First Impressions of a Real Estate Syndicator…

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Well – I’ve put the pedal to the metal as it relates to the process of syndication, and I’d like to share with you some of my first impressions.

I apologize in advance to those of you who are used to my articles being on the longer side – this will be rather to the point.

Why – because one thing I am getting confirmation of is that:

Running a Syndicate is a Job!

Yep – this has been the busiest couple of weeks in recent memory.  I know what you may say: it’s just because this is your first one – once you close on it and outsource the management, you’ll have nothing more to do than sit there and collect cash flow…

And my answer to you would be – this might be true if I was only doing this one time; but, I am hoping to do 10 syndicated deals in as many years, each one requiring the same amount of output from me.  I have to assume that however busy I am at the moment is how busy I will be for the next 10 years…

Honestly guys, it seems that I am always on the phone with someone.  And if I am not on the phone, that’s only because I am studying Pro formas.  And if I am not doing that, then I am building spreadsheets with which to analyze those proformas…

And Speaking of Pro formas

I’ve come to accept that Pro formas are put together by seller’s agents for one purpose and one purpose only – to fool the idiot buyers who have too much money but not enough brains (feel free to extrapolate upon that).  The Proforma incomes are always and without exception overstated.

Often, the incomes are being represented as “Stabilized Income”; as in – the property is not currently stabilized, but you, young Mr. Buyer are a smart a capable guy so you can very easily do what the seller could not and stabilize this property.

Oh yeah – don’t you worry your pretty little head about what the income is right now; just go ahead and pay us a price based on what we tell you the income will be once YOU stabilize this asset…

Nice; thanks so much guys – I think to myself.  But, is it terribly silly for me to want to get paid for the work I am about to do to stabilize the building you’ve run down, and don’t my investors need to realize a return on their investment for taking on the risk that comes with the process of stabilizing a large building?

How about this – I pay you a price which is based on current income levels; would that work for you?  No one has said yes yet…

And then there are the expenses, which are always understated, and quite often omitted.  With this item I am especially disappointed with the CCIM designated crowd…

CCIM Designation

CCIM is a training program for commercial real estate brokers; it was established in 1954 to essentially teach them how to be the smartest people in the marketplace – the top dogs.  It is a national program and it has indeed managed to fool people, most notably its members, into thinking that they are indeed the best and the brightest out there – the best thing to happen to real estate since dirt…

The CCIM people are a bit more knowledgeable than the average agent (though I am finding out not by much), but unfortunately my experience thus far has been:

1. None of the Pro formas delivered to me by CCIM people have included CapEx as part of the expense structure of the asset.

CapEx stands for Capital Expenditures – think of it as a rainy day fund, and it’s not a big freaking secret that roofs get old and need resurfaced, water heater break, windows need replaced, and parking lots need re-paved.

I stand corrected – these things might be news to the Joe-shmo Realtor out there who spends his days showing pretty houses to pretty people, but it sure as all get-up should not be news to a CCIM.

And yet, having gone through 100 proformas in the last 2 weeks, I can count on the fingers of one hand how many of them accounted for CapEx.  This means that having accounted for the industry standard of $300/door/year on 100 units, the stated NOI of $190,000 becomes $160,000 in a hurry – see the problem?

So, what does this mean?  And the answer – either they don’t know about CapEx, which is very difficult to imagine relative to CCIM designated people, or in their zeal to get the most money for the seller (and the most commission for themselves) they are willing to put out unrealistic Pro formas that no one but a fool would even remotely consider taking action upon…neither is good!

The reality that I have not taken action yet, reflects the fact that I am not a fool and I won’t work with those jokers…

2. Let’s talk about the utilities – one the most difficult and volatile elements in the expense structure of any building.  Here’s what one CCIM did (you’ll love this):

I received in e-mail a brochure for a building.  It looked interesting; it was in the right location, the rents were in-line, and it indicated expandability via energy efficiency.  I wasn’t sure what to make of that, so I requested a Pro forma.  Turns out, the owner pays water and heat on this building, and the magnitude of the expense that was listed in the Pro forma was, by my estimates, at least 60% less than I would expect for a building of this size.

So, what did this guy do?  He figured he can turn a lemon into lemonade.  He called it “Value Add”, which is a buzz phrase signifying significant opportunities to increase value, and suggested that I could have the very distinct pleasure of replacing close to 100 widows by which improving energy efficiency and thus lowering the heating costs – this was his idea of value add.

I read that and nearly fell of the chair – are you kidding me…?

This wasn’t a fire-sale by the way; he wanted a market price for the building.  What a way to put pale lipstick on this ugly pig; thanks – I think I’ll pass!

I expected much better from CCIM!

A Good Agent

I think I finally did find a good agent, though.  We spoke on the phone for the first time on a Wednesday.  About 10 minutes into the conversation, he wanted to schedule a 30-minute block of time to talk more.  I offered to simply tell him my criteria – I know it so well, after all.  But, he insisted we that we must speak again; he has questions above and beyond my criteria that he must ask and receive answers to, in order to determine if he can help me and how.

We scheduled a time for that Friday, and as I hung up the phone I thought to myself – this is good…

On Friday, 20 minutes ahead of the scheduled time I received a text from him.  He apologizing and advised me that his preceding meeting will run a few minutes long.  I thought to myself – I am starting to like this guy!

When he called, 7 minutes later than the scheduled time, we spent about 30 minutes on the phone – he asked a lot of questions and LISTENED; once again I thought to myself – right on!

Having heard what he needed to hear he told me that what I want does exist, but that in order to find it he will need go OFF MARKET.  I thought to myself–

Score! Finally someone with a damn bit of sense…

Naturally, I will let him keep all of the commission even though I am licensed in the State.  Though I am staying in Ohio for this first syndication, the markets that I am looking in are all several hours from where I live, and team members that are quick, honest, and knowledgeable are the key to my success.

I am not about nickel and dime this guy over commission split!

One Other Impression – The Market is Inflated

I am discovering that there are fools out there paying 7 CAP for multi-families and commercial buildings in the Mid-West; if that’s not inflated then I don’t know what is.  I am not talking coastal markets here – the Mid-West.  Who buys at 7 CAP in Ohio…

Personally, anything under 9.5 – 10 CAP will not work for me and my investors.  I am looking for a 12% annualized Cash on Cash (more if I can get it), and 15% IRR, and those numbers just don’t work at anything under 9.5 CAP at the front door.

Until I find what I am looking for I am comfortable sitting on the side-lines for as long as it takes, and I’ve communicated this much to my investors – we are in agreement.  A lot of ARMs will be adjusting and balloons coming up in the next couple of years, and I believe that there will be a dip in the market as the result.  We can wait until then if we need to…

Wrapping up

I am learning new things every day and there are many more items that can go on this list – keep your pants on… 🙂

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Great piece!!

    My full time job is in insurance and there is a very important point (one of several) you made that is present in the insurance industry (and most cyclical industries) and that is overpaying for the priviledge of taking the risk. And thus, markets can easily become bloated and overbought (and subsequently undersold) by those acting on emotion easily mislead about the underlying fundamentals in the current maket and not wanting to miss a run up in price perceiving there is unbridled demand for all assets.

    It’ll be interesting whether the “investors” in real estate are patient and disciplined enough to not overpay for the risk they are taking on. You being one member of the market may be disciplined and patient, but I pose to you that this where the opportunity always presents itself because you’ll be able to by when there is blood in streets. Just look at the stock market. Same concept only not backed by real assets.

    I applaud your willingness to share your experience and wish you best of luck on cooly executing on your stated approach. Things worth doing are seldom easy but often justly rewarded.


  2. Douglas Dowell on

    EPIC article Ben,

    This has caputured alot of what I have experienced in game of syndication as well.
    CCIM is a great education but It seems to me like everything else its just a label. For sure their is no ethics portion of the training. hahahaha

    Commercial brokers have an agenda to sell at maximum price even if that means saddling the buyer with a foreclosure. Proforma is code for pay me for work you have to do.
    I really recommend Robert Ringers book on “Winning through Imtimidation” where he recounts his stories as a commercial broker and how not to get “punked”.
    This is also why BP is such a great place to network with other experienced pro’s that can point out landmines.

    I too have found syndicatable (if thats a word) deals are hard to find therefore I have been looking more to the development side.

    Looking forward to hearning about your journey…your investors are fortunate to have your leadership.

  3. Echoing off the other comments, GREAT POST!

    One thing I have seen over and over from my research and talking with other investors is commercial brokers who don’t know you seem to want to test you by throwing you their crap and seeing what sticks. I guess it’s either their way of showing their complete incompetence or vetting you to see if you are a real player.

    Of course you see through it but I know there are people out there who just eat it up! Doug has a great story of a group of doctors getting together and buying a large complex that ended up being a 1 cap because they bought on pro-forma!!!

    Just curious, are you still in the process of raising money or are your investors already primed and ready to go? Also, do you have a dollar amount set as far as how much equity you need/want to raise?

    • Ben Leybovich

      Hey Nick – it’s always the doctors hahaha!

      The brokers can keep their crap, and the whole point is that may be some of them read this and quit wasting my time – it’s very valuable…

      I wouldn’t say that all of my investment capital is in – that would be a blind fund and its not what I am doing. But, I do have a pretty good idea.

      As to magnitude, I am thinking I’ll be raising in the neighborhood of $1,000,000 – $1,500,000. If the IRR is right there shouldn’t be too much difficulty to raise the money. Finding the deal that makes sense is the real challenge…

      Thanks Nick!

  4. Corey Schneider on

    Hello Ben,
    Just wanted to add my 2 cents here as a long time “Investors Realtor” [35+ years] & a CCIM since 1993….. You are absolutely correct in figuring in a Capital Expense/ Funded Reserves. That is real life as the asset will need to be repaired, rebuilt, replaced and up dated as time goes on. The appraiser, in appraising an income property for the lender, will put in this expense in his income & expense analysis. The 1st thing I do in my practice when I get a set up on an income building is to see what the expense ratio is. This tells me if the “Set Up”/Pro Forma is in the realm of realistic. I will then recast my own “APOD” [Annual Property Operating Data] sheet & put in or update the numbers that are more in line with the real world. In my experience, the Reserves are not the only line item(s) on the income statement that need attention.
    I can’t comment on what my fellow CCIM’s are doing, but I can assure you that most are on top of their game. However, I did like the value add bit on the windows. Now if he provided a program where the owner of the building can get a grant for the replacement of the windows [which I have seen in the past], he might just have been on the money…….Like I said…..It’s just my 2 cents here…..
    Corey Schneider,CCIM,ALC,GRI

    • Ben Leybovich

      Hey Corey – thanks for jumping in indeed!

      First of all, send me a PM – I’d love to chat. Secondly, the expense ratio is right on – I look at that very closely. But, unless it included CapEx it is useless 🙂

      Thanks so much for your comment

  5. Ben, good article. I have one minor disagreement, however, but I am not a CCIM by any stretch of the imagination. I’ve been told by multiple sources, CCIM and otherwise, that CapEx is not taken before calculating the NOI. I certainly consider it when I run the numbers on a property, but I’m told that strictly speaking, NOI is calculated without figuring CapEx into it. And that this is a convention for the purpose of comparing apples to apples.

    Although I totally agree with you that pro-formas seem to be designed to baffle the unwary with BS. I always create my own estimates, even on small multis. And the market seems to ignore the real numbers, because I haven’t bought much up in my neck of the woods lately.

    Maybe others will jump in with more feedback.

    • Ben Leybovich

      Hey Ann,

      I am not sure of what the “conventions” are, but it doesn’t matter much. If CCIM has steered the market to accept convention whereby CapEx enters the equation post-NOI, this is ever more indicative of them manipulating the reality behind the numbers in order to earn a higher commission.

      Crap happens, and money has to be set aside as part of a reasonable approach to valuing an opportunity – period. This is my perspective and this is your perspective as well – this is a reasonable perspective. They can take their conventions and shove them… 🙂

      Thanks so much for jumping in Ann!

    • Ann, I have always been told that same thing. Even in my college classes. The reasoning behind it, from my understanding, is that capital expenditures are not a commonly occurring expense. Therefore, they are to be taken after NOI, so that, like you mentioned, you can compare apples to apples. That isn’t to say that they shouldn’t be taken into consideration and used when calculating cash flow.

      But, as far as NOI goes, it is much easier to predict more common expenses as opposed to a sewage line failure. In fact, when thinking about it, money for the capital expenditures that may occur could, in theory, be calculated in the reserves because you are essentially saving up for the larger expense. Just my two cents.

        • Luke –

          Let us not confuse semantics for intent. I am not interested in semantics – I don’t have time for semantics. Anything that is a real expense now or in the future needs to be weighted in a valuation – period.

          If I am to consider my career as somewhat successful, I would have to attribute that success to a willingness to part ways with the established, conventional, scholastic approach. At some point, this game comes down to common sense. CapEx is as much common sense as common sense gets…

          I appreciate what the professors teach you. I would encourage you to look at your professor’s income statement to see how much of their income is W2 from the college, and how much comes from real estate holdings – just saying Luke.

          We can dress this pig all day long, but it’s still a pig. I don’t get to put CapEx in my pocket; I will need to spend it to sell the asset at a profit. As such, I am not about to pay for it upfront! All the rest of it is indeed semantics 🙂

          I appreciate you jumping in Luke. Please don’t hold it against me for shutting you down pretty hard as I did. In my mind CapEx is not up for discussion…Truly, I can’t believe that Brandon and Josh haven’t kicked me off the blog yet – must be cause I am so damn good-looking…

  6. Ben,

    I think what you are seeing is more a function of world economics and the space you are now playing in. Everyone is chasing yield. The space you are in would be considered a space where more sophisticated investors are and with those investors comes more money that needs to be invested. A lot of them are stretching just to find yields in places outside of the stock market, so if the alternative is holding 10yr corps vs a 100 unit apt building at a 7 cap. They are going to take that 7 cap. The key is just being disciplined and not suckered into a mediocre deal because you have nothing else to invest in. This will be a test of your resolve and I have no doubt you pass.

  7. In any operating business (as opposed to an investment holding company) which relies on a resource or asset(s) to deliver their product or service, there will be a reserve or sinking fund to address the day those resources or assets are depleted or wore out.

    I’m not sure what the GAAP rules are on this matter, but in some industries you see the deduction made to gross income and in others from net operating income. Where it is deducted is likely important to accountants and the tax man, but the point is the deductions are made. Why anyone selling a business which just happens to be a 50 or 100 unit apartment complex, would think there was no need to account for a reserve {CAPEx} is ignorance at best and dishonesty at worse.

    It all comes down to your buying a business and can only pay a price which will allow you to continue to profitable run the business.

    BTW: In December, I looked at an 18-unit where the clock was ticking down to its first major rehab and rents were ~20% below market overall. The pro forma acknowledged the revenue was below market and indicated there was room for ~20% improvement and then went on to price that improvement into the asking price. We suggested a priced based upon current revenue and our standard allowances which was received as if it were an insult. Our response was: Improve the revenue by 20% and we can talk about your price, but we are not going to pay you for work we have to do.

    • In referring to “GAAP rules ….likely important to accountants and the tax man, but the point is the deductions are made.” you are likely referring to depreciation but let’s not complicate matters as these are wholistically whimsical and not based on real expenses except to say that they recognize a building’s value is being reduced overtime by the seller though it’s based on what the Seller had paid (or overpaid) initially for the asset in the PAST and not reflective of the property’s current econimic viability as it stands today. It also DOES NOT reflect any need for new (or upcoming) capital purchases required in the near term (roofs, mechanicals, windows, etc) to stabilize or improve property’s economics and thus the purchase should be justifiably discounted for these requirments…not paid for in advance by the buyer in a purchase price AND then paid for again to actually make the improvements. That’s where the creative accounting “double” accounting hijacks the buyer.

      Fight the good fight – Best of Luck


      The concept though is spot on in that they are recognizing that a property (excluding Land) is a depreciating asset as of the date it’s put in service. However, there is little to no correlation to current economics needed to stabilize a property and properly maintain it going forward. There are two elements that should be considered here…one is ongoing and regular maintence and CAPEX, the latter of which is a definite consideration on the front end of a purchase and refelects the true economics of coninuing to operate profitably.

  8. Jeff Brown

    Whatever they’re called, cash reserves are indispensable. If they’re not included in the big picture for each investor, all ‘great’ planning is subject to Murphy. I’m reminded of O’Toole’s corollary to Murphy’s Law. “Murphy was an optimist.” 🙂

    The whole cap rate thing is a different story altogether.

  9. Ben – this is a great post indeed. You are absolutely spot on regarding the omission of capex. I have analyzed hundreds of offerings in my market and have found the pro formas presented as laughable. In fact I would say that the real cap rates are probably in the 3-4% range. I have not found one deal yet that could service debt with even a chance of profit. As you have found, it is difficult to even have a knowledgeable conversation with these brokers, CCIM or not. On a side note I find it pretty funny how every CCIM you talk to will never forget to mention at least twice that they are a CCIM:)

    My question to you – why not use your syndication capital on a large portfolio of SFRs? I understand all of your theories about adding value through operations BUT this is all based on finding something with a true 10%+ cap rate on real numbers. My theory is that if a seller was realizing true profits with ALL expenses factored in he would never sell at such a cap rate. The reason being that he could not replace that yield in todays market. True there are different motivations to sell including ARM resets and locking in profits but as your seeing its mostly overpriced junk out there. A package of hand picked SFRs in Ohio could easily meet your IRR requirements and provide much easier management, transparent accounting and easier pickings through bank owned listings. If I were in the syndication game this is the route I would take. I think going down your current path may have you waiting a very long time for the right deal.

    • Haha – totally agree. “I am CCIM” – that’s their favorite phrase. One idiot tried to tell me that 4 CAP is good because institutional investors deploy at 4 CAP and because CCIM says so – I didn’t know whether to laugh or cry…

      I see what you are saying about SFR. SFR is too volatile for me. Besides, I think I will find 10 CAP, but by looking where nobody else looks 🙂

      I’ll keep you posted here. Thanks so much Serge!

  10. Ben some institutional investors do buy at a 4 or 5 cap. They want brand new product for teachers credit unions and other investments eyeing ultra safe investments outpacing inflation. In a strong barrier to entry markets those rent rates increase at an exponential rate and the institutions can push the cap to 5 and 6 eventually through strong rent increases. For them these are slam dunk deals on new projects.

    On the flip side you have foreign investors. A cheap house in Canada for instance can run 600k to 700k. They are extremely happy to get a 7 cap in the states here. If you were a seller and local buyers said 9 cap and foreign said we will take 7 and had proof of funds which would you take??

    If the listing broker represents the seller the job is to get them the most yield possible. The value of a property is what a particular buyer wants to pay for it at a given point in time and what a seller will accept.

    When you syndicate you have to get a great yield to make the numbers work over a direct group or individual buying. You do not have to bake in all those extra costs to make the project viable. I think the hard part will be finding a true 10 cap that is stabilized. I think you can find properties at 50 to 60% that can be force appreciated through rehab and lease up. That is where the greatest gains lye. Many of these types were already turned around in 2009,2010. There will be some new ones coming up as mentioned.

    I am currently thinking of building new with building and land costs totaling a 10 cap and selling off at a 7 cap. Developers do this on commercial real estate such as pharmacies. All in costs are around a 9.5% cap to 9% and they sell in the 6’s. Lots of yield for developing new product. Gotta love real estate with all the angles!

  11. Anthony Yeoman on

    Thank you Ben for this post. I thought I was the only one going through this with brokers. Consistently I have run into the following problems:

    – Misrepresented or missing expenses
    – Inflated cap rates (sometimes higher than what is represented by the income and expenses they sent me. As if I would not double check the math)
    – No financial statements (no P&Ls, just a random list of income and expenses.)
    – No actual numbers, only pro forma.

    These are pretty basic things but I see this all the time. In my market of Florida, multifamily properties are still moving, even with the inflated prices and low cap rate.

    Congrats on finding a broker willing to find off market deals for you. That is definitely the way to go. Good luck to you and thanks again for your post.

  12. Deblin McKnight on

    Let me start by saying wow. I have been scanning (and sometimes fully reading) almost every article you have posted on BiggerPockets and I have a healthy educational headache coming on, not something I have experienced since my college days. I feel like creative investing is such a better option than conventional loans and look forward to a further education. I have been browsing your personal JustAskBenWhy website and would love further information. Just tell me to buy it and that it will be worth my time, please. I need that extra push.

    My fiancee and I are in contract for our first single family home and I have an investment partner to buy a multifamily (he puts up all the capital, I do the work) and my fiancee and I would like to buy a multifamily as well. I believe we purchased our first house (with no education in real estate at all) quite creatively using the Neighborhood Lift Program, FHA financing and a few other items – we are able to purchase this property with no money down! Also, our loan officer is HORRIBLE, but this far in the game it’s pretty much too late to switch. This will be our primary residence. As we are young (he is 23 and I am 25) we have no money to put down on a property. Does your course on the website cover instruction and ideas for this process? How about just general education in real estate? I have taken enough notes to write a textbook but would love to cram more information inside my head.

    Looking forward to your thoughts!

    • Hey Deblin,

      First – I am glad that you have a headache; it means you are learning. Congrats on a nice first deal!

      Now – I just sent you an email in regards to your question. BP blog and forums, outside of the Marketplace, are not to be used to push product or services – such are the guidelines. I understand why – I hate it when people do it to me. As such, I will chose to restrain from answering your question directly here; besides, even if I did answer you directly you’d likely never see it as the comment would be removed by the moderators.

      I sent you an email. If you don’t receive it, then send me a quick email through my website; you’ve been there 🙂

      Thanks so much for the kind words. Speak to you soon.

  13. Great article.
    Love the insights and pointing out how terrible given information is.
    BTW lest anyone thinks this is based on the asset class this crap is even worse on residential multi units. Love looking at a duplex on MLS with its like 15% expense ratio because they don’t even include taxes(!) in the expenses.

    Mentioned this on another article recently but in case you weren’t aware “Pro Forma ” is Latin for “total bullsh*t”. 🙂

  14. Mehran Kamari on

    This is one of the best articles I’ve read in a long time. I think every investor should read it to get a feel of how deceiving pro-formas can be; it would save many a pockets from getting smaller. Sometimes I get on Loopnet, look at some of the pro-formas, and I wonder how the heck someone can have the nerve to even put those numbers down on paper :).

    I haven’t had the pleasure of working out my offers based on current(not potential) income specifically because I’ve been working in the residential space so far. I can imagine it being very frustrating have no one entertain an offer this way when you’re buying on solid investing fundamentals. I really hope you find what you’re looking for.

    • I’ve looked at hundred of OMs in the last 4 months Mehran. I’ve seen pro formas by 2 brokers that even come close to something other than pie in the sky. One guy is in Indiana and another in Ohio. These are the exception that proves the rule…

  15. I’ve been actively searching for a quick method to determine Cap Ex when scanning deals. I have a reserve study spreadsheet I use for detailed evaluation of my best picks, but that is unmanageable for quick decisioning.

    Ben, I noticed you mentioned $300 / year / unit. Out of curiosity, what is that based upon? Clearly building age / remodels / location (cost of labor) etc would have so much impact I have a hard time imagining a general formula. If there an actual formula where I plug in variables?

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