Real estate syndication Vs S&P 500 index fund

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Real estate syndication Vs S&P 500 index fund

Sanjay Bhagat
Member since 2018 · 10 posts · 2 votes

I have a dilemma. This is my first post in Bigger pockets.

S&P 500 index fund has given a historical AAR (Average Annual Return) of 10 % in the last 60 years and 14.5% AAR in the last 15 years as of today. The AAR does NOT include dividends. With margin trading of 20-25% of initial investment, when stocks market collapses with dollar cost averaging as a strategy  , leverage of the initial investment in stocks, the AAR can be more.comparable to most syndication (compared to 20% down payment in real estate).

I have been following BP forums for the last 4-5 months and have spent almost 4-500 hours. Most syndicate offer 20%. I have never invested in syndication.

I understand diversification in different asset class (precious metals, real estate stocks etc). But if AAR is important and someone is starting out. why syndication is better than real estate for the next 10 years? My risk appetite is 80%. I do understant the team risk, market risk and deal risk in syndication as Scott in his podcast said.

Thank you for your insights

Sanjay

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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y

Both of your invest strategies above I don’t consider as RE investment.  An investment forum would be better for this post.

With that said let’s look at these two but also let’s look at Risk adjusted.  Find your own figures.

A.  S&P 500 is at a PE ratio of 30.  Price to earnings.  An example. A $300 investment would make $10 earnings per year.  Before personal taxes.  That’s roughly a 3% return.  
No investor would make that investment even before adjusting for risk.  Most commercial investors are looking for a 6 to 10% cap rate return.  

Take the top 5 stocks in the S&P out of the equation and see what the P/E ratio is.  A lot worse.  

But hey, money is pouring into the US stock market from all over the world. Smart people they have to be right.   .    
    
B.  RE syndications.  You said you have been reading several hundred hours of BP posts.  By now you have read all of the Syndication failure issues.  You should have boiled them down to the following lack of proper due diligence.

 1.  Short term debt used in longer term investment time frame.  They got caught short with the recent rate increases.  Investors already learned this lesson about 15 years ago with housing.
 There is a rule.  Intelligent people learn from other people’s mistakes. Smart people learn from their own mistakes.   Dumb people keep making the same mistake.  This was a very simple due diligence item that was missed by many people. 

2.  Bankrupt brand names, Broadway shows, crypto investments.  These investors didn’t risk adjust these syndication investments.  

These investors were looking for Passive income, but they didn’t realize they had to fill the role as an Investment banker and they didn’t have the skill set or systems to do that.   Are you an Investment banker? 

If you're looking for an REI strategy state your financial objectives, resources and time frame and ask for suggestions.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y
    Quote from @Sanjay Bhagat:

    I have a dilemma. This is my first post in Bigger pockets.

    S&P 500 index fund has given a historical AAR (Average Annual Return) of 10 % in the last 60 years and 14.5% AAR in the last 15 years as of today. The AAR does NOT include dividends. With margin trading of 20-25% of initial investment, when stocks market collapses with dollar cost averaging as a strategy  , leverage of the initial investment in stocks, the AAR can be more.comparable to most syndication (compared to 20% down payment in real estate).

    I have been following BP forums for the last 4-5 months and have spent almost 4-500 hours. Most syndicate offer 20%. I have never invested in syndication.

    I understand diversification in different asset class (precious metals, real estate stocks etc). But if AAR is important and someone is starting out. why syndication is better than real estate for the next 10 years? My risk appetite is 80%. I do understant the team risk, market risk and deal risk in syndication as Scott in his podcast said.

    Thank you for your insights

    Sanjay


     I am not sure its "better", depending on the syndication it could be better, it could be worse. The truth is no one is going to be able to predict the next ten years in real estate or the stock market. As someone who is in both the markets and real estate (I do real estate and my wife the markets) its all about balancing the portfolio and the risk. I would say most syndicates may offer 20% but are they currently getting to 20%? 

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  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    1y

    Based on your question and your expectations, stay in index funds. If you think you want to try syndications, read The Hands-Off Investor by @Brian Burke before you do anything.

    [email protected]Podcast Guest on Show BiggerPockets Daily 667: 5 Amazing Benefits Multifamily Investments Offer (That Single Family Homes Don’t) by Gino Barbaro
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  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    1y

    Both of your invest strategies above I don’t consider as RE investment.  An investment forum would be better for this post.

    With that said let’s look at these two but also let’s look at Risk adjusted.  Find your own figures.

    A.  S&P 500 is at a PE ratio of 30.  Price to earnings.  An example. A $300 investment would make $10 earnings per year.  Before personal taxes.  That’s roughly a 3% return.  
    No investor would make that investment even before adjusting for risk.  Most commercial investors are looking for a 6 to 10% cap rate return.  

    Take the top 5 stocks in the S&P out of the equation and see what the P/E ratio is.  A lot worse.  

    But hey, money is pouring into the US stock market from all over the world. Smart people they have to be right.   .    
        
    B.  RE syndications.  You said you have been reading several hundred hours of BP posts.  By now you have read all of the Syndication failure issues.  You should have boiled them down to the following lack of proper due diligence.

     1.  Short term debt used in longer term investment time frame.  They got caught short with the recent rate increases.  Investors already learned this lesson about 15 years ago with housing.
     There is a rule.  Intelligent people learn from other people’s mistakes. Smart people learn from their own mistakes.   Dumb people keep making the same mistake.  This was a very simple due diligence item that was missed by many people. 

    2.  Bankrupt brand names, Broadway shows, crypto investments.  These investors didn’t risk adjust these syndication investments.  

    These investors were looking for Passive income, but they didn’t realize they had to fill the role as an Investment banker and they didn’t have the skill set or systems to do that.   Are you an Investment banker? 

    If you're looking for an REI strategy state your financial objectives, resources and time frame and ask for suggestions.

    3Reply
  • Sanjay Bhagat
    OP
    Member since 2018 · 10 posts · 2 votes
    1y

    @Chris

    Thank you. Your reply was thoughtful and balanced. As a moderator can you guide me:

    1) Is there a syndicate in BP which has gone through all the 4  real estate life cycle (recovery, expansion, hyper-supply, and recession) ?

    2) What percentage is their track record of delivering what they promise to deliver?

    3) Is there a chart in BP which tracks what is promised and what is delivered since inception by the Syndicate/promoter/General Partners?

    4) If yes to #3, then may I have the link for such a information from a Limited Partner perspective?

    0Reply
  • Sanjay Bhagat
    OP
    Member since 2018 · 10 posts · 2 votes
    1y

    @Jonathan Greene Thank you for recommending Brian book. I intend to read it. I have also read and watched Scott's video on this link https://www.biggerpockets.com/blog/biggerpockets-money-podca...

    Very insightfull

    1Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    1y
    Quote from @Henry Clark:

    Both of your invest strategies above I don’t consider as RE investment.  An investment forum would be better for this post.

    With that said let’s look at these two but also let’s look at Risk adjusted.  Find your own figures.

    A.  S&P 500 is at a PE ratio of 30.  Price to earnings.  An example. A $300 investment would make $10 earnings per year.  Before personal taxes.  That’s roughly a 3% return.  
    No investor would make that investment even before adjusting for risk.  Most commercial investors are looking for a 6 to 10% cap rate return.  

    Take the top 5 stocks in the S&P out of the equation and see what the P/E ratio is.  A lot worse.  

    But hey, money is pouring into the US stock market from all over the world. Smart people they have to be right.   .    

    B.  RE syndications.  You said you have been reading several hundred hours of BP posts.  By now you have read all of the Syndication failure issues.  You should have boiled them down to the following lack of proper due diligence.

     1.  Short term debt used in longer term investment time frame.  They got caught short with the recent rate increases.  Investors already learned this lesson about 15 years ago with housing.
     There is a rule.  Intelligent people learn from other people’s mistakes. Smart people learn from their own mistakes.   Dumb people keep making the same mistake.  This was a very simple due diligence item that was missed by many people. 

    2.  Bankrupt brand names, Broadway shows, crypto investments.  These investors didn’t risk adjust these syndication investments.  

    These investors were looking for Passive income, but they didn’t realize they had to fill the role as an Investment banker and they didn’t have the skill set or systems to do that.   Are you an Investment banker? 

    If you're looking for an REI strategy state your financial objectives, resources and time frame and ask for suggestions.

     Just to pick on point 1 a little. The top 5 names have a higher P/E actually-- Amazon at 48, Nvidia at 53, Apple is at 41, MSFT at 37. Only Meta & Google are sub-30. The most recent growth stocks in & out of the S&P-- Tesla is north of 100, Palantir 359, Coinbase 51, Microstrategy at -178, speculative but cyclical like Micron is 140.  I hate to be the bearer of bad news, but such P/E levels are not sustainable and be considered an expansionary or growth cycle.

    This does not mean a hard crash is imminent, but it does mean the dollar will be significantly weaker for certain just how it gets there is anyone's guess. 

    Back to the point. I do take index funds over syndications, but take real estate over both. Right now, I'm very slightly invested in index funds have most of my capital bottom feeding on RE acquisitions. I think comparing to the two-- syndications vs index funds-- is too difficult because of the nature of the specific RE under the syndication versus the broad economy(global and domestic) the index funds capture. Syndications also require exactly what you stated a real hard underwriting. Very few people in the world know what to look for.

    3Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y
    Quote from @Sanjay Bhagat:

    @Chris

    Thank you. Your reply was thoughtful and balanced. As a moderator can you guide me:

    1) Is there a syndicate in BP which has gone through all the 4  real estate life cycle (recovery, expansion, hyper-supply, and recession) ?

    2) What percentage is their track record of delivering what they promise to deliver?

    3) Is there a chart in BP which tracks what is promised and what is delivered since inception by the Syndicate/promoter/General Partners?

    4) If yes to #3, then may I have the link for such a information from a Limited Partner perspective?


     1. I recommend looking into passive pockets and the syndication forums https://www.biggerpockets.com/forums/960 for reviews on syndications. I am not currently invested in any syndications except my own fund at this time as back in 2020 I pulled out of all syndications.

    2. N/A

    3. There is not chart, there is a website called Vyzer that tracks this if you are an investor and use their platform.

    I know this does not give you a specific answer of XYZ, but I hope this helps

    PS:As a moderator I am not employed by BP but volunteer to moderate the posts to make sure they meet community guidelines. 

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  • Sanjay Bhagat
    OP
    Member since 2018 · 10 posts · 2 votes
    1y

    @Chris Seveney

    Thank you Chris for your reply and the link. The link was helpfull as a starting point for syndication.

    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    1y

    @Sanjay Bhagat, I am all for chasing returns, and if that is the goal, then I agree with you that real estate in general and syndications, specifically, are not worth it.  


    But returns take out risk.  Admittedly, many syndicators are inputting just as much risk into their deals to try to lure people like you into them.  Many groups that you hear about are more incentivized to buy deals through their 3% acq fees + financing fees, etc then they are to find good deals (but every deck will tell you it is the greatest deal ever, until the next deck comes out).  

    It comes down to portfolio theory and having a balanced portfolio.  If you want 100% of your investments in public equity, that is fine and you will reap those rewards or suffer those losses.  Long term, fundamentally sound real estate shouldn't be returning 20+% IRRs, historically.  Many value-add syndicators are flippers, not long term investors.  The people that I see that have made their investors and GPs themselves real long term wealth, never anticipated a huge short term return.  They got fundamentally sound real estate, with matching debt (10+ yr fixed rate) and budgets with the intent to hold nearly forever. 

    1Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    1y

    Risk vs reward. Stocks are likely overvalued right now. The over/under says that the market will revert back to the mean. If you are return-driven, I would suggest investing in start-up companies, like tech businesses, etc. Those can 10x+ your money. High risk since most fail, but big rewards. 

    If you want predictability, value hard assets, and like the tax advantages, then investing in a real estate syndication may be a good fit. If you are simply return driven and risk-averse, then it's not a great fit. 

    0Reply
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