Have you ever tried to make reservations for a Subway restaurant? That’s a ridiculous question, right?
Subway started in the 1960s and grew to be the largest food franchise in America, with over 25,000 locations. No matter where you are, if you’re craving a Subway footlong, you are likely minutes away from satisfying that urge.
Have you ever tried to get reservations for Noma restaurant in Copenhagen?
René Redzepi’s Noma is the most in-demand table in the world. On the sixth day of every month, the third month out opens up for reservations (this coming January 6th, for example, they start taking requests for March). It takes only a matter of hours for an entire month to book up. Noma managing director Peter Kreiner estimates that about 20,000 people attempt to get a table on reservations day.
(Note: This is the historical norm. Noma reservation policies are different during the pandemic, but the restaurant is still prospering. And Subway started spiraling in 2014. Poor location selection and the Jared scandal were the culprits.)
So, what does this have to do with real estate?
Real Estate Syndication Deals Abound
I’m entering my third decade as a full-time real estate investor. And I’ve noticed a disturbing trend. Syndicators and investment opportunities are popping up on every corner, like Subway restaurants.
I fear the future for many of today’s celebrated syndicators. The rising tide has lifted all boats since the Great Financial Crisis. But as Warren Buffett said, the tide will eventually go out, and then we’ll see who is swimming without a bathing suit.
Are you planning to invest in a passive real estate opportunity?
I’ve been investing this way for some time, hundreds of friends have joined us to do the same. We’ve been combing the fruited plain for years on a quest to find the very best operators and deals. And we’ve learned something: This is a lot harder than it looks!
If you want to do it really well, that is.
I started researching syndication in the mid-2000s. I spoke with a Virginia-based syndicator of shopping centers to learn all I could about that process. The barriers to entry for syndicators and investors seemed hard to overcome in those days.
The word “syndication” made me nervous back then. I had grown up watching The Godfather, and I wondered if syndicates had anything to do with horses’ heads and such.
In those days, it was hard to find a great syndication opportunity. The fat cats had the corner on the market and small investors had little meaningful access. And there was limited information online. I can’t imagine just how little information was available before the internet.
Oh, how times have changed. Syndicators have come out of the woodwork since the Great Financial Crisis. People who weren’t even investing in real estate are now raising millions of dollars for their deals.
Social media and a proliferation of online portals, as well as relaxed SEC syndicator and investor restrictions, have resulted in an explosion of opportunities. Most are beautifully packaged. Some are great… others are not so great.
Exercise Caution When Investing a Syndication
I’m not saying there is anything sinister about all that. Many fabulous business people have transferred their skills in other arenas to the real estate realm and are crushing it on behalf of their investors.
What I am saying is this situation calls for great diligence on the part of investors. There’s a lot to choose from out there, and making the right choice could dramatically impact your future and your retirement.
I know. I’ve made and lost a lot of hard-earned capital on passive and active investments over the past three decades. This school of hard knocks has been painful at times, but it’s meaningfully shaped our firm’s investment philosophy and practice today.
The great news is you don’t have to travel this same oft-painful road. There are smoother highways that can help you bypass a lot of the pain and loss that many of us have experienced.
One way to do that is through coaching and mentoring. Another is through a plethora of books and training courses. There are hundreds of podcasts with thousands of episodes that can provide an education that exceeds what you’d learn in any university.
And, of course, there’s BiggerPockets. You’re likely here because you love to learn and want to connect with like-minded investors and entrepreneurs. You’re in the right place to do that. There’s no other place like this on the planet!
Real Estate Syndication Due Diligence Is So Important
So, before we wrap up, I want to give you a few specifics to assure your due diligence efforts are on track. There are just too many great podcasts and books to list here, but I’d like to call out one particularly great book written specifically to help you in your due diligence efforts.
You need to be sure you deeply trust any syndicator you hand your cash to. The critical question to ask yourself is this: “Am I willing to be in trouble with this person for the next 5 or 10 years?”
Why? Because almost every deal has trouble of some kind. Do you trust this person to handle your capital through tough times?
If you’re going to invest passively, you should develop a checklist you strictly follow. Set it up in advance and determine not to let your emotions sway you into ignoring important items that don’t align with your list. Virtually no prospective syndicator meets every single item on our list, but you should assure yours hits the points that are most important to you.
Due Diligence Process for Real Estate Syndications
Here is a sample of the issues we consider essential. (Note I’m using the terms syndicator, operator, and sponsor interchangeably.)
- Has the operator been in this asset type since the Great Recession or before?
- Does the operator have a cohesive internal staff?
- What is the syndicator’s track record? Their best deal? Their worst deal?
- Is there a moral and philosophical fit?
- How does the syndicator speak about their spouse, their investors, and their competitors? And how do they speak to waiters and flight attendants?
- How much skin does the syndicator personally have in the game?
- Does the PPM (the investment prospectus) show alignment between the sponsor and the investors?
- How much debt does the syndicator utilize and what are the details of that debt?
- What do online reviews and other investors say about them?
- How much and how often do they communicate with investors along the way?
The Bottom Line
I talk to active real estate investors every week. Many of them are tired of managing toilets, tenants, and trash. Many are cashing in their winnings and are ready to invest passively. If that’s you, one of the most important financial decisions of your life is where you’ll invest next.
Choose wisely, my friend.
If you boarded a plane for Copenhagen right now, you might not be able to enjoy dinner at Noma’s. You may not get a seat at Noma’s this year, or ever. Its exclusivity speaks of its quality.
If you had the time, money, and opportunity to eat at Noma’s, you would probably choose that over Subway. Especially on your anniversary.
Don’t treat your investments with any less care than you do your anniversary eating choices.
What about you? Are you planning to invest passively? How do you choose your syndicator and your investments?
Join the discussion below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.