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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42 Replies
- Houston, TX · Member since 2019 · 13 posts · 4 votes6y
@Nathan G.
Nathan I don’t think you really read the OP.
What was mentioned was investing in syndication, not becoming a syndicator...
- Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes6y
Already a lot of good content on this thread. I would reiterate the most critical variable in your experience as an investor will be the PEOPLE you are investing in, not just the DEAL you are investing in. As you connect with sponsors that resonate with you, take the time to develop a relationship with them. Trusting the sponsor will be paramount to you sleeping at night, and I can't stress that enough. It does no good to place capital with a sponsor who has a 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 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 sponsor already. Simply ask the sponsor 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 with the sponsor over time. Some items to touch on while you talk to prior investors:
How has the overall experience been? How accessible is the sponsor? If you have a concern, are you able to talk to them? Do they return your calls? Are they transparent? Even when they run into a problem?
Also, one of the most often overlooked components of a syndication is the reporting. When you find a sponsor you like, do yourself a favor and get clear on what your experience will be like AFTER you have invested.
Does the sponsor have a communication plan? How often will you receive progress reports? How are they delivered? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? In the sponsor's history, have the reporting and distributions been on time?
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 like.
The purpose of investing in a syndication is to leverage the sponsor's time, expertise, and ability to source great deals, but if the experience is going to cause you to lose sleep at night, any return you might make simply will not be worth it.
All the best,
- Specialist · Columbus, OH · Member since 2012 · 176 posts · 98 votes6y
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?
Investing in syndications can be a great way to own real estate. I manage syndications and also invest in many other syndications so I see both sides of the coin. Feel free to PM me and I can share a guide to help you do your due diligence on any given investment opportunity that you're looking for! With all the good that can come, their certainly are deals that can go bad but in general if you do your homework and good due diligence then you can have some amazing outcomes.
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Andy Mirza That's what I am ultimately afraid of, con men. That makes sense though, to be careful who I deal with. Someone I have had a lasting successful relationship with. Thanks
Andy, eye opening advice I will use in the future to build my investments.@James G. That is promising to hear. I will get experience in investing overall before I think about syndication with anyone. Weather it be giving my money or trying to take peoples money for an investment. Thank you!
@Steve Vaughan Yes I agree, I was a bit confusing. I do invest in REITs online but they are minimal investments and nothing substantial enough for me to "escape the rat race" and I think the cash flow opportunity and well the opportunity overall is significantly bigger if I invest in more hands on real estate outside of REITS or index REITS. I do like the sound of how passive syndication can be though, thanks Steve.
@Joshua Ferrari Thank you, I will definitely add Brian's book to my list as I love Bigger Pockets books and am reading one right now.
@Frank Wong That is a humble opinion Frank. That is great advice I think I am gonna go with it which leads me to wanting to wait until I have built up substantial capital before I partake in syndication.
@Joe Splitrock Thanks Joe, I will definitely check Brian's book out.
@Nicholas L. I completely agree, as this post taught me so much about syndication, I think it would be a good idea to wait until I have built up my portfolio and the syndication deal would be a smaller amount of my investing portfolio.
@JD Martin Thanks JD, sounds like many have agreed on this that it is not meant for early on investors. I now understand syndication more and see why it is important to wait for the right timing.
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Ivan Barratt Great advice! That's a good way to check if I am ready, but don't think I am but more importantly I have learned priceless advice. Thank you.
@James Hamling Thanks James! I agree, there are so many ways to get scammed I am scared to get burned by not doing something right. Or thinking I did enough research and finally taking the leap and end up leaping into something terrible. I like REITS to, to be specific I usually invest in a few REITS themselves then also Index REITs to be safe. Would love to pick your brain more on REITS if your open to it! Thank you!
@Carl Fischer That's a great Idea to use your IRA, as I have an IRA with the military also and will look in to utilizing this in the future for a possible way to fund an investment. Thank you.
@Collin Placke That's a great way to look at syndication. As I know emotions have no place investments, I did not think it applied to syndication but that is quite eye opening. Thank you.
- 6yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
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?
A) I live off of my passive investments (including a large allocation to syndication/crowdfunding) to support myself and my family. So to answer your question: I feel that investing in syndications is as "promising" as you make it. There are people that do badly at it and there are people that do good at it. I personally feel the most important thing is doing appropriate due diligence (which the majority of people don't take the time to do because it's difficult).
B) As far as the previous advice to invest in a REIT: I have REITs in my portfolio as well. However, in my opinion neither is superior to the other as they both have their pros and cons. REITS allow daily liquidity which is nice if you need to get out of the investment. On the other hand, there's no such thing as a free lunch and you pay for that liquidity with the liquidity premium. Additionally, since its trades on the public stock market volatility is much higher.
C) For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, 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. Here's how I do my due diligence:
1) timing: we don't understand many fundamental things about coronavirus that causes covid-19. As a result we don't yet know how long we will be fighting the disease, and thus the type of economic recovery we will see. This means at this point we also don't know for sure which will estate asset classes will hold up okay versus get hammered. And so there is additional risk/uncertainty with entering a deal right now.
The more we learn, the less risk there is. And I personally think about 3 to 5 weeks we will know a lot more than we do now. So I don't see any reason to pull the trigger on any deal right now, unless I am compensated for that extra risk with a lower price, etc. Currently most sellers are taking a wait-and-see approach as well and not lowering their prices. I think in the coming months either we will see that they were right and then I will feel fine with paying the current price. Or they will see that they were wrong and will capitulate and there will be lots of discounts/deals. I personally would rather wait until then (and am focusing instead on virus resistant asset classes). But you may be coming from a different place, so I'll dive into how I would be looking at things if I were right now.
2) 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
3) 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.
The Real Estate Crowdfunding Review - 6yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
Thank you for your service.
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes6y
Is no one going to mention the income/net worth requirements associated with syndication and that OP more likely than not doesn't qualify to invest in them even if he wanted to?
For what its worth, I fundamentally disagree that the sponsor is a primary, secondary, or even tertiary driver of returns in syndication. The asset class and location matter FAR more than any sponsor. In general, as long you know the GP's aren't morons or crooks, that's about all the vetting you need to do. Figuring out if they are dumb or will rob you is harder than one may think, but you don't need to find the next Sam Zell to run your money.
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." -Warren Buffet
- New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
@Ian Ippolito Wow this is fantastic advice, thank you. Sounds like doing some serious digging into the due diligence is key. Thank you.
@Bill F. Good point Bill and I agree. Thank you.
- Belleville, NJ · Member since 2016 · 46 posts · 19 votes6y
@Ian Ippolito you said that you evaluate almost a hundred deals a month. Can I ask how you have that “set up” in your life? Is it that you have created relationships with a handful of trusted syndicators and when they have deals they send to you creating a regular flow of potential opportunities? You do your evaluation as they come and pick the ones you like?
As someone new to investing as an LP in syndications , I am trying to figure out what is the best way to have a regular inflow of “quality” opportunities comes on my radar that I can evaluate. Appreciate any advice you have. Thanks. PS: I am non-accredited.
- 6yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Originally posted by @Login George:
@Ian Ippolito you said that you evaluate almost a hundred deals a month. Can I ask how you have that “set up” in your life? Is it that you have created relationships with a handful of trusted syndicators and when they have deals they send to you creating a regular flow of potential opportunities? You do your evaluation as they come and pick the ones you like?
As someone new to investing as an LP in syndications , I am trying to figure out what is the best way to have a regular inflow of “quality” opportunities comes on my radar that I can evaluate. Appreciate any advice you have. Thanks. PS: I am non-accredited.
I am an accredited investor so there are a lot more opportunities than nonaccredited. However, you can start off by going to the crowdfunding sites and that should get you at least 30 or so to look at. Then as you start to figure out the types of sponsors and deals that you like, you can make sure to monitor those the closest. You can also join an investment club which is another source of getting a good deal flow. Good luck.The Real Estate Crowdfunding Review - Belleville, NJ · Member since 2016 · 46 posts · 19 votes6y
@Ian Ippolito thanks for the response. I have been staying away from crowdfunding sites because I thought that may be experienced syndicators (since they have an established investor base) would not be on the crowdfunding sites. But it sounds like I am wrong and good sponsors can be found on these sites as well?
- 6yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Originally posted by @Login George:
@Ian Ippolito thanks for the response. I have been staying away from crowdfunding sites because I thought that may be experienced syndicators (since they have an established investor base) would not be on the crowdfunding sites. But it sounds like I am wrong and good sponsors can be found on these sites as well?
Just like with private syndications, you can find different types of sponsors with varying amounts of experience. For example the 500 pound gorilla and most popular fund is from BlackStone, which is one of the largest and most experienced real estate companies in the world. There are also plenty of smaller/newer companies as well.
The Real Estate Crowdfunding Review - Belleville, NJ · Member since 2016 · 46 posts · 19 votes6y
@Ian Ippolito thanks for the input ian. Appreciate it.
- 6yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
@Kole Moore i would not recommend someone investing in a syndication if they don’t own their own home to start.
I’d recommend you use a fha or va loan (if you qualify) to house hack a 2-4 unit and while you are living in one of those units read books and reach out to other local investors regarding RE investing, then at some point down the road send me a pm to thank me ;)
Compass5122 Reviews - New to Real Estate · Seattle, WA · Member since 2019 · 39 posts · 16 votes6y
Thanks @Twana Rasoul, I agree! I plan to use my VA loan and house hack. I wont forget the PM! haha
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