Evaluating Syndicated Deals as the Investor (not syndicator)

4 Replies

I've invested in real estate for years, including REITs via index funds, directly in a rental property, and in a syndicated deal connected to my employment. I've got a regular job I enjoy, and at which I am paid very well. In fact, I've got two jobs that meet that criteria. I don't need another one. I'm not particularly talented or interested in buying, managing, or selling real estate directly. What I am interested in, however, is the returns available through real estate and the low correlation it has with the remainder of my portfolio (primarily stock and bond index funds in tax-protected accounts.) I have cash, but not time or interest to do this stuff myself. As an accredited investor, I have the opportunity to invest in a number of syndicated deals, and I become aware of more and more of them as time goes by. However,  most of the information about these deals and how they work comes to me from those who are selling the deals, not exactly an unbiased source. Plus, each of these requires a pretty good chunk of change, usually around $50K, making it hard to diversify by buying tons of them. I'd like to learn more about how best to choose between them. 

For example, here's one being offered by Bla bla bla company via bla bla bla crowdfunding company (I deleted the details so nobody would think I was looking for an offer or asking for an offer) right now:

Built in 1968, the Property is a 208 unit apartment community containing 176,783 net rentable square feet. The Property is comprised of 20 two-story, four two-and-one-half-story residential buildings and a clubhouse.

The primary objective of this investment is to acquire, renovate, reposition, and sell the Property in five to seven years.

They estimate a cash on cash return of 7-12% (avg 9.5%) and an IRR of 15.5%. It'll be 32% down on a total budget over $10M. They're calling it a Cap Rate 7.1% property.

The fees are not insignificant- 2% of purchase price as an acquisition fee, 2% of equity (the realty mogul fee), 4.75% per year for property management and investment management. The investors get an 8% preferred return, then it's split 70 investors/30 sponsors above and beyond that.

So here are my questions:

1) How do I know bla bla bla aren't criminals and are actually skilled at doing this? Obviously it's not very cost effective to spend $3K doing a background check on every principal in the company when I'm only going to be investing $50K total with them.

2) Is 70/30 after 8% fair? What's a good deal and what's a bad one?

3) Are the fees fair and reasonable? What would a "too expensive" fee look like?

4) What's the likelihood of actually seeing the projected returns?

5) What's the likelihood of losing my entire investment?

What would you do to properly evaluate an opportunity like this? To make it more difficult, you usually can't compare one offer to another at the same time, because while I might see 20-30 deals like this in a year, it's only 2 or 3 in any given month. Any other tips for choosing a syndicator/syndicated deal to invest in?

Don't do big, syndicated deals. Do little deals. Big return. Faster turn. Less exposure.

I don't want to spend my time putting together deals. Faster turn is not a good thing for me. I'm interested in low correlation with the rest of my portfolio and solid returns. I don't need 25% returns on $4K. I need 15% returns on $40K.  I'm okay with someone else getting paid to do some work, but I don't want to get taken to the cleaners.

The fact that you are asking questions like this probably means you are not ready to be an investor in a real estate syndicate.  It's going to take some work (more than buying index funds).  Allow me to illustrate...

#1 - Easy to answer, ask to speak with previous investors in past projects that have been successful with them.  Ask to see examples of previous projects they have worked on.  A prospectus for this project should include some history.  (as an aside, if they are seeking $10M in investment funds and haven't produced a prospectus, that should tell you all you need to know...)  If they have no history and are new at this then stay away unless you personally know them or others that will vouch for them.

#2 and 3 - There are numerous threads on BP that talk about the specifics of syndicated deals.  Read these threads to see what other members have done in syndicates as far as fees and returns are concerned.  Knowing what is fair is also open to interpretation.  Some people are happy making 3%, others want more.  Depends on what you want.  Also, if you are seeing multiple deals offered a month, just take a couple minutes to compare the fee and return structure to see what's common.  Again, requires a little bit of work on your part.

#4 and 5 - Can't be known.  Refer to answer for #1 above.

You may not have time to evaluate tons of deals, but you will need to spend some time researching deal structure.  The good news is that there is tons of info here on BP, you just have to spend some time digging and reading.

Good luck.

I dropped in my responses by the OP's questions below.

Originally posted by @Jim Dahle :

I've invested in real estate for years, including REITs via index funds, directly in a rental property, and in a syndicated deal connected to my employment. I've got a regular job I enjoy, and at which I am paid very well. In fact, I've got two jobs that meet that criteria. I don't need another one. I'm not particularly talented or interested in buying, managing, or selling real estate directly. What I am interested in, however, is the returns available through real estate and the low correlation it has with the remainder of my portfolio (primarily stock and bond index funds in tax-protected accounts.) I have cash, but not time or interest to do this stuff myself. As an accredited investor, I have the opportunity to invest in a number of syndicated deals, and I become aware of more and more of them as time goes by. However,  most of the information about these deals and how they work comes to me from those who are selling the deals, not exactly an unbiased source. Plus, each of these requires a pretty good chunk of change, usually around $50K, making it hard to diversify by buying tons of them. I'd like to learn more about how best to choose between them. 

For example, here's one being offered by Bla bla bla company via bla bla bla crowdfunding company (I deleted the details so nobody would think I was looking for an offer or asking for an offer) right now:

Built in 1968, the Property is a 208 unit apartment community containing 176,783 net rentable square feet. The Property is comprised of 20 two-story, four two-and-one-half-story residential buildings and a clubhouse.

The primary objective of this investment is to acquire, renovate, reposition, and sell the Property in five to seven years.

They estimate a cash on cash return of 7-12% (avg 9.5%) and an IRR of 15.5%. It'll be 32% down on a total budget over $10M. They're calling it a Cap Rate 7.1% property.

The fees are not insignificant- 2% of purchase price as an acquisition fee, 2% of equity (the realty mogul fee), 4.75% per year for property management and investment management. The investors get an 8% preferred return, then it's split 70 investors/30 sponsors above and beyond that.

So here are my questions:

1) How do I know bla bla bla aren't criminals and are actually skilled at doing this? Obviously it's not very cost effective to spend $3K doing a background check on every principal in the company when I'm only going to be investing $50K total with them.

I would check with the crowdfunding company to get detailed background on the syndicators. I would posit your detailed questions (see mine below) about the syndicators directly to the crowdfunding site, they should know, or be able to find out the answers.

2) Is 70/30 after 8% fair? What's a good deal and what's a bad one?

The 30% split is standard. However, based on the 15.5% IRR that is a little generous to the syndicators IMO (they get 30% of a fairly large spread over the preferred return). A 15.5% IRR sounds respectable if it is AFTER ALL FEES AND PROFIT SPLITS. This should be clear from the offering. If not, ask.

There is no easy way to tell a good deal from a bad one. A 10% IRR on a Class A deal with no rehab required may be equivalent to a 50% IRR for a flip on a Class D with lots of work and other unknowns. On the first one, the investor will get the 10% 9 out of 10 times. On the second deal the investor will make 100% half the time and 0% half the time. The investor must adjust the returns for the perceived risk. A good syndicator will explain these risks to you in the offering.

3) Are the fees fair and reasonable? What would a "too expensive" fee look like?

These fees seem reasonable. Property management plus asset management fees could run as high as 6% (this assumes property management personnel costs are included separately in the expenses).

4) What's the likelihood of actually seeing the projected returns?

No way to know this without a full analysis of the deal and the market. Even the best laid plans sometimes fail due to factors outside the syndicator's control and conversely, a blind squirrel sometimes finds a nut. The best you can do is to work with syndicators that have a proven track record. 

5) What's the likelihood of losing my entire investment?

If you have done your due diligence on the syndicator (see below), I think that it would be a rather small risk, especially if the syndicator's interests are properly aligned with the investors (ie. syndicator is invested, syndicator's fee & profit is mostly deferred to the investor's). 

What would you do to properly evaluate an opportunity like this? To make it more difficult, you usually can't compare one offer to another at the same time, because while I might see 20-30 deals like this in a year, it's only 2 or 3 in any given month. Any other tips for choosing a syndicator/syndicated deal to invest in?

Here are a few good questions to ask a syndicator (or the crowdfunding site presenting a deal):

a) What is the syndicator's experience and education? Have they ever been arrested or charged with a crime?

b) How long has the syndicator been doing this type of deal?

c) How many deals has the syndicator done? What are the returns to investors from these deals?

d) How much does the syndicator have invested in the deal?

e) Can I speak with a prior investor about his/her experiences with the syndicator?

My final advice is once you find a good syndicator and you believe in his/her strategy then stick with that person. You will save a substantial amount of time and effort by not having to evaluate other syndicators, their strategies and their voluminous legal documents each time an investment drops on your doorstep.

Full disclosure - I'm a syndicator.

Good luck!

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