How promising is syndication really?
New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes
How promising is syndication really?
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6yLet me be brutally honest: why would anyone invest large amounts of money to someone with no track record?
Even if you have been investing for the past three years, that's not really a track record. We've had a growing economy for three years straight and the housing market has been booming for ten years. It's very difficult to fail in real estate at this time.
Even some of the "big" syndicators you see on BP have never been through a difficult market. They tout big numbers, but there's no evidence those numbers will remain true in the future. If I'm handing that kind of money to someone else, I'm looking for someone with a track record of more than ten years that includes the last down-turn.
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- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes6y
Let me be brutally honest: why would anyone invest large amounts of money to someone with no track record?
Even if you have been investing for the past three years, that's not really a track record. We've had a growing economy for three years straight and the housing market has been booming for ten years. It's very difficult to fail in real estate at this time.
Even some of the "big" syndicators you see on BP have never been through a difficult market. They tout big numbers, but there's no evidence those numbers will remain true in the future. If I'm handing that kind of money to someone else, I'm looking for someone with a track record of more than ten years that includes the last down-turn.
The DIY Landlord Book4.7247 Reviews - Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes6y
@Kole Moore The best thing to do is a LOT of due diligence on the Sponsor on the front end before you invest. You have to mitigate your risks as much as you can before you sign that subscription agreement and wire in your capital contribution.
I wish I had saved the link to one of @Ian Ippolito 's posts. He does a great job of explaining what should be on your checklist when doing due diligence on a Sponsor.
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Nathan Gesner Sound advice! Thank you. I wont have that kind of experience any time soon and I don't want that to slow me down. If I were to syndicate with you, as a young in-experienced investor how could I gain your trust?
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Andy Mirza Is there any way to completely mitigate the risk when handing over my capital? Whats to stop someone to just take my money and run?
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes6y
Originally posted by @Kole Moore:
@Nathan Gesner Sound advice! Thank you. I wont have that kind of experience any time soon and I don't want that to slow me down. If I were to syndicate with you, as a young in-experienced investor how could I gain your trust?
Like I said, you need a track record. Before anyone syndicates, I need evidence they know how to (a) handle a large number of units and (b) handle large amounts of money. And you'd have to be well above average in both cases.
The DIY Landlord Book4.7247 Reviews - Rental Property Investor · Bend, OR · Member since 2016 · 27 posts · 26 votes6y
BP Podcast Episode 378 with Brian Burke goes into depth on this - there is a large chunk specifically on mitigating risk in syndication. I haven’t done any syndication deals either and this episode answered a lot of questions I had. I definitely recommend checking it out.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
@Kole Moore to expand upon what @Nathan Gesner is speaking to; it is one thing to do wholesaling deals, flip homes, even buy build manage rental properties, all which is real estate investing, but a syndication is developing and directing an organization, that is a completely different beast from just simply doing real estate investing.
The most successful syndicator I have personally had 1st hand insight into interestingly enough knew very little on real estate investing at the immediate hands on functionary level, but he was absolutely amazing at building and running an organization. It was that skill and trust in that function why many persons placed 7 figure sums into his hands happily and readily. Strategic alliances were recruited and built with those with the functionary skills and track records be it flipping, market analysis, deal generation, property management and so on, he didn't need to be an expert at any of those as he was an expert at recruiting the best and running the big show.
Syndication seems to be the hot word of the year but I don't see nearly enough pointing out how it's not just a different strategy, it's a whole different business that just so happens to deal with investment real estate.
As Nathan G. pointed out, it's easy to get by when it's a smooth road, now we're getting into the bumps and things are gonna start getting sporty.
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Nathan GesnerThat makes sense, wasn't too sure what a promising track record consisted of.
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Ashton Cleveland Thanks Ashton, I will definitely check that episode out!
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@James Hamling That makes sense, I did not know it entails this much. I guess my next question would be, how does one find a syndication to pay funds toward?
- Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes6y
@Kole Moore There is no way to completely eliminate your risk that the sponsor will just take your money and run. There will always be con men out there.
At the end of the day, you need to trust that the sponsor will do what they say and make their best, honest attempts to deliver on their promises. For investors like Nathan, he lowers his risk that the operator won't deliver by only choosing syndications in which the operator and syndicators have established track records. Although past performance does not guarantee future performance, it's definitely a factor in judging an operator's competence.
It looks like commercial real estate will have some tough times ahead. It's not my area of expertise so I won't comment on those syndications. Different sectors of real estate will be affected differently by the coronavirus crisis and ensuing recession. In my industry, some timelines have been pushed back but that's the worst that's happened. If the economy gets worse, we'll be in a perfect position to participate.
To find syndications: connect with syndicators or people that run funds.
506(c) funds or syndications are the easiest to find because they are allowed to generally solicit and advertise their offerings. The downside is that these are open to accredited investors only.
506(b) offerings can be open to a certain number of non accredited but sophisticated investors. These offerings can only be made to persons with whom the syndicator has a previous relationship with. For that reason, you'd need to find the syndicators that put these deals together and establish a relationship with them first.
There's also the crowdfunding option out there, which are Reg A+ offerings, which you can find online.
- Investor · St Louis, MO · Member since 2017 · 250 posts · 181 votes6y
@Kole Moore syndication in real estate is as promising as.... Well as promising as you make it. Your job is to raise money, invest it in real estate, and execute on your business plan. You hedge against risk by educating yourself (the best way is through experience), underwriting deals conservatively, having reserves in the account for rainy days, and by getting good, long term debt. There is certainly risk, this is why it is an investment. What will make the difference for you is how well you execute your business plan.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
Originally posted by @Kole Moore:
@Nathan Gesner Sound advice! Thank you. I wont have that kind of experience any time soon and I don't want that to slow me down. If I were to syndicate with you, as a young in-experienced investor how could I gain your trust?
Kole, you're looking to maybe one day invest in a syndication, correct? I think it's getting blurry whether you are investing in one or will be offering one.
Here's my $.01. $.02 is too high. If I want to be completely passive, I will invest in a REIT or mutual fund. That's basically what a syndication is, but with more risk and illiquility.
With a REIT /MF / ETF we can choose sectors and it's liquid, has a clear track record, holdings transparency and oversight. I guess an exception might be if I'm 1031 exchanging out of a hard asset and want passivity but need to research further. My $.01
- Rental Property Investor · Mobile, AL · Member since 2018 · 121 posts · 136 votes6y
- @Kole Moore
- Syndication is a very lucrative investment strategy, if done properly. You MUST have the utmost trust in the syndicator/sponsor. The best way to create trust is by learning everything you can about them and how they run their business. Below are some questions you can ask every potential sponsor in order to get a handle on exactly who they are and how their syndications have been operated.
- Questions are courtesy of @Brian Burke of whom just wrote a fantastic book all about vetting syndicators! Title of the book is "The Hands-Off Investor" and it can be purchased at the biggerpockets book store! I definitely recommend the read. Let me know if there is anything else I can do to help you in this journey!
- TEAM
- How they have delegated their roles, and who is responsible for the various disciplines? (Some examples of roles include acquisitions, due diligence, equity and debt structuring, entity and transaction legal, insurance, accounting, asset management, property management, investor relations, investor reporting, and tax matters.)
- Who is providing the loan guarantee?
- How long have the partners been working together?
- Do the partners do all deals together or do the partners switch up from deal to deal?
- What plans are in place if one or more partners break off?
- Have any principals ever been convicted of a felony or any other financial crime or securities violation?
How do they handle key person risk, and do they have a succession plan?
EXPERIENCE
- How long have the principals been investing in real estate, and more specifically, in the type of real estate that is being contemplated for syndication?
- How many properties has the team acquired?
- If they are in the multifamily business, how many units have they acquired? How many do they currently own?
- If they are in the commercial property business, how many square feet? How many hotel rooms, or self storage units, or whatever it is that the fund is investing in? How long has the sponsor been in the geographical market? How many units have they owned and managed in that market?
- Has the sponsor survived previous adverse market cycles? How did it work out for them? How did they handle it?
- How long have they been doing syndications?
- How much money have they raised?
- How many deals have they done?
- How have their previous deals performed?
- How have they performed as compared to what they projected?
- Why did underperforming deals underperform, what did they learn from that, and what did they change in response? How many investments have gone full-cycle (bought, managed and sold)? How did those perform relative to their original projections? What does their current portfolio look like? How many units? Where? Product type? Similarity to what they are buying now? Have they done similar investments in the past? How many? Where? Do they specialize in one specific strategy, location, or product type? Have they ever had to make an unplanned capital call, and why? What did they try to do to remedy the situation prior to issuing an unplanned capital call? What was their worst deal, and what they did to overcome the challenge?
- RELATIONSHIPS
- How do they source their acquisitions?
- How do they source their debt?
- Ask them to explain their lending relationships. How many loans have they done with this lender? How long have they been working with this lender?
- DUE DILIGENCE
- Ask them to explain their due diligence procedures.
- REPORTING
- Who performs the accounting function at their organization?
- What accounting experience does that person possess?
- Ask them to explain their accounting experience specific to real estate operations.
- Ask to see sample quarterly reports.
- Ask how frequently they report and distribute.
- Do they have an online investor portal?
- When do they typically deliver their K-1s to their investors?
- Have their investors ever had to file for an extension because they were waiting for their K-1?
- PROPERTY AND ASSET MANAGEMENT
- Who will be managing? Third-party company or in-house?
- Ask to see a bio on manager’s experience.
- How many units has the manager managed? Are those properties similar to the ones being acquired by this sponsor?
- How many units are they managing now?
- How many units do they or have they managed in this area?
- CAPITAL IMPROVEMENTS
- Is their renovation budget based on contractor bids, their past experience, or just a wild guess?
- Is there a line item in the budget for contingencies?
- CAP RATES AND VALUATION
- What is the market cap rate for similar properties in this area?
- What exit cap rate is the sponsor assuming for the sale of the asset? How did they arrive at that exit cap rate?
- Is the income used for calculating the forecasted exit price adjusted for the next buyer’s property taxes?
- SPONSOR CAPACITY
- What happens if they don’t close?
- What will they do if they only raise half of the money and can’t raise the other half?
- Do they have someone willing to contribute the difference so the deal closes, and they can continue raising until that lender is repaid?
- Can they delay the closing to allow more time to raise the rest of the capital or will they have to cancel the deal?
- If they have to cancel, what happens to the money already raised? Do the investors get it back or would it be held by the sponsor for the next offering? Or would the sponsor use it to pay for the cost of the failed deal?
- Is there any risk of loss of any or all of your investment if they can’t complete the fundraising?
- Who absorbs the costs that were paid for due diligence and other unrecoverable expenses if the deal fails to close?
- ALIGNMENT OF INTEREST
- Who is signing the loan guarantee or carve-out guarantee?
- EXIT STRATEGIES
- Does the loan have a large prepayment penalty due if we sell when planned? Is that included in the cost of sale?
- What is the plan if there is an adverse market cycle when it comes time to sell?
- Does the operating agreement have provisions that allow you to hold for longer than planned if the original sale timing isn’t right?
- UNDERWRITING AND PROJECTIONS
- Are the forecasted returns gross or net?
- What are the terms of the loan?
- Are there any prepayment penalties? If so, what, and for how long?
- WATERFALLS
- Is this a fund that invests with other operators or is this fund buying real estate directly?
- Is there a dual-promote?
- FEES
- How is the asset management fee calculated?
- Are all fees accounted for in the financial projections?
- Are there any fees that aren’t shown in the marketing or underwriting?
- REPORTING
- How often do they report to investors?
- What do the reports contain?
- If the investment is a fund, do the reports include property-level reports or just fund-level reports?
- Do they show a comparison of the originally projected performance and actual performance in your quarterly reports?
- Or do they show a comparison against the current budget, or no comparison at all?
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes6y
I think a syndication is fine as long as you put a small portion of your net worth 10% or less in it. I would never put a large amount of capital knowing I have zero control of it. To me thats the most dangerous investment bc of the lack of control. This is my humble opinion.
If I own my own rentals I can control the property and can liquidate at anytime. REITs, index funds, stocks I can liquidate anytime. All investments have risk some have more risk than others. When it comes down to things no one will care more about your money than yourself.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Syndicators are promising a lot. That can be the problem because their assumptions are built on an appreciating market with low unemployment.
Every investment has fine print. "Past performance does not guarantee future results."
@Brian Burke wrote a book on this subject, so I would highly recommend you read it. Get educated, understand risks and make the right decision.
https://www.biggerpockets.com/store/hands-off-investor-ultimate
- 6yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Kole Moore as @Steve Vaughan pointed out, it wasn't clear whether you were going to (1) try to offer your own syndication, or (2) invest your own money in one. Since you're starting out, I wouldn't do either. If it's something you're interested in, learn about it in as much detail as you can while you pick a different beginning strategy (for example, house hacking.)
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes6y
In my opinion, no way should an inexperienced person start out in a syndication deal. Investing in a syndication deal (or worse yet, starting one) successfully is either going to require you get really lucky, or that you know and understand the business. It really is/was a way for those with a pretty good amount of money to put a small amount of that large pot to work in something that if it worked, great, but if not OK they lost some of their principal but when you are worth 10+ figures already it's not soul-crushing. It's not the same as investing in a good mutual fund/REIT or similar. What you're talking about is more or less small guys investing what little extra principal they have into a pool that one-several people will control to buy a big asset that will hopefully make everyone some money. Even if that person has a track record that doesn't mean they won't be wrong on this one.
Remember, just because you can bark loud doesn't mean you're a big dog.
Skyline Properties - 6yIvan BarrattBusiness MemberInvestor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
@Kole Moore great stuff here already. Underwriting the sponsor is def the key. The list above is great too! But instead of asking a potential partner (another word for sponsor) do this instead... answer as many as you can by reading the sponsor's material. If lots of questions remain unanswered you probably have a less experienced team and may want to look elsewhere. If only a few remain it doesn't mean you have a "great one" but it's a big step in the right direction. And by doing your homework first it will also show the sponsor you're potentially good fit for them.
Remember, it's a partnership! :) - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
Originally posted by @Kole Moore:
@James Hamling That makes sense, I did not know it entails this much. I guess my next question would be, how does one find a syndication to pay funds toward?
Kole that is a fantastic question, and if you google in efforts for developing say a top3 list of where to place such $ you will find it really is a monumental problem, how does a person best know what syndication to place $ with. I believe this is a whole post in and of itself, if not a blog, maybe a 4 part webinar series, even a book or two.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
Originally posted by @Steve Vaughan:
Originally posted by @Kole Moore:
@Nathan Gesner Sound advice! Thank you. I wont have that kind of experience any time soon and I don't want that to slow me down. If I were to syndicate with you, as a young in-experienced investor how could I gain your trust?
Kole, you're looking to maybe one day invest in a syndication, correct? I think it's getting blurry whether you are investing in one or will be offering one.
Here's my $.01. $.02 is too high. If I want to be completely passive, I will invest in a REIT or mutual fund. That's basically what a syndication is, but with more risk and illiquility.
With a REIT /MF / ETF we can choose sectors and it's liquid, has a clear track record, holdings transparency and oversight. I guess an exception might be if I'm 1031 exchanging out of a hard asset and want passivity but need to research further. My $.01
I am always so baffled why I hear so little on REIT's and so much on syndication, not to mention 3/4 if not more of what I hear on syndication has some form of SEC violations if not a laundry list of such.
You hit the nail on the head, and yes I am vested in REITs, for the exact reasons listed above not to mention solid performance, easy to vet, research and cross evaluate for selection of which to move forward with. Now I will say, this is my kind of "piggy bank" $, I DO invest, so I am not all in 1 way or the other but for my "safe" $ I go REIT, personally.
- 6yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
@Kole Moore There is a lot of useful information here on this thread. I have found a lot of success in investing in syndication. Like many of the other posters, however, I make sure that I do my proper due diligence and research on the syndication. Typically, I don't like to invest in syndications right away. I like to get to know them and watch how they perform, what plans they have in place for worst case scenarios, and the background and credibility of those running the syndication. I like a balanced syndication. That balance can mean different real estate assets, but it can also stretch across different industries and asset classes. I personally like to use my self-directed Roth IRA to invest in syndications; that way, I can grow the profits tax free!
Based on where the market is, you may structure your deals differently. Asking yourself if you're prepared to do that, or if the syndication is equipped to handle sudden changes, is also a critical part of your investment research as you calculate and assess risk and reward factors. Performing your due diligence can lead you to areas or sectors that were hit hard with a quick recovery or others seeing little change but may also have an upside based on circumstances. Understanding the market conditions and how they affect your investment in a syndication is paramount before and periodically. Great places to look first are Ripoff Report, or by checking with the SEC. If you have any more questions, I would be happy to connect!
- Rental Property Investor · Denver, CO · Member since 2018 · 46 posts · 48 votes6y
@Kole Moore There is some great advice on this thread so I won't belabor the point... When it boils down to it, successfully investing in a syndication is 100% dependent on the character and experience of the sponsor team. At the end of the day, everyone says their underwriting is conservative, their markets are solid, and their business plans are proven.
Don't be afraid if you've heard a few horror stories about syndication gone wrong. Fear is an EMOTION, and emotions should never have a place in sound investments...
Be relentless with your education. Know the numbers, they will not lead you astray. We are both engineers, the numbers should be the easy part! If you know and trust the numbers, you can keep emotions out of the equation, which leads to the next step...
Network with sponsor teams. Find one or two with solid track records. Vet them thoroughly. Talk to passive investors who have gone full cycle... did their returns add up to what was promised? Did they invest with the same team again?
If you follow these simple steps you can eliminate much of the risk. Yes there are horror stories out there, but passive multifamily investments are a rock solid way to build wealth when done properly. Especially considering your alternative choice, go blindly invest in the stock market and hope it appreciates... but betting on "appreciation" is a gamble and "hope" is not a strategy.
Collin
- 6yRoni E.Pro MemberSpecialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
As you are a civil engineer I would look at trying to JV or bringing value to that group
Originally posted by @Kole Moore:Hi there,
I am 21 going to college to be a civil engineer in Washington, once I graduate I plan to use syndication to invest in real estate. What I am scared about is getting burned with syndication, I have seen and heard about people getting large amounts of money taken from them because they did something wrong in the process. How can this be avoided? Is syndicating as useful as some talk about it considering the risk?
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes6y
@Kole Moore given the current environment, you’re best served with investing in liquid assets which is not real estate or syndications.
Many syndicators are going to get crushed In the coming months.
With a little research you can do much better with other investments.
PS I’m an engineer too
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