Syndication v active investments

12 Replies

I hear a lot about syndication and putting money to work passively with good sponsors of a large deal. Is it totally passive? I am very interested in owning my own real estate and having the equity in the home, but it is much more active and is certainly risky. Why would I do syndication over active management of my own properties? I assume you can make better return doing your own properties, but it seems like if you can put the same money to work for 8-12% returns without lifting a finger, that would be a better investment anyway. Do you also get equity in the property when you put money in? Not sure how it all works exactly and would appreciate any feedback on which option would be best or any personal experience doing both. Thanks so much!

@Tyler Hampton

Your assumption about making more money by doing all of the work yourself is correct. The missing piece here is time and energy commitment. When you work on the business yourself, you're supposed to make more. Syndication is a completely passive way to generate income. Here're a couple of posts that will give you an additional clarification:

https://www.biggerpockets.com/member-blogs/10850/85836-should-i-buy-a-turn-key-property-or-invest-in-a-syndication

https://www.biggerpockets.com/member-blogs/10850/84064-what-type-of-investor-to-be-when-i-grow-up-active-or-passiv


@Tyler Hampton yes, you have equity in the deal. Your equity is returned during equity events, i.e. supplemental loans, refinance, and primarily sale.

You can certainly earn more doing your own deals, but the beauty of syndication for passive investors is just that, the passiveness. To be clear though, it isn't entirely passive as you have to vet the Operator and do your due diligence on the particular deal(s), but it's about as passive as it gets. That's why this type of investment is well suited for busy professionals who have capital to put to work but no time outside of their primary money earning ventures.

@Michael Bishop that makes sense! When you do these syndications, do you get to see what the preferred return will be, or is it just an estimate until the project gets going? And is it better to use a crowd funding site, or a single sponsor? I’ve seen a lot of people talk about individual great sponsors and crowd funding, but not sure what the difference is. Thanks for your input!

Like Michael said, syndication is great for those who don't want second and third jobs. If you've got the time AND experience, being an active real estate investor can yield greater short-term returns. Whereas syndications can spread your investment across hundreds to thousands of doors and give you that true passive income.

@Tyler Hampton Just depends on the sponsor and how they filed with the SEC. There are plenty on both sides of the coin. If the syndication is for non-accredited investors, it limits the sponsor to how much information they can give and it can only be to formerly established relationships. Once a sponsor has a proven track record, they will typically only partner with accredited investors.

The theory is you can make more money by running your own deals. Direct investing.

For a number of people, they lose more money with their own deals. They make mistakes, get emotional, buy or sell at the wrong time or price.

You can make more money running a business than you can owning the shares. That said, if you do not have the time, the skill, the temperament to be a business owner, the risk premium will not happen and you can easily be less well off.

If you look at Warren Buffett, from an early point in his career, he decided that he was not good at running a business compared to buying shares in a business. Even when he buys the whole company, he is very focused on buying a good management team so he can avoid being hands on.

Investing direct or through others is a decision. There is no perfect answer. You do have to go all in if you are going to be the direct owner. As much as you can outsource activities, there are many decisions which will either enhance or destroy the returns.

You're basically paying the syndicator to spend the time and energy to do all the management and work for you. Thus, less return but less time.

Crowdfunding sites tend to have sponsors who are not newbies, but also sometimes lower quality deals. It really depends on the site. Every site tends to have its own focus. Single sponsors require more (or, I should say, the same amount of) vetting by you for track records and such. You can see @Ian Ippolito 's realestatecrowdfundingreview website--he did a lot of due diligence on all the sites.

Some sponsors who are doing 506b deals accept non-accredited investors.

@Tyler Hampton what this conversation comes down to is experience and control.  If you have the experience to do successful deals on your own, you will likely create a better return than you would get in a syndication. However, if you don't have the experience, you could lose money as mentioned above by @John Corey

If you don't have the experience and don't want to take your lumps while you earn the experience, you can invest in a syndication where the experience is already present, but you will be giving up the control.  As long as you find the syndication that is a good fit for your investment goals and properly vet the sponsor, you could very well end up making a better return than you would if you learn as you go.  

With that said, if you choose to invest in a syndication, here are a few points for you to consider when seeking a good syndicator:

Character - In a syndication or fund, you are a passive investor with little control over the day-to-day decisions, so if the sponsor is dishonest everything else will not really matter. Make sure to do proper due diligence on the sponsor and consider acquiring testimonials from current/prior investors.

Strategy - Is the sponsor's overall real estate strategy smart? Have they considered the potential market risk, economic risk, interest rate risk, etc? What is their backup strategy if the market turns? You'll want to make sure the overall strategy has been well considered and stress tested. Even if you find a sponsor with great character, the project can still be a bad one if the strategy is poor, or the pro forma is too aggressive. Gaining clarity on this will help you avoid jumping into an investment just because you know a good person who says they "have a great deal".

Fair model - The relationship between an investor and a sponsor as it relates to how income and profits are split is extremely important. Investment models can include a host of fees to the sponsor, preferred distributions, claw backs, equity splits, inversions, lockups, tails, etc. which can be complicated and confusing for investors, so make sure you understand the model completely before you invest. Consider the most important question to be: "With this model encourage decisions to be made in the best interest of all parties?"

The Business - Most real estate sponsors are good at real estate, but can get so focused on the real estate that the other business requirements get ignored. Some of the areas where that will cause investors to become frustrated are things like regular reporting, timely delivery of payments, accurate and transparent financials, timely delivery of tax documents, and the ability to meet timelines, budgets, and target projections. To be candid, this may be the most important and most overlooked component of choosing a syndication or fund investment. Make sure the sponsor you choose has a well thought out communication plan that can be clearly demonstrated. This will help you sleep at night.

    When you find a sponsor capable of creating comfort for you on those items, you will probably have a good experience investing in a syndication or a fund.

    All the best,

    Jack

    You'll nearly always make a much higher return investing in yourself and becoming an operator.  What many people discover is that they're already really good at something else (business, medicine, sales, etc).  Read Cash Flow Quadrant by Kiyosaki. The truly wealth funnel income from the S, E, or B quadrants into the I quadrant to accelerate the process of becoming financially free.  

    For example my 80 employee real estate private equity / management company is my B quadrant business.  I use it as a vehicle to acquire more income property.  Our partners however do the same thing from all manner of income as mentioned above.

    IF you can devote all your time and energy to learning the active real estate operator game you should definitely go for it.  If you already have a good thing going elsewhere focus on making that thing produce more income!

    Down the road you can start looking to be a passive partner.

    All the best!