Property values have dropped significantly as a result of the crisis, while mortgage rates remain at record lows. This appears to be an ideal time to invest in income-producing real estate, so why isn’t everyone out looking for bargains? Unfortunately, banks are not ready to lend just because interest rates are low. Banks that are ready to invest in real estate require extensive loan documents, great credit, and, most crucially, a down payment of at least 25% of the purchase price. Unless you have a large amount of cash on hand, this real estate investment market appears to be out of advance for all but the biggest players.

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Is there any way to enter into the real estate market if you don’t have any money?

When alternative financing options are unavailable, a real estate syndication allows individual investors to pool their funds to invest in real estate. The standard syndicate combines the money of investors with the experience of management and has a three-phase cycle. The first phase comprises of forming the syndicate, obtaining the property, and marketing it. The second phase is managing the property for the benefit of the syndicate members. Finally, the property is liquidated in Phase 3 and the investment gains are divided to syndicate members.

Most components of forming your own real estate syndicate may be completed without the assistance of a lawyer. Real estate syndicates are typically formed as limited liability companies (LLCs) because LLCs allow for greater flexibility in management and capital structure, which may be advantageous if members of your syndicate will be contributing services or other non-cash investments as part of the company’s capitalization. Setting up an LLC is normally conducted by submitting articles of formation with your state’s corporations department, followed by the preparation of an operating agreement, all of which can be done on your own.

Once the corporation is formed, you must produce a prospectus/business plan as well as a private placement memorandum in order to acquire funds from investors. Typically, selling stocks necessitates extensive paperwork with the SEC and the state corporations department. To encourage small company development, both state and federal law give limited exemptions for the selling of securities to fund your syndicate.

For example, under Section 3(a) of the United States Securities Act, you can use the intrastate offering exemption if: (1) your syndicate is organized in the state in which the securities will be offered, (2) the company will conduct a significant portion of its business in that state, and (3) the syndicate only offers its interests to residents of that state. You can raise up to $5 million under California’s limited offering exemption provided your offering fulfills California Corporations Code 25102(n) and you follow the restrictions governing your marketing and sales practices. Furthermore, in California, licensed real estate brokers are permitted to sell interests in real estate syndicates without a broker-dealer license from the California Department of Corporations, albeit utilizing a broker precludes using the restricted offering exemption under California law.

It is always advisable to need a lawyer help you through the process of selling stocks since the state and federal rules and regulations regulating the sale of securities can be intricate. Understanding the exception on which you will depend before consulting an attorney will save you time and money.

After the syndicate has been formed and funded, the manager can begin hunting for a suitable investment property. Having enough cash on hand to make a 25% down payment and cover the estimated first year operating expenditures would go a long way toward alleviating most banks’ worries about lending in current real estate market. More importantly, if you are successful in raising the cash to acquire an investment property without the need for outside financing, the syndicate will present a highly appealing investment option because it will generate immediate cash flow as well as the possibility of profit from property appreciation.

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