Apartment Syndication vs. Turnkey Single-Family Rentals

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Apartment Syndication vs. Turnkey Single-Family Rentals

Mark Koster
Member since 2018 · 1 post · 11 votes

I know this has been asked in the past. I've read through those posts and am looking to update the discussion based on current market conditions and get some advice based on our specific circumstances listed below.

We are looking to diversify our stock-heavy portfolio into more passive, cash-flowing real estate and are analyzing our options. Our current real estate holdings consist of a few large-scale class B value-add apartment syndications in markets around growing major metro areas (with a very experienced sponsor), as well as a couple class C turnkey single-family rentals in the Midwest. We're looking at buying more of one or both of these asset classes and want some help comparing the two.

Some more background: we are accredited investors who are busy professionals and don't have time (right now) to learn how to find, and manage our own rental units without the help of a third party like a syndicator or turnkey provider. All else being equal, we prefer a more passive approach, but we realize some "work" is necessary for any investment, at least upfront. Rental properties in our local market are overinflated and the numbers do not make sense as long-term rentals from a cashflow perspective, which is why we are looking at investing out of our local area. We budget well and are ok with the irregular cashflow from the apartment syndications.

Here are some of the pros and cons of each option that we've identified so far. We'd love to hear others' thoughts on the risk/reward profile of each and anything we haven't yet considered:

Value-Add Apartment Syndications
PROS

  • Higher return potential (most pro-formas I've read aim for 13-18% IRR over the life of the investment) due to value-add component
  • Specific market and asset risk is short-term (most funds aim to sell properties in 3-7 years, after value-add is complete)
  • Can fairly easily spread risk across multiple assets and markets using a syndication fund
  • Investment opportunities (at least at the moment) seem to be readily available from many different syndicators
  • Portfolio risk from individual unit vacancy is minimal (although nationwide eviction moratoriums and neighborhood/regional factors can still present a risk)
  • No impact to personal credit. Leverage is baked into the investment at the GP level
  • No decisions to make once investment is made (until the assets are sold and you need to find another investment)

CONS

  • No control over investment
  • Illiquid
  • Some syndications have high initial investment requirements
  • Short-term nature of investment requires identifying new investments as assets are sold
  • Risk/return is more reliant on competence of syndicator - more due diligence needed upfront to vet them

QUESTIONS

  • What unique risks are there with the value-add apartment syndication model that go along with the higher returns? How to mitigate those risks?
  • What is the long-term outlook on value-add apartment investing? Are current IRR numbers sustainable over the long run? Is the "value-add" component creating a more speculative component that could be riskier if the market shifts?

Turnkey Single-Family Rentals
PROS

  • Medium return potential (seems to max out at 7-10% CoC currently, using leverage)
  • Full control over investment
    Long-term investment - most of the "work" is front-loaded. With good property management in place, it can be fairly hands-off after that
  • More liquid than syndication investments - at least as long as there is a market for the property. Caveat is that turnkeys sell for the high-end of market value, so disposal in the first few years will likely lose money

CONS

  • Specific market and asset risk is long-term (per property - mitigate by diversifying across different markets and property types)
  • Spreading risk across multiple assets and markets requires multiple investments and quite a bit of due diligence
  • Turnkey properties (along with most other single-family homes) are becoming harder to acquire and thus more expensive, compressing returns and making it harder to find properties to buy with solid cashflow
  • Portfolio risk from individual units is high (until sufficient number of doors achieved to mitigate this risk)
  • Using leverage requires qualifying with personal credit - may become harder/more expensive with recently-announced changes at Fannie May
  • Requires some effort (to "manage the property manager") and decisions required at some point for capital expenditures

QUESTIONS

  • What unique risks are there with the turnkey single-family rental model? How to mitigate those risks?
  • What is the long-term outlook on class B/C turnkey rental investing? Will CoC numbers continue to compress or will they level out/rise over the long run?

Overall, we are leaning more towards adding more value-add apartment syndication investments, mainly due to the higher return potential, more plentiful opportunities and lower barriers to entry at present, as long as we feel comfortable selecting a competent syndicator. We'd like to know if there are factors we are not yet considering in the above analysis and if there other options we should be looking at for real estate exposure in a mostly "hands-off" fashion. Is there a higher risk of loss of capital in one of these two options? Are there any different tax benefits to holding one or the other?

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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
5y

I'm an investor and support myself and my family from my investment income. And I invest in both direct real estate (via residential rentals) and syndication/crowdfunding passive investments. In my opinion, both have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both. But I also feel directly owned properties that are turnkeys are kind of a hybrid with unique risks (that I myself am not comfortable with).

1) Directly owned properties are great because they give you maximum control and the ability to tweak them exactly how you want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.

Also direct control means you know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.

The flipside of having the power to control everything is that can be alot of work (and a full-time job if you are putting in sweat equity). Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes.

2) On the other hand, one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself. And once you finish the due diligence, your work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

The downside is that someone has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.

3) Turnkey operators are kind of in-between. However I would not consider them to be truly passive because they do not put any skin into the game like a good passive investment does (via a sizable coinvestment). This coinvestment is what mitigates the risk of the other party taking risks that could be a detriment to the investor. Turnkey operators don't work like that and they are more like a broker collecting a fee for their work (regardless of the long-term performance). So they are financially misaligned on long-term performance (and I think this is why there are so many people who have had bad turnkey experiences)

And, as someone who has done lots of rehabs directly myself, I have seen hundreds of ways that turnkey operator could take shortcuts (to the detriment of the investor but beneficial to their bottom line) which investor could never detect (or not until years later when it's too late). So personally I don't trust reviews from investors saying there turnkey operator is great (because really they have no way of knowing). And personally I cannot pull the trigger on a turnkey operator. However there are other investors who feel very differently and love turnkey operators.

Hope this helps.

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  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 538 votes
    5y

    @Mark Koster, great write up.  I’m in a similar situation and also invest in both.  I don’t really have much to add at the moment, but am interested to hear others’ thoughts and will be following this thread.  Perhaps I’ll be able to jump in later with more meaningful feedback.  I guess the only thing that comes to mind at the moment is the benefits of the long-term, fixed interest rate debt on the turnkey rentals that can be locked in at today’s low rates.  As others have said, “the deal is in the debt.”  I think this needs to be included in the overall return profile of the turnkey route.  Yes, syndications also generally use leverage, but as you mentioned, the exit is fairly short term.  These 30-year loans on turnkey rentals will probably look REALLY good going forward based on where things are today and where they could be heading (inflation, rising rates, etc.).  

    1Reply
  • Steve Donovan
    Rental Property Investor · Green Bay, WI · Member since 2016 · 150 posts · 94 votes
    5y

    @Mark Koster, great job on your very detailed list of pros and cons! To answer one of your questions, one of the largest risks of turnkey investment is that the property cannot be rented at the level in the marketing proforma's, or that the costs run well in excess of those predicted. Do your diligence and make sure your analysis assumes realistic vacancy and maintenance allowances and any ancillary costs that may be necessary with a property (is the owner responsible for any of the utilities, lawn care and snow removal, etc). I do think your estimate of return potential of 7-10% CoC is low; there are many markets where double digit returns are achieved with high quality units and tenants. Best of luck to you as you expand your existing portfolio!

    3Reply
  • Aubrey Tatarowicz
    Investor · Brooklyn, NY · Member since 2019 · 57 posts · 51 votes
    5y

    @Mark Koster This is a great summary. I'm invested in both of these passively and am actively looking for deals on the GP side of syndications. One thing I see as another con or at least something to consider is entity structure, specifically for single family homes. You are more protected by default for syndications as compared to single family homes because the apartments are already in an LLC. There is some startup cost and hands on work to set something up on the single family home side.

    For me, right now, I like the economies of scale of multifamily value add syndications.  It is easier to deploy more capital in a single deal and ramp up investing.  In the future though, I see myself continuing with both.

    4Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    Investing in a syndication is closer in substance and spirit to investing in a small public REIT than investing directly in SFR's. The former is a truly passive investment; the latter typically is not (despite what a turnkey seller might tell you). If you are not interested or have not time to learn the average price of copper pipe, pine 2 by 6's or sewer lateral replacement in your market, you probably should stick to syndications.

    2Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    I'm an investor and support myself and my family from my investment income. And I invest in both direct real estate (via residential rentals) and syndication/crowdfunding passive investments. In my opinion, both have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both. But I also feel directly owned properties that are turnkeys are kind of a hybrid with unique risks (that I myself am not comfortable with).

    1) Directly owned properties are great because they give you maximum control and the ability to tweak them exactly how you want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.

    Also direct control means you know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.

    The flipside of having the power to control everything is that can be alot of work (and a full-time job if you are putting in sweat equity). Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes.

    2) On the other hand, one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself. And once you finish the due diligence, your work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

    The downside is that someone has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.

    3) Turnkey operators are kind of in-between. However I would not consider them to be truly passive because they do not put any skin into the game like a good passive investment does (via a sizable coinvestment). This coinvestment is what mitigates the risk of the other party taking risks that could be a detriment to the investor. Turnkey operators don't work like that and they are more like a broker collecting a fee for their work (regardless of the long-term performance). So they are financially misaligned on long-term performance (and I think this is why there are so many people who have had bad turnkey experiences)

    And, as someone who has done lots of rehabs directly myself, I have seen hundreds of ways that turnkey operator could take shortcuts (to the detriment of the investor but beneficial to their bottom line) which investor could never detect (or not until years later when it's too late). So personally I don't trust reviews from investors saying there turnkey operator is great (because really they have no way of knowing). And personally I cannot pull the trigger on a turnkey operator. However there are other investors who feel very differently and love turnkey operators.

    Hope this helps.

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  • James Brown
    Real Estate Agent · Denver, CO · Member since 2017 · 86 posts · 26 votes
    5y

    You guys might like our Hybrid model. It's a single family strategy like turnkey, where we find lease/option buyers, vet them with our lender partners up front, then if they qualify we let them pick out a home and match them up with a single investor. It's good for busy professionals because the maintenance and repairs are the responsibility of the tenant so everyday property management and expenses are not on the shoulders of the investor. There is money paid by the tenant up front in the form of a non-refundable option fee that brings net cash in down and is nice insurance. The cash flow and back end profit in 1 to 3 years is better than syndications and regular SFR rentals.

    2Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    5y

    BENEFITS OF INVESTING PASSIVELY

    1. Minimizing PITA: No more managing tenants, vacancies, maintenance and the managing the manager (who is a $12-20 dollar employee who's compensation structure us not aligned with your goals) By passing the control of the day to day operations to true experts who are literally partners (direct alignment of compensation and motivations), you can assure the investment is being optimized while you spend your time on what you want which is 1) making more money at your day job, 2) spending time with your family or 3) finding that one off deal that you want to do one your own while pairing with a Limited Partner strategy.

    2. Asset Diversification: Many commercial real estate investments have high acquisition prices (think $10M+) where most people don't have access to. You want to get away from these other Mom and Pop invests like these 1-40 units. When I was a syndication newbie and thought I could do everything by myself and did not trust anyone. I then realized in a few months that 1-40 unit deals had horrible pricing because all the amateurs were involved and the ones that looked good from a per unit price prospective were under 80% occupied and had ISSUES. Investing passively in a group can allow you to invest in multiple asset classes (apartment/mobile home/assisted living), in multiple locations and with varying business plan duration.

    3. Avoid Credit and Liability Risk: Investing passively allows one to avoid being exposed to credit or liability risk. No W2 documented income no problem! You do not need to personally guarantee multi-million dollar loans and and be the fall guy. Plus now you can get into all the travel hacking credit cards and tradelines you want

    4. Cash Flow: The goal of a LP syndication investor is to create a "ladder" of investment that create accumulated cashflow and cashout at different times. It's like your grandpa's CD ladder strategy but with 10-30x returns.

    5. Taxes: All the deprecation benefits of single family home being your DIY direct investing but even better! Bigger deals are able to pay for a cost segregation to squeeze out even more depreciation. 

    4Reply
  • Account Closed
    Investor · Fort Worth, TX · Member since 2019 · 120 posts · 147 votes
    5y

    @Mark Koster You've certainly done your due diligence - nice job! I can help you on the apartment syndication-specific questions - 

    QUESTIONS

    • What unique risks are there with the value-add apartment syndication model that go along with the higher returns? How to mitigate those risks? 
    • (***Biggest risk is always the operator - their leadership skills to execute the business plan and their  underwriting to hedge and mitigate risks. I have a webinar recording my mentor did a few months ago that will help you know what to look for - it's called "Tricks Syndicators Play to Make the Numbers Look Good".  I'll PM it to you)
    • What is the long-term outlook on value-add apartment investing? Are current IRR numbers sustainable over the long run? Is the "value-add" component creating a more speculative component that could be riskier if the market shifts? 
    • (***also depends on the underwriting, the market, and assumptions made by the operator in the pro forma - sent you PM with details)
    2Reply
  • Michael Gilman
    Investor · Westchester, NY · Member since 2014 · 96 posts · 57 votes
    5y

    @Mark Koster Your analysis is sound. To further mitigate risk on passive syndication consider investing in value-add with existing stabilized cash flow. This will typically be in secondary and tertiary markets, but its hard to go wrong when you cash flow from day one plus have the value-add execution to force appreciation.  

    0Reply
  • Chris Levarek
    Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    5y

    @Mark Koster To every investor, the pros/cons will be valued different. Having done both small and large properties, I can say experience and time are big factors to choosing a per unit investment such as SFH or buying in bulk so to speak with apartments. To follow-up on the excellent points by @Lane Kawaoka,

    Experience : Often the smaller properties are being managed by teams with small portfolios or experience. This simply means the systems/processes are not as fully developed as an apartment property management team. Not always the case, however the risk profile goes up with smaller sized properties due to the unpredictability of these smaller teams over X amount of years.

    Time : As you mentioned, performing due diligence per SFH investment takes time. Each property will require repeating the same form of due diligence. In apartment syndication, this can be a one time event and allow for 5-7 years of cashflow without repeating that time effort. For some, this is preferable. A set it and forget it approach versus trying to place capital in 5-10 some SFH and maintaining those investments.

    Diversification : A big one to repeat. Syndication groups can offer fund offerings whereby capital is placed directly into multiple large apartment complexes in multiple states, thus truly giving much higher diversification. All with the same tax benefits and economies of scale. We did this in our fund thus achieving investments in Texas and Ohio through one fund.

    Everything comes down to what the investor is trying to achieve. What aligns with the lifestyle and goals? And what group do they feel good about? :) Relationship is far more important then it would appear at surface level.

    1Reply
  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    Hi @Mark Koster. Great post and analysis. You won’t go wrong following the advice from @Ian Ippolito above. He has a wonderful site called The Real Estate Crowdfunding Review where you can see reviews of syndicators and more.  
    I would also recommend you get the excellent book by @Brian Burke called The Hands-Off Investor that will help you in evaluating syndicators. Brian’s also got one of the best multifamily syndication companies out there. 
      Lastly, I would recommend looking outside just apartments for syndications. There are other fragmented asset classes where mom and pop sellers can provide more risk protection and upside potential. I like mobile home parks and self-storage.  
         Good Luck!  

    Podcast Guest on Show #533
    2Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    5y

    I don't like turn-key investing. You are buying a rental property that someone else stripped all of the equity out and then you're relying on them to lease it and manage it for you. There is no value add upside. They are typically in lower end areas and often in low to no growth cities. 

    Now, with that said. I am biased, as I am a multifamily value add syndicator and also invest passively in syndications. I do, however, own a portfolio of 1-4 family rentals. I purchased those for a deep discount, renovated and refi'd. If you want to go the SF route, that, in my opinion, is the way to go. 

    2Reply
  • Rohan D.
    Member since 2019 · 41 posts · 41 votes
    5y

    @Paul Moore, @Ian Ippolito, @Lane Kawaoka- relying on experts since I've always had this question.
    Is apartment syndication really true wealth building? Your returns increase, your income goes up, but as passive investors, if we hold for ~5 years and sell (pay capital gains and recapture depreciation) and re-invest into a new syndication, you are always going to have to rely on a new syndication to get you that cash flow every ~5 years. Is my assessment of syndication with respect to wealth building correct?

    1Reply
  • Nathan Williams
    Member since 2019 · 172 posts · 93 votes
    5y

    I agree with Todd, not a fan of turnkey provider arrangements at all.  You are coming into the deal at an inflated price and the expenses tend to quickly rack up if you give them full control in managing the property. 

    0Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    5y
    Originally posted by @Rohan D.:

    @Paul Moore, @Ian Ippolito, @Lane Kawaoka- relying on experts since I've always had this question.
    Is apartment syndication really true wealth building? Your returns increase, your income goes up, but as passive investors, if we hold for ~5 years and sell (pay capital gains and recapture depreciation) and re-invest into a new syndication, you are always going to have to rely on a new syndication to get you that cash flow every ~5 years. Is my assessment of syndication with respect to wealth building correct?

    I'm pretty interested in getting other folks' perspectives on this myself. As someone who lives in California, my personal view is that I would never have gotten into my current situation if I had relied on syndications. I attribute my current situation to my directly held investments and good timing.

    But once you reach a certain asset level, I don't see why syndications cannot provide the same level of wealth-building as direct ownership. If we examine the kind of returns such as double-digit IRR's....sometimes in the 20's, 7-8% pref returns and an equity multiple approaching 2.0 within 4-6 years, is that not just as good or better than what can be expected from a very good directly owned property? Probably not as good as more active strategies such as flipping distressed, but I think the comparison should be against passive strategies.

    I think a good balance would be to have a good core portfolio consisting of directly held properties and a smaller portion of your portfolio held in carefully selected syndications.

    1Reply
  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    @Rohan D.. You are generally right. I think you must keep reinvesting and adding to your portfolio to build wealth.  Your goal, as you probably know, is to get money/assets that make money for you while you sleep. It is important to try to reinvest the excess cash flow you make along the way plus the gains you make at the end.  Especially in the early years of this process.   Bonus depreciation which creates losses on your tax returns in early years should really help you get more net cash flow which, if added to your assets, should help you quite a bit.

    Podcast Guest on Show #533
    2Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    5y

    All investors will have to pay back the depreciation recapture (losses taken throughout the hold) and capital gain (the big payout on the end which is sale minus cost basis). But don't despair because although this is the case when you look at it myopically, in reality most investors go into multiple deals accumulating 100s of thousands of passive activity losses in their first few years investing. Those losses do not go away, but they become suspended to be used to offset future passive income and sales/capital events like this in the future. When you exit a deal, what normally ends up happening (like Tom Brady keep winning more Super Bowls) is that you go into two more deals (with now double the amount of capital) and you will likely find that with those new K1s you could result in you having way more passive losses you began with If you can see where this is going... yes, experienced investors with a lot of capital deployed might have 500k-1M+ suspended passive losses and have not paid taxes in years and do not appear to pay taxes for years! (you can find how much suspended passive losses you currently have on your IRS Form 8582 - which your CPA is likely not giving to you and in that case you should get a new one)

    PS - I am not an CPA or attorney but I became financially free doing this for myself after 10 years working as a w2 engineer :( and I am sick and tired of seeing highly educated and hard working professionals getting stuck in the rat race because we deserve financial freedom and the option to do more with it.

    3Reply
  • AJ Singh
    Rental Property Investor · Orange County, CA · Member since 2016 · 513 posts · 374 votes
    5y

    @Tony Kim

    Even a small percentage of your real estate in multifamily syndication will not yield the same results as your direct ownership.. The full bonus depreciation is only available to a person who is a real estate professional ( and there is a certain criteria to that designation as per IRS) 

    If you want 7 to 8 percent yield, invest in riverside and san bernadino county multifamily. You can exchange in these properties as well..

    Read a book on multi family syndication and you will realize that if you want to make income in that field, you need to be the one operating the syndication..Every syndication is not a home run and most of the Gurus in the multifamily space are also running a education empire e.g. lucrative master mind clubs and seminars...

    1Reply
  • Tushar P.
    Member since 2019 · 332 posts · 171 votes
    5y
    Originally posted by @AJ Singh:

    @Tony Kim

    Even a small percentage of your real estate in multifamily syndication will not yield the same results as your direct ownership.. The full bonus depreciation is only available to a person who is a real estate professional ( and there is a certain criteria to that designation as per IRS) 

    Talking of bonus depreciation, whether it is useful or not to the LPs was discussed briefly here:

    https://www.biggerpockets.com/...
     

    0Reply
  • AJ Singh
    Rental Property Investor · Orange County, CA · Member since 2016 · 513 posts · 374 votes
    5y

    @Tushar P.

    The real gainers in the syndication structure are general partners, the operator who are earning fees for managing the asset, social media influencers and BP posters who may be LPs and also part of the operating team,

    Every syndication talks about bumping rents and buying a B asset in a A class neighborhood :)

    0Reply
  • Tushar P.
    Member since 2019 · 332 posts · 171 votes
    5y

    @AJ Singh yes, I see that. Most syndicators are offering what any Tom, Dick, and Harry can deliver. Haven’t seen any syndicator who actually has the confidence on themselves (about all the qualities/experiences they proudly state) to offer promote combined with zero fees.

    Like how some of the hedge fund managers who take fees only after promote: e.g. 20% of the profits only after 6% or 8% return, and no asset mgmt fees. 

    @Account Closed
     have you come across any syndicator who has the guts/confidence to offer a deal where they have substantial skin in the deal and make absolutely zero money until the LPs make 6% or 8%?

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    Im not sure why you would think that's a good syndicator to work with. Only someone with no track record having a hard time finding investors would have to do that. I would rather work with experienced syndicators with a long history of exits. Also, the GP has to front all the money for due diligence and screening. They also provide guarantees for the loan. Why do you think that is not worth anything? If a syndicator came to me with the terms you propose, I would be way to skeptical to invest with them. Good syndicators have a list of investors ready to put money into their next deal and rarely even need new investors. The best ones deal directly with Family Offices and dont want your measly 100K.

    2Reply
  • Tushar P.
    Member since 2019 · 332 posts · 171 votes
    5y
    Originally posted by @Account Closed:

    Im not sure why you would think that's a good syndicator to work with. Only someone with no track record having a hard time finding investors would have to do that. I would rather work with experienced syndicators with a long history of exits. Also, the GP has to front all the money for due diligence and screening. They also provide guarantees for the loan. Why do you think that is not worth anything? If a syndicator came to me with the terms you propose, I would be way to skeptical to invest with them. Good syndicators have a list of investors ready to put money into their next deal and rarely even need new investors. The best ones deal directly with Family Offices and dont want your measly 100K.

    I am comparing real estate syndication with non real estate hedge funds as an investment choice. We have already seen over the last year that non real estate return (average, not even highest) has yielded what the best real estate return may not yield even with 10+ yr hold. If I have to put money into real estate syndications even for the sake of diversification then the preference would be to find a syndicator that could at least match the terms similar to the hedge funds. I would expect such a syndicator to be well renowned and institutional (just like hedge funds) and not mom & pop. The hedge funds that offer the terms I mentioned above are very few - they don’t need new investors either and have a minimum of 1-2 million. The hedge funds have to spend money on due diligence and asset management too, but seems like their interests are completely aligned with the investor when they offer to make absolutely zero money until the investor makes at least 6-8%. 

    I do have investment into a real estate syndication as a co-GP where one of the GP is a family office. This family office will indeed make zero money until I make 8% (by giving up their portion of asset mgmt fees to me) but the main syndicator will still take their portion of asset mgmt fees. So it’s not like I have found a syndicator who can match hedge fund terms and demonstrate that their interests are completely aligned with that of the investors.

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    @Tushar P. I dont think comparing with Hedge funds is appropriate. Hedge funds operate at a different point on the risk/reward scale. Just look at the recent collapse of Archegos. Hedge fund managers are incentivized to make huge risky bets. Sure, they dont make money until you do but they dont lose anything when their risky bets crash. And even if they have "skin" in the game it may be a very small portion of their net worth that they can risk. Maybe you cant. Or maybe they just like the adrenaline. Anyway, its a completely different game in my opinion. Decent syndications give you 15-20% with rather low risk profile and some tax benefits. Hedge funds are far more volatile. Im okay with the fee structure of most syndications as long as I get a reasonable return. 

    1Reply
  • Tushar P.
    Member since 2019 · 332 posts · 171 votes
    5y

    @Account Closed yes, the hedge fund managers can risk a few million dollars and still have no significant impact to their net worth. They are also willing to have a few lean years as one good year will make the lean years look like noise. For real estate investments, maybe I need to find a reit that pays ~8-10% dividends and doubles it’s stock price every 3-5 years - because that will roughly mimic what the combined portfolio of investments in 20+ syndications is expected to yield. But I guess no such reit exists, hence the need for individual syndications.

    What I’m struggling with is that some of these syndications come with a risk of losing all the money (just like hedge funds or risky stocks) but the upside is nowhere as high as what risky investments like hedge funds or stocks can yield. Other option is to invest in less risky syndications but that will lower the potential return. Since my current risk tolerance is quite high, I’m wondering if I should invest in real estate only after a few decades when I’m close to retirement and have lower risk tolerance.

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