Friend netted $3m , looking to deploy newfound wealth into RE

36 Replies

Hi, 

A very close friend of mine has just sold his business and will net $3,000,000

He is very eager to put his new found wealth into real estate.  Having read books and listened to podcasts he feels multi-family is where he wants to invest. 

I suggested that because he has no RE investing experience and the current market conditions, it may be wiser to find proven private equity real estate investment companies like Praxis Capital, etc and let them do what they do best. 

What is the downside of investing with RE Investment companies rather than doing it on your own?

Any thoughts/ideas would be greatly appreciated. 

Hi there, SD investor here...perhaps ask you contact if they would consider being equity partner. Great returns...yet greater risk.

@Louie Pullen Congrats to your friend and I can appreciate the concern. I am not sure of your background in real estate or financial wealth but why is your friend soliciting your advice? I liken it to the financial advisors starting out from college for Edward Jones trying to get people twice their age to invest their money with them. There are plus and negatives to real estate investment companies but I would say the biggest thing is you will have much conservative gains but they are truly passive. Now with that being said I can't tell you how often I see large companies swallow that I would not touch myself because the returns are horrible. If your friend wants a passive income and be in real estate another option they may consider is the NNN lease with established tenant market. Simply the more time your friend is willing to spend to manage their investment, especially into getting the knowledge the invest the greater the return they can expect but best of all that knowledge compounds and finding invests gets easier.

@Louie Pullen I really appreciate your confidence in Praxis Capital, and it might come as a surprise that I would chime in with the downside of investing in syndicated offerings such as the ones we do at Praxis, or anybody else does, for that matter.  But, you asked...  :)

There are plenty of downsides.  The company he invests with could be of low quality (present company excluded, LOL), could lack a track record, not have experience with having survived a market cycle, could produce inadequate reports that don't tell him what he needs to know...whatever it is, when investing in a syndicated offering there is an additional risk component that isn't present when buying real estate directly--the sponsor of the investment.

As an investor in a syndicated offering you can't typically 1031 exchange in or out, which you can do when buying real estate yourself.  You also don't have full control over when the asset should sell, when you can refinance for cash out, or how you can make changes to the business plan. 

When you buy real estate directly, you are in the pilot's seat.  When investing in a syndication, you are a passenger and there is a professional pilot flying the plane (if you picked the right company).

But there are upsides too.  I call it leverage.  Not the type of leverage you usually think of in the context of real estate (debt), but leveraging the sponsor's track record, experience, skill, judgment, relationships, deal flow, financial strength, team, research and time to produce an outcome as good as or even better than one can achieve on their own. 

So the question is, do the upsides out-weigh the downsides?  And, what about the downsides in direct ownership (there are plenty)?  And which one is a better fit?  It's definitely an individual decision as each option isn't for everybody.

The person confident enough in their product to tell the good bad and ugly is a person who knows what their talking about. 

Kudo's @Brian Burke .  Well said and true Your analysis indicates what I usually say - no one approach is right any or all of the time.  Almost every successful real estate investor I know has a sweet spot but always other things going on as well.

Another advantage of syndication is scale. The biggest property you can buy with 3m is $15m which is still not a large building. In a syndication you are part of a different asset class of large apartment buildings which are essentially a business not real estate. 

Hi Louie,

Great, work together and do some research on MF. Syndication is a good place to start if he doesn't have experience.  Partner vetting, and finding deals in strong markets, conservatively modeled / assumptions and experienced team are important.  Here's a few articles to continue the learning process.  I'd also advise looking at spreading some of that into multiple syndicates, geographies.  Value add a must.  There are other types of niches that have fairly good "all weather" holdings such as mobile home parks and self storage.  It all starts w/having a strong operator, doing your homework and patiently moving into on opportunities.  These are fairly illiquid asset holdings so make sure he understands that as well.  

With this much capital, he might even be able to play into the GP side of things as another angle.  With proper vetting of sponsor, even look at leveraging this wealth by being a guarantor on a non-recourse loan to gain GP fees / equity.

Vetting a sponsor, why I like investing in large apartments and 25 FAQs on syndication......happy reading.

https://www.biggerpockets.com/blogs/9145/53820-why...

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

https://www.biggerpockets.com/blogs/9145/65780-syn...

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@Brian Burke hit on a lot of downsides already, but I will mention a few others, which could also be downsides if your friend invests in their own deals.

Con's

1. The sponsor is not conservative and over-promises - I think this is a big one right now and I fear a lot of syndication's will fail if/when the market corrects

2. The team in place is not quality (this is traced back to the quality of the sponsor)

3. You can't leverage your own money the same way (money is still being leveraged, but the sponsor's cut is being taken out)

Also, some more pro's

Pro's: 

1. You can still 1031 exchange, but with some limitations

2. You are dealing with an experienced team that has done it before and is an expert.

3. The time and effort to make a profit is a lot less - less education up front, research, running the deal, etc

4. The profits can be better or as good right from the start. When most people start investing in real estate they make a lot of mistakes (learning opportunities) and don't end up making as much profit as they thought. With a syndication, you have a greater chance - in my opinion - of making good profit on the 1st deal. 

Your friend has a great problem on his hands, good luck to him in his decisions and feel free to ask any questions or PM me

Wow! This is really a great thread if you're interested in investing with a sponsor/syndicate. I've spent an hour or so reading through the thread and the posts that @David Thompson shared but well worth it.

Question for @David Thompson, @Brian Burke or anybody else who would like to chime in. What differentiates you (a private sponsor) from a crowd funding site like www.CrowdStreet.com? I get that Crowdstreet (and other platforms) are just giving exposure to private sponsors through a more visible platform. Ultimately, this business is about trust and relationships but I'm curious if there is more that we should know. 

Thanks to all for the great education and valuable content. Your time and effort is greatly appreciated.

Originally posted by @Scott Skinger :

  What differentiates you (a private sponsor) from a crowd funding site like www.CrowdStreet.com?  

A lot, actually. The straight equity crowdfunding sites are offering are just pieces of private offerings.  If you find a good sponsor or two that has good deal flow and you’ve fully vetted them, you can invest directly and cut out the middleman. Or you can invest in crowdfunding deals and they take fees and a cut. 

But not a lot of experienced sponsors want to give some of their raise to the crowdfunders because they have no trouble raising the equity directly from their client base very quickly. Why wait for a third party to assemble a separate offering, market it, and raise the capital when you are on a tight performance timeline with the seller?  So you might find less experienced sponsor’s offerings on the site because they need the capital—their investor base is too small to cover it. 

A lot of offerings on the sites are debt or preferred equity, which carry lower returns than straight equity. 

But the differences don’t stop there. If you invest through a crowdfunder in many cases you are their investor so you don’t have direct communication with the sponsor. So your questions might not be answered or not answered as completely. If you are a direct investor you can oftentimes communicate directly with the sponsor’s senior management. My investors can call me directly or send me an email and get a response. For some folks, that’s really important. 

Our investors can do their due diligence on us. This means they can ask us a thousand questions (or as many thousand as they want), talk to references, and visit our offices and meet us in person.  Can’t do that with point and click investing on a website. Some say that they rely on the website to vet the sponsor and that gives them an advantage. I’ve been vetted by crowdfunders, and let me tell you, it was nothing compared to the wringer that some of our investors have put us through.  So I wouldn’t think of that as the gold standard. 

We once had an investor visit our office and do extensive DD on us. He said that he had invested in dozens of crowdfunding deals without doing any DD at all because he was only investing $25K per deal. He wanted to invest substantial capital with us so “now it was time to get serious about doing due diligence“.  My point is that crowdfunding is fine if you want the simplicity of point and click investing. But if you want top quality sponsors and no middleman taking a cut, there are better ways...

Originally posted by @Louie Pullen :

Hi, 

A very close friend of mine has just sold his business and will net $3,000,000

He is very eager to put his new found wealth into real estate.  Having read books and listened to podcasts he feels multi-family is where he wants to invest. 

I suggested that because he has no RE investing experience and the current market conditions, it may be wiser to find proven private equity real estate investment companies like Praxis Capital, etc and let them do what they do best. 

What is the downside of investing with RE Investment companies rather than doing it on your own?

Any thoughts/ideas would be greatly appreciated. 

There are some great posts here about pros and cons of syndication, and crowdfunding. 

The question for your 'friend' is, does he want to become active in REI or just invest his money passively? Being that he just sold his business, and has been reading books etc. about REI, it sounds like he may want to become active. If so, none of the above will fulfill that desire. Don't get me wrong, there can be great returns, but it's not as fulfilling as being fully involved in a deal.

I would suggest approaching a number of seasoned MF investors, and offer a partnership. His money to invest, in exchange for apprenticing the professional, and being fully involved in all aspects of the deals. 

1) He'll get much more return on his investment being a partner than any syndication or crowdfunding can offer.

2) Learning first hand from a seasoned investor is the best way to become an independent investor (who make the most money in REI)

@Brian Burke Thank you for the detailed answer as always. I think there is something appealing or mesmerizing about Crowdstreet's marketing, website and the point and click nature. Having the buffet of offerings and then the pretty investor dashboard helps too. Mesmerizing...especially to someone like myself with limited experience in REI and syndication.

Everything you've stated makes sense. My conclusion is that crowdfunding sites are:

1. For inexperienced investors who don't have contacts with the REI world yet and maybe just find comfort in the point and click interface versus having a conversation with a live sponsor.

2. For investors with limited capital. $10,000 can get you into some deals on Crowdstreet, whereas I don't see $10K getting you into a deal with an experienced, quality sponsor. $50K minimum?

3. For lazy investors who don't want to do their DD, or are just wowed by the front end marketing and promised returns.

Thanks again,

Originally posted by @Yonah Weiss :

I would suggest approaching a number of seasoned MF investors, and offer a partnership. His money to invest, in exchange for apprenticing the professional, and being fully involved in all aspects of the deals. 

1) He'll get much more return on his investment being a partner than any syndication or crowdfunding can offer.

2) Learning first hand from a seasoned investor is the best way to become an independent investor (who make the most money in REI)

Regarding Yonah's advice, I've considered this myself. I would love to invest with a sponsor and then shadow them to learn the ins and outs by participating in a large deal. But how realistic is this? Does a sponsor want to deal with the mentoring, time and general hassle of an apprentice? Maybe some or willing to take this on every once in awhile but it seems like a distraction from their core focus.

Does a larger investment, say $250K instead of $50K, make a difference to the sponsor and "buy" some clout and the willingness to mentor the investor? 

DIVERSIFICATION  .... don't put all your eggs in the real estate basket....

He may want to retain a good Money manager that is fee based not commissioned based and have him go into some different asset class's.

and is that 3 mil net  or does he owe tax?  that's a biggee right there.

@Brian Burke   good honest feedback Brian as opposed to all the me me me post BP tends to get :)

I would think take 20% into syndication with a fully vetted syndicator.. maybe 10 to 20% in double tax free muni's

Also some performing trust deeds like a Norris in LA provides whole note .. short term 

Even a builder type for this big hits put 500k into equity with a top shelf builder developer like the deals that @Will Barnard does there in LA .

spread it around if your going into real estate..  one could always buy into another business as well that has upside  

Louie,

I highly recommend to have your friend meet with a fee only financial advisor. They should work together to determine a diversified mix of investments including real estate. He should not place all of his eggs in one basket. There are two good websites where he can explore his options.

1) NAPFA.org
2) garrettplanningnetwork.com

See article below as well.

http://clark.com/personal-finance-credit/fee-only-financial-planners-are-in-your-best-inter/

Good luck!

Marco

@Scott Skinger like any partnership, each party brings something to the table that the other needs. In this case, money has very big pull, and more money has more pull.

But you make a very valid point like, many investors have their systems established and are not looking to partner, and teach. That's why I said, reach out to a number of investors, hopefully you'll find one that will want to take someone under their wing.

If he is real comfortable with real estate then he should consider diversifying trusts deeds, mortgage pool, syndication, partnerships, own income producing real estate  etc.

@Louie Pullen ,  I invest in both private real estate that I own and didn’t passive investments. And my passive investments include both syndications and crowdfunded investments. 

I agree with a lot of what was said above. However there are also some things that I  disagree with, or will point out that perhaps there is more to the story than the poster understood. 

For example:

1)   “Can’t 1031 exchange passive investments“:While Praxis may not offer a 1031 exchange,  there are some syndications that do. And the same with Crowdfunding: some do and some don’t

2) “crowdfunding costs more”: not every crowdfunding platform takes fees from investors.   CrowdStreet which you mentioned takes no fees from investors because they charge the sponsor. 

3) “Crowdfunding platforms are for investor who can’t afford a higher minimum than $10k” .  This is strange and definitely not true. Crowdfunding is just syndication online and the minimums varies just as much as they do with syndications. The CrowdStreet average is about $25,000.  There are platforms that have a $1 million minimum. 

4) “ if you go through a crowdfunding platform you can’t talk directly to the sponsor”.  Again, on most platforms that isn’t true.  CrowdStreet will even route  you directly to the Sponsor for most questions. 

Now here’s my answer to your original question. The biggest difference between owning direct and passively is that of control. The nice thing when you own directly is that you know everything about the investment and you can control all of it. When you invest passively, you turn over that control to someone else. You have to be competent and  comfortable with vetting someone and then letting them run the show.  Neither one is always superior and they both have plus and minuses. 

 And then to answer  the question about the  differences between  syndications and Crowdfunding: they are essentially the same thing. Crowdfunding just puts it online. 

 There is some truth to the fact that there are some syndicators you do not need to go to Crowdfunding because they have plenty of investors.  And the majority do not have more than a full cycle of audited historical experience. 

However, that’s also true for most syndications. The high-quality sponsors are few and far between and the majority are not. So I don’t see this as an issue with Crowdfunding per se, but of the general nature of passive investing instead. 

@Louie Pullen If I had a (3) million dollars...

New to real estate investing, you need to consider how to protect yourself against loss & liability.  A lot of good points made above about the pros and cons of working with/vetting a sponsor vs. DIY.

Two things to consider in your exposure to the risk of a deal.

  • General partner carries the business's debts & obligations 
  • A limited partner's liability for the partnership's debt is limited to the amount of money that the individual contributed to the partnership.

Thank you all for the info on this thread – I’ve appreciated reading all of the commentary especially that about these different investment vehicles.

If I had $3m and were in his/her shoes, I'd find an investment or wealth management advisor (fee based, not someone who will try to sell him on annuities and whole life insurance and such) with experience in real estate. There are so many nuances, pros/cons, to each of the strategies outlined above. I'd get with someone who has has advised or helped managed this type of investment, has good reviews and references, and a track record of growing returns.

Curious to see how this plays out and nice to see someone's hard work pay dividends - 

@Louie Pullen Tons of great pointers here. $3M leveraged across asset classes within the real estate space is definitely the way to go since your friend has unequivocally decided to go with RE. 

Downside:

  • Some companies, as they become big, may not be able to tend to all their investor clients, especially if your friend is looking for some hand-holding and learning all through the process 
  • Your friend wouldn't have the autonomy of capital deployment and what deal and market it will be invested in

Since your friend just sold a company, he doesn't strike me as a beach bum and the fact that he already reading a ton of content about MF it looks like he may want a little more. Consequently, he can find a really good syndicator that he can partner with to learn the ropes of the business and grow his own portfolio.

Something different for your friend to think about. That way, he gets some autonomy, while learning all through the journey.

Hope this helps. Goodluck. Thanks! - Ola 

Originally posted by @Ian Ippolito :

 2) “crowdfunding costs more”: not every crowdfunding platform takes fees from investors.   CrowdStreet which you mentioned takes no fees from investors because they charge the sponsor. 

Good point, Ian.  We came close to giving CrowdStreet a portion of one of our deals once, but ultimately decided it wasn't necessary so we didn't move forward.  What I liked about their platform is that the investors would invest directly in our offering, making it our relationship, and in that case the investors would have direct communication with us.

And you are also correct that they charge the sponsor, not the investor.  That said, and please correct me if I'm wrong here, I'd think that the sponsor would be passing that cost to the investor either through a higher sponsor fee or making the cost a deal-level expense (which is very typical in the LP capital space for marketing costs).  Either way, it ultimately costs the investor more, right?

Originally posted by @Scott Skinger :

Does a larger investment, say $250K instead of $50K, make a difference to the sponsor and "buy" some clout and the willingness to mentor the investor? 

 I think it would make a difference and you'd be more likely to find a sponsor willing to play this role. But my concern would be that when you are networking to seek this type of sponsor, you are going to spread the word that you are sitting on a pile of cash and inexperienced (based on your desire to be mentored), which can attract some sharks too.

Even if he wants to be more active in the long run, investing $50,000 or $100,000 in a syndication would be a quicker way to get some education in the multi-family world, and still leave plenty of capital to do his own deal, or diversify into other asset classes. The reason I say it's quicker is that one can do some due diligence on a sponsor in much less time than it takes to get fully educated and find your own deal in today's competitive market. 

If he decides syndication is the right path for him, he should still meet several sponsors as opposed to only investing with one. Not only is diversification a wise idea, but many good sponsors only do a few deals a year because they are conservative and are often outbid, so you need to have a relationship with several in order to get access to many opportunities. 

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