for it. And as a real estate investor, speaking at these REIA events is really important so I worked on it so I can get better,” says Aaron.
How can you be a speaker at real estate events?
Get in touch with the owner of the meetup group or the showrunner of the event and let them know you want to speak during the event. “A lot of times, the people running the shows need your help. I constantly have to help bring in new speakers and it’s a lot of work. The networking business is a lot of work so just approach them and say, ‘I can come in and I could speak about buying my first two multifamily’ and more often than not, they’ll let you,” advises Aaron.
But what can you talk about when you speak at RE events? As any communication expert would suggest, you should speak about a subject that you are very familiar with, a topic that you are passionate about, or where your expertise lies. Aaron suggests talking about your first real estate deal.
“We love that because that’s the story of how you built that you kind of forget about after a few years later. That could be inspiring for someone new in the business. Maybe you flipped a house, talk about your first flip. Whatever you do in this business, just get it out there to the world as much as you can,” advises Aaron.
#3 Build and maintain an active network of key real estate people
I’m sure you’ve already heard this before, but Aaron echoed this during our conversation: It is all about who you know and not really what you know in the real estate industry. Networking and building relationships are important skills that you should develop in order to succeed in this business. Having a strong connection with key industry people can be the difference between being very successful and simply getting by in this business. By building a community of people who trust what you do, you’ll have a stream of deal flows, a better chance of meeting potential investors, and more opportunities to grow your business.
Here are some ways to build your own network.
- Join your local real estate investment association and other local professional and business groups
- Engage with your local community to expand your client base
- Attend real estate conferences and networking events
- Create an online platform and maintain an active online presence
“I had gone around to all different types of real estate groups for years and to this day, still has good relationships with them. I speak at different REIAs and that’s been a godsend to our network and our fundraising capabilities. I host regular monthly meetups of my own networking group, the New Jersey Real Estate Network. I have had transactions as a realtor from which I’ve formed lasting business relationships. It’s all about forming and maintaining those relationships,” tells Aaron.
#4 Under-promise but over-deliver
Syndicating smaller deals comes with its own challenges, says Aaron. “Syndicating a small building such as a six-unit means when you lose one tenant, that is 17-18% of your income lost. So, that might be tough and you’d rather be doing 25-plus units. But if you don’t have many options, like us in North Jersey where there are a lot more discounted six-units than the larger ones, you just try to make them work.”
He adds that they have some syndicated properties that are doing much better than expected, while others are just barely above where they expected them to be. Hence, he advises being conservative in projections when structuring the deals. “You don’t want to set the bar too high because you might overpromise and underdeliver. You just want to do the opposite – underpromise and over-deliver.”
#5 Challenge in finding deals
Aaron admits that finding a good deal within their location and market is a day-to-day challenge. “We can raise a good deal of money pretty quickly but finding great deals and investment opportunities requires more effort,” he says.
To find good deals, Aaron’s company directs its marketing efforts toward the following:
- Direct mail marketing – their biggest source of deals
- Online marketing
- Billboard marketing – although Aaron notes it’s proving to be not so cost-efficient
- Knowing the right brokers and wholesalers
“We have a great network of agents and brokers that provides us pocket listings that are not on the market yet. The good deals are not sitting on LoopNet, not in this market at least. It is direct mail marketing and knowing the right brokers and wholesalers. Again, it is all about who you know really with commercial real estate,” shares Aaron.
#6 Choosing to have their own property management company
After cycling through two failed hired property management firms, Aaron’s company decided to develop its own property management division. The decision to self-manage proved to be the right fit for their current 25 properties with 140 units.
“We have an amazing property manager and a team that runs our property management company plus independent contractors that work with us. It is a good well-run repositioning company that goes above and beyond what a normal management company does. Because
we buy mismanaged buildings, we have to figure out ways to make income on the property, get our expenses down and save money every day. The setup allows us to really control the assets and just do better with the buildings,” says Aaron.
However, he says that self-managing properties is ideal only if the location permits close supervision. If you are a syndicator raising capital in cities such as New Jersey and New York and buying deals in Texas or North Carolina, then self-managing is impractical, and hiring a third-party management company could be your only option.
#7 Caring for investors
Communication is key when care for investors is concerned. As passive investors put their trust in the sponsor, the sponsor, in turn, has the duty and responsibility to communicate critical aspects of running the business to investors throughout a project’s lifecycle.
“I have to teach, educate, be a thought leader. Always know exactly what you are talking about, be honest about how the business plan is performing, how you make money with their money and if you can explain that properly in a way that people want to listen, then you’re a step ahead in keeping your investors,” says Aaron.
Some tips to keep in mind when aiming to keep investors top of mind.
- Be transparent. Communicate updates regularly (monthly preferably)
- Have good financials, as you are responsible for all financial reporting.
- Make prompt payments to investors in accordance with the operating agreement.
“I learn every day in this business. I just work hard. I am a decent public speaker. I understand finances. I have a really good business partner, a good team under me. I hire the right people too. If I am not adapting and learning and growing from my mistakes then I am not a good business owner,” ends Aaron.
Syndicating smaller deals is not really much different from operating larger properties. But no matter the size of your business, it is getting up and working hard every day that will set your course toward a successful business.