New member, invest through syndicator or directly?

Buying & Selling Real Estate Discussion 19 Replies

Hello all,

I'm totally new to this. I've been reading voraciously, listening to the podcasts, and trying to understand the best route for me. I've got a full time job, with a little cash to spare that I'd like to invest in real estate. I'm currently thinking around a six month ramp time between now, and actually investing in a property.

I'm trying to decide if I start looking for deals on my own, or go with a syndicator? My inclination is to use the syndicator, but parallel to that look for deals and evaluate them against each other, I'd assume for the first few months, or even years, the syndicator would likely have more attractive deals. What do people see as the pros and cons of investing directly verse with a syndicator? I think I could invest around $25k per year with my current financial situation, more if I did a home equity loan.

About me and my situation:

  • Married, father of a 2 year old and 4 year old, both me and my wife have full time jobs, so I've got limited time to bird dog deals.
  • MBA, and work in commercial building energy efficiency, so I know enough to dangerous, but not enough to be effective (yet, hopefully) when it comes to real estate investing.
  • I live in Minneapolis, so I'd likely need to invest in other towns to get cash flowing deals.
  • At this point I'm looking for investments, not another full time job like flipping.
  • Have been maxing out my 401k and IRAs since graduating from college, so this is additional savings to diversify, and maybe allow an early retirement.

Any thoughts and suggestions would be appreciated.

Thanks,

Chris

@Chris Baker

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Medium logo 19 1Dmitriy Fomichenko, Sense Financial | dmitriy@sensefinancial.com | (949) 228‑9393 | http://www.sensefinancial.com/ | CA Agent # 01876563

Welcome @Chris Baker !  There's plenty of attractive middle ground between syndication and DIY flipping. For example, you might lend to experienced investors and have your investment secured by a mortgage and personal guarantee.  Or, perhaps you could joint venture with a rehabber and get involved with the high-level decisions and budgets, etc., while they do all the heavy lifting.   

Know the pros/cons, including the risks associated with each. It may even be worth hiring someone like myself or doing the reading here on BP (ideally, both). For instance, I'm often surprised people don't think through the ramifications of owning a good mortgage versus owning a share of a syndication (ie debt versus equity interests).  Both are hands off, but owning debt with personal guarantees and rights to foreclose provides a significant advantage to owning a share of a syndication in which the company itself could go bankrupt and your investment becomes greatly diminished if not destroyed altogether.     

Syndications have the advantage of scale and returns are crazy good if you're in the right deal with the right team.  Funds can add diversification of portfolio to the advantages column.  But great track records from the recent past definitely do not mean great future returns; markets are all different now, and many syndicators haven't been tested.  You also pay more in fees to the deal sponsors & fund managers than you might realize.  Minimally, you'll want  to learn how to evaluate a syndicator's deal structure and legal "get out of jail free" cards.   

IMHO, you will learn more (and faster), have more fun (or fear depending on how you're wired) and have less risk, by pumping a small amount into several different flippers than a bigger chunk into a syndicator.

Happy Investing!
Heidi 

Heidi Pliam JD | 612‑888‑0998 | http://REILawyer.com

@Chris Baker keep your cash in the bank and get more education. Wait till you have more liquidity and are able to invest 50k into a deal without breaking a sweat.

I agree with @Heidi Pliam that you should get more familiar with both debt and equity deals and the pros and cons of both.

Take a deep dive and read/listen to actual books on apartments, syndication, and creative finance.

NOTE: The next economic winter is approaching. Good deals are out there but not so easy to find.

Happy Hunting

Ivan Barratt CPM, Barratt Asset Management | ivan@barrattassetmanagement.com | 317‑762‑2625 | http://www.barrattassetmanagement.com

I'd suggest a mentor. I am from Minneapolis and this plays a crucial role. the competition is fierce, but you can do it.

612‑462‑3923 | http://christianbarth.kw.com

@Chris Baker First off, I want to encourage you in the way you are starting. Getting a solid base level of understanding is a critical step to success! Nice work!

My advice would be to start by figuring out exactly how much time you are willing to put into this. That will really help you decide on what sort of real estate investing you want to do. 

I would also challenge your assumption that you would have to invest in an area outside of the metro area. There are deals to had in the Twin Cities, it just depends on if they align with your strategy. 

If you are interested in meeting up and talking strategy, I am totally willing to share my experience and market knowledge. Feel free to message me.

@Chris Baker For what it's worth, you don't seem like you know enough about what you want to do.  What you've done so far is limit what you don't want to do (which, by the way, is a great first step).  Do you want control or to give up control?  If you own it yourself you get to (or HAVE to) make the repair vs. replace decisions, decide what to buy, when to buy, when to sell, if you want to pay more for tile floors or put in the cheapest carpet, etc.  And you get to pick exactly where you want to buy and (through a PM, since you're passive) how you want the unit or property managed.  

With a syndication you don't get that control.  But you do get diversification and it's passive.  I also see some syndicators that like to brag about how many units they own a part of.  To me that means nothing but to them it means a lot.  Maybe you have really strong positive feelings about the Minneapolis market and syndication is the only way for you to get into it.  But then you do have to start thinking "syndication for what?"  Apartments?  Mobile home parks?  It's not as though there's a single option there.

The bottom line is that my goals are the same as yours and neither of our goals are the same as just about anyone else on here.  Heck, you can find people that want to invest in a vacation rental so they can go there a couple of times a year for "free".  Just because it isn't my goal doesn't mean that it's bad or wrong.

But I will ask you this, if you want something trust passive why not just invest in a publicly traded REIT (equity not mortgage)?  You get diversification, liquidity, dividend payouts as a return, etc.  I'm not saying there aren't good reasons to choose one over the other but, for you, why not a REIT?

Originally posted by :

But I will ask you this, if you want something trust passive why not just invest in a publicly traded REIT (equity not mortgage)?  You get diversification, liquidity, dividend payouts as a return, etc.  I'm not saying there aren't good reasons to choose one over the other but, for you, why not a REIT?

Disclaimer: I own ~10% of my portfolio in publicly traded REITs.

My tentative answer to that is: public REITs are extremely correlated to the stock market rather than the real estate market, so if you already have a healthy portion of your savings in the stock market in index funds and such, a passive syndicated deal might be a good way to diversify. Not to say that if the stock market crashes 30% then syndicated deals wouldn't be affected, but certainly the correlation is lower. I think with public REITs an investor pays a "liquidity" price.

Also, tax advantages of public REITs are almost non-existent, to the point that it's foolish to be holding them in a taxable account, which is where the majority of aggressive savers hold their funds.

Hi Chris,

I think you are thinking the right thoughts. Do you want to be active or passive? You can also be a hybrid. Own some direct investments when your lifestyle, time, education and passion align. Till then, I think syndicators can outperform most folks starting out in just about any niche that they are focused in. The advantage is several including relationships, scale and forced appreciation which are concepts that can add value and separate syndicators from those investing in SFR or small MF.

For a lot of syndicators, you need to be accredited investor to qualify but not all deals of course. Also, w/a minimum of $25K, that might exclude you from some deals as well as $50K is what I see most often. I did an article on 10 tips for vetting deal sponsors you may find of interest and an article on diversification w/alternative REI classes you may find helpful (see below). Wish you the best.

https://www.biggerpockets.com/blogs/9145/53959-vet...

https://www.biggerpockets.com/blogs/9145/59865-div...

Medium b16990 thompson investing logo sp 1David Thompson MBA, Thompson Investing | david@thompsoninvesting.com | 5125459720 | http://www.thompsoninvesting.com

Hi @Chris Baker , like @David Thompson said, it's important to determine how active or passive you want to be. If you’re looking to take a more passive role in your real estate and want the benefits of diversification there are funds available to accredited investors that are designed to allow investors the opportunity for ownership of institutional investment grade property that is occupied by regional, national, and Fortune 500 credited companies. 

Medium archer logo transparentLeslie Pappas MBA, CCIM, Archer Investment Advisors | Leslie.Pappas@ArcherInvestors.com | 650‑430‑4333 | http://www.ArcherInvestors.com

Thank you all. Getting all your comments has been helpful.

I totally agree, I don't know enough yet. I'm planning a six month stretch before I do a deal, during which, I've got a lot of learning to do via books, talking with people, podcasts, and running numbers in excel.

As for active or passive, I guess it depends on the difference in returns, which of course depends on the individual deals. Either way, I'm going to hire a property manager (with a full time job and kids, I don't need to get calls from tenants). 

I shy away from REITs because they don't seem to have the same returns. One of the Bigger Pocket podcasts the person mentioned that yields on REITs were about 1/2 of that of private deals, which makes sense from what I know of private companies verse public companies. Less liquidity, and less public visibility means those companies sell at lower multipliers. 

I may be missing a distinction, is there a difference between a syndicated deal, and being one of several silent equity partners in an S corp with K-1 distributions?

My ultimate goal is to be able to produce 50-75k per year in mostly passive income.

Are you qualified as an accredited investor? Most syndication deals are private placements, and you must be an accredited investor to participate. So, if you are not, then most of the syndication offerings will not be available to you. If you don't know what the qualification criteria are, google is your friend ...

Chris,

REITS buy what we have once we are done doing value add.  So, yes, REITs will move along at a lower yield and return profile typically than what a value add syndication can achieve.  Think of flipping a house but doing this w/200 - 300 unit apartments.  You have families living there right.  If you are 95% occupied on a 200 unit apartment, you have 10 units down to renovate when you purchase, that's all you can do until the next month when 8-10 more leases come do, then you move those folks into the just renovated units, and renovate their old unit for the next lease expiration resident. 

Value add syndication profile returns for experienced operators would be in the 8-10% CoC range and 18-20% IRR on a 3-5 year hold. It often gets better than that because at the pace above, it takes about 2 years to renovate the apartment. At the end of that period, you've created a much higher NOI w/increasing rents and you do a refinance pulling more equity out for your investors so we often see another 5% on top of these returns in solid markets. We may hold a bit longer but if the market is healthy we may look to exit and go find another property that needs updating. I'm not sure your returns would approach this unless you are turning these properties like this. Buy in hold won't achieve these returns. REITs are conservative by nature and will buy a pool of these stabilized and fully renovated properties for yield. They are not in the game of renovating and turning properties around in general, hence, the return profile should be lower and is.

Medium b16990 thompson investing logo sp 1David Thompson MBA, Thompson Investing | david@thompsoninvesting.com | 5125459720 | http://www.thompsoninvesting.com

@David Faulkner ,

I am not accredited. But there is a big difference between most and all.

The thing that got me started thinking about this was discussing with a friend who is one of the higher volume realtors in our area about a Multifamily unit for sale the next block over. During the discussion he suggested I look it to a certain local company that does take non-accredited investors that he invests with. He'd make more money if he talked up buying individual properties directly, because I'd almost certainly use him.

The way I figure it, I've got to understand the pros and cons of the two general approaches, I've got to vet out the specific company, and the specific deals. If the general approach doesn't make sense, then I don't go to the next level of due diligence on the company or the specific deals.

My inclination right now is to talk to the company, and keep looking for other deals, and compare them side by side. My gut says that for the first 5-10 deals, having a pro do the prospecting, and coordination would be a lot better than the mistakes I'd be likely to make.

Syndication pros and cons
-could be a Ponzi scheme
-passive
-better returns on early investments, but less potential for a home run
-less learning for me since I don't get to make the mistakes
-recommend by a savvy real estate guy I trust
-seem like a better option for our of town purchasing when I get there

If I can make 10-20% per year, with an average year on the upper side (my speculative numbers, not historic numbers from them yet), but as a direct investor could lose it all to an upside if 25 or 30% but with a full time job equivalent, I'd rather the passive. Especially since the closer to 20% or higher returns are mostly going to be a result of lots and lots of work as an individual, and for the next few years I think working my job will produce more free cash flow to invest than investing full time would.

@Ivan Barratt , in six months I will have $25k cash, and could tap about $200k in home equity. Since the first foray or two may be losses, I don't want to pull out any more home equity than I can cash flow with no additional income. This is all outside of both our 401Ks, IRAs, and 529s for the kids college. I'm leaving those in index funds, because even if I do terribly in real estate I still want to be able to retire and pay for my kids colleges.

@Chris Baker, thank you for sharing information and for your strong desire to attain financial independence.  You will probably receive much advice but I would strongly advise you to know how averse to risk you really are.  Many times a new investor will invest their hard earned money with a syndicator and get investor's remorse thereafter.  Be prepared for the psychological ride.

Also, please don't discount the fact that you are already an investor because of your significant equity in your home. So take it easy and build up your cash position to a minimum of $50k.  Also, I see some amateurs jumping on the syndication bandwagon without having survived one downturn.  Beware of those guys

There are respectable funds in all major metros including Minneapolis.  There are known for their deal volume and their track record. Unfortunately, those guys don't get on a forum like this to market themselves because they have a reputation that brings them clients.  Good deals always bring repeat clients.  Now some of them are pretty lean and some of them are larger. 

@Chris Baker I highly recommend NOT using home equity loan in syndication or any other long term investment. That's called going long with short money. If the spread between your cost of capital and return inverts (goes negative) because of interest rate environment, deal flatlines or fails, etc you'll be in bad shape.  That's how companies and investors can go bust!

@Ross Ayesh makes some good points about being wary of sponsors that will take unaccredited investors for a low minimum investment.  That should be a red flag.

Ivan Barratt CPM, Barratt Asset Management | ivan@barrattassetmanagement.com | 317‑762‑2625 | http://www.barrattassetmanagement.com

@Chris Baker I am also busy with my job and invest semi-passively in local rentals.   I am in Minneapolis if you would like to know how my investments are returning for me I can give you a pretty good picture of what it would look like to own rentals here, and hiring out the rehabs, repairs, and property management.  I am happy to open to the books and share my experience to shorten your learning curve.

I just got two more properties this spring.   Have 3 townhomes and a duplex now.

I am more hands-on and DIY right now than you would be.   It is my personality.  However I chose and plan investments with the intent to make them passive at a future date.

Marc

Originally posted by @Chris Baker :

Syndication pros and cons
-could be a Ponzi scheme
-passive
-better returns on early investments, but less potential for a home run
-less learning for me since I don't get to make the mistakes
-recommend by a savvy real estate guy I trust
-seem like a better option for our of town purchasing when I get there

This industry, like all real estate, has its ups and downs. Some investors have had to deal with the downs but that may be tied to poor Sponsor selection or offering selection. It's vitally important to know who you are working with, and have the history of the players involved. I see former players from the 2000's coming back to the industry under different business names, and some of their prior work was less than stellar. It's important to have the advice and perspective of an industry old-timer, in my opinion.

Medium archer logo transparentLeslie Pappas MBA, CCIM, Archer Investment Advisors | Leslie.Pappas@ArcherInvestors.com | 650‑430‑4333 | http://www.ArcherInvestors.com

Originally posted by @Ivan Barratt :

@Chris Baker I highly recommend NOT using home equity loan in syndication or any other long term investment. That's called going long with short money. If the spread between your cost of capital and return inverts (goes negative) because of interest rate environment, deal flatlines or fails, etc you'll be in bad shape.  That's how companies and investors can go bust!

 Ivan, can you elaborate on the home equity loan? If you have substantial equity in your home, and can get a fixed rate loan for $50,000 at 4%, and you are confident that a deal will return at least 10%, AND your income is such that if the deal fails, you would still be able to make those loan payments out of pocket without jeopardizing your home, do you still that is too risky?

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