Investing in Real Estate Syndications

9 Replies

HI! 

There seems to be a wealth of information and podcasts on people who start and manage syndications but are there any resources on the flip side - the investors who invest in syndications?  What to look for?  Success stories? Comparisons etc?

Thanks!

@Luis Barberi Luis, you are 100% right. Personally, Integrity, Track record, Conservative culture, and Interests alignment are key when selecting a firm to invest with.

You NEED to feel great about investing with a certain company, you need to feel that you can actually trust them and sleep well at night knowing that not only do you believe in the product you invested in, but the people behind it. Of course, it is very important to know that these people have a track record of success and know what they are doing, and most importantly that they show a conservative investment culture where they prioritize a solid, conservative, yet high yielding investment protected from downturns more than looking for non-protected, volatile investments with unrealistic high returns that whenever a correction comes, they are done.

Let me know if you have any other questions, and I wish you a great investing journey!

-AB

@Luis Barberi I would echo what @Arturo Borges has shared as it relates to trusting the syndicator.  Trust is paramount to sleeping at night, and I can't stress that enough. It does no good to place capital with someone who has a great project with an attractive pro forma, to find out later they can't be trusted.  Making sense of the deal and understanding their track record is important, of course, but I believe you should develop trust BEFORE you ever invest.  Developing that trust with someone you don't know may seem like a challenge, but if you approach it correctly, you should be able to achieve a pretty solid foundation of trust. 

The best way is to talk to others who have had an experience investing with the syndicator already.  Simply ask the syndicator if they would be open to connecting you to a handful of investors who have known and invested with them for a long time.  There is nothing that replaces a live conversation with someone who has already built that trust over time.  

Some items to touch on while you talk to prior investors:

- How has the overall experience been while you have been an investor?

- How accessible is the syndicator?  If you have a concern, are you able to talk to them?  Do they return your calls?

- How often do they communicate?  And do they have a communication plan? 

- What does the reporting look like?  Is it limited to progress photos? Do you get to see a P&L?

- Are they transparent?  Even when they run into a problem? 

- Are they on time with delivery of tax documents?  

Your overall experience investing in a syndication involves much more than the yield you could achieve.  If you take the time to share some phone calls with a handful of prior investors, you should get a pretty good handle on what your experience is going to be when you invest. 

All the best,

Jack

@Luis Barberi I would highly recommend you look into due diligence groups like @Ian Ippolito group.

Ian can speak much more intelligently about it but I would google The Real Estate Crowdfunding Review and the 506investor group.  Both I believe will give you insight into what you are looking for into other investor's experience.

Hope that helps feel free to reach out to me if you are looking for more info....

Kris

I'm in 8 deals and so far so good. You just have to make sure you vet people well and get to know other passive investors to learn who they are using.

@Luis Barberi , I second @Jack Martin 's recommendation to ask any Syndicator you are considering if they wouldn't mind sharing a few investors info. Typically, they won't hand out investor contact info to just anybody, as privacy protection is big and part of that trust factor. But, if after a conversation or two they trust you (it goes both ways) and think that you are a serious investor, most Syndicators should be happy to connect you with a few previous or current investors who they've already okayed it with.

Hey @Luis Barberi , I love that you asked this question. When I started out looking into syndications, I found the exact same thing. There was a ton of info for people who wanted to become syndicators, yet very little out there for people who want to become passive investors.

From the outside, this whole syndication thing seems like a black box. You don't know whom to trust, where to go for resources, and on and on. The few who make it through and successfully invest often see great success, yet many turn back in the process because it's so hard to find resources and figure out whom you can trust.

While I've found it useful to learn things from the syndicator's perspective (investment criteria, underwriting skills, etc.), that can be very time consuming and more technical than the level the passive investor needs.

I would start by looking for sponsors, and asking them for investment summaries from previous deals. These are the marketing packages created for each investment opportunity and typically go through everything from the business plan to the financials to comps, and much more (I'm happy to share some closed deal decks; just message me).

You'll start to see how different sponsors lay out their business plans, and what they look for in a deal. As you compare the deals, you'll start to see what's important to you as a passive investor. 

And that's the other thing I would say is important to know going in, is what your personal investing goals are. Are you investing in syndications for cash flow, appreciation, tax sheltering, diversification, etc.? 

Knowing what you're personally hoping to get out of it will help you find the right opportunity for you.

Good luck!

Thanks @Kris Benson

@Luis, Every investor has their own process. Here's the process that I use. Background: I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive.

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)

b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.