Rental Property Investor · Gilbert, AZ · Member since 2017 · 69 posts · 64 votes
Say I am an accredited investor and I want to allocate $500k for a type of investment that should be capital preserving; completely passive; and generates $100k annually in income. In general that's a tough row to hoe, as the classic truly passive income flows almost never get near 20%. But it does seem like even (relatively) conservative apartment syndication deals do hit that mark, over time.
Here's my thinking. I take my $500k and I invest it into apartments in an investment ladder, with $100k invested each year. That could be one property at $100k or two at $50k each. Each year I invest $100k more until after year five, all of my cash is in between 5 and 10 apartments.
A typical deal, from what I've seen, may return 8% annually in dividends and 175% (including initial investment) during a sale in year 5. That's a 2.1x multiplier. This is what it looks like to me:
The 8% isn't a lot and it will increase to only $40k a year when all $500k is in play. But on year 5, I get the original $100k back plus an extra $75k, leaving my annual return at $115k -- just above my target. I then take my returned capital from year 1 and invest it again.
After this, there's always my one or two properties from 5 years earlier going up for sale, and so my annual return will stay at $115k (22%) indefinitely, until I finally stop the ladder.
When that happens, I will temporarily have an extra $100k each year for 5 years.
On the surface, this seems like it beats pretty much all other truly passive investments for annual income generation. Therefore:
It's a great plan and I'd like to add a little more insight.
I'm doing the same thing but have come to the conclusion that I need to average my return on equity (NOT CoC) to ~12%. So... if I want 1.2m in passive income (I'm a 10x kind of guy) I need to work hard to earn $10,000,000 (1.2m divided by 12%) in equity. How do I do this?
1: Grow an operating business or income stream that generates excess cash flow (for me it's a property management and syndication business). For you it might be a day job, new biz venture, etc. 2: Invest the cash into income producing assets that generate the best risk adjusted return while greatly protecting hard earned principal (for me it's workforce apartments in great locations, with long term, fixed rate debt). 3. Reinvest distributions and refinance liquidity events from these projects into new income producing assets. Simple formula that takes a lot of discipline and a ton of perspiration to execute.
@Daniel Dietz, yes, I started with my plan last year and successfully found an apartment syndication in Texas with projected higher returns and a similarly higher risk plus a storage unit syndication in Florida that was a bit more conservative. I'm really liking the mix of geographical locations, market influences, and risk levels.
This year I'm hoping to find some suitable deals that are maybe even more conservative than those. It really feels like we are right at the end of the current high in the cycle and I have very little faith that it'll continue for the next five years. So I'm going to focus less on the five year projections and more on how stable the investment will be if it all crashes next year. Low debt; long term fixed rates; and conservative to the point of pessimism assumptions on attributes like vacancies and price increases will all be very important factors!
I also discovered relatively recently the idea of "funds" that encapsulate multiple real estate deals. Those sound on the surface not unlike an REIT but they apparently aren't and they do require being accredited to participate. I know extremely little so far but the idea of a relatively high return "income fund" that could still be "safer" than an individual property is intriguing and worth a look.
You do not need to be accredited to participate in funds. That would be a sponsor requirement, not an SEC requirement.
>>I also discovered relatively recently the idea of "funds" that encapsulate multiple real estate deals. Those sound on the surface not unlike an REIT but they apparently aren't and they do require being accredited to participate. I know extremely little so far but the idea of a relatively high return "income fund" that could still be "safer" than an individual property is intriguing and worth a look.
There are actually multiple ways to do this (and literally hundreds of thousands of different sponsors to choose from).
First, not every syndication is a single property. Many of them (especially the larger sponsors) will put more than one property into a single syndication deal. So you get additional diversification benefits right there. Some may bundle two or three properties together. Others may bundle 25 or 100. Some will focus on the same types of properties (for example they may all be value-added multifamily). Other sponsors will diversify (for example, Blackstone Real Estate Investment Trust invests in office, multifamily, retail, etc.). So this can provide additional diversification benefits.
As you mentioned, these private offerings are very different than a public REIT. A public REIT trades on a stock exchange and offers daily liquidity. That's a nice perk, but the investor also pays a heavy premium for it. If an investor can afford to lockup their money longer term (and arguably all real estate investments should always be allocated to longer-term money) then avoiding a public REIT can let the investor cash in on the liquidity premium and get a higher return.
A second way to get diversification on multiple deals is to invest in the feeder fund. This is a fund that invests in multiple syndications. The plus side is that this often let's you get into the syndications at a much lower minimum than if you were to invest directly yourself. The downside is that there is often an additional cost to run the feeder. So depends on the investor and what they are looking for.
Mobile home parks have the same total return but a little more cashflow.
There are other asset classes like assisted living deals and all kinds of other developments but I like how MFH gives cashflow which is important where we are in the market cycle.
Start by reading the books on syndications: one by Gene Trowbridge and the other one by Joe Fearless. The next logical step would be to get familiar with the asset classes. If you're currently investing in MFH (just an assumption), then look into other commercial asset classes to determine which ones will potentially be of interest to you to invest in.
@Kurt Granroth thanks for the update. I am mostly studying up on syndications for when I want to start possibly exiting my own rentals in 5-10 years. I figure that should give me enough time to figure it our ;-) .
If I can ask, what is the range of projected returns on the ones you are in right now?
@Kurt Granroth You're receiving some good ideas here in regard to being cautious in the MF space this late in the cycle. We're being VERY careful with our capital allocation on MF deals and turning down about 50% of the deals we're seeing. Mind you, these are deals already deemed good deals by experienced syndicators. We're putting more of a focus on storage and MHC's at this point in the cycle. The fund approach is favorable to us because we have very limited downside. (Don't have the time here but the market supply of MHC's is actually diminishing at a time when demand is increasing nationally. This is a space to own now.) Funds provide the ability to refi cash back to investors much quicker and more reliably than an MF deal in a very compressed cap rate environment. My suggestion is to hunt for experienced sponsor in the MHC and SS space, and look for cash out opportunities. Look at their track record and evaluate the probability for a cash out in year 3-5. This capital is then reinvested for higher cash flow in other deals. If you take this approach and do your diligence, you will have a better chance of hitting your target.
While some of your numbers I may agree or disagree with if you are investing in different syndication what you really need to look at is their track record and ability to execute, not just the class as a whole. I have seen deals that investors lacked the experience or local knowledge to execute. Just a few years ago I saw a 40 million asset by a very well known investment group that had never purchased in this city go bust, because they were not familiar with the dynamic of the area despite their due diligence at a mile high level. This investment group had the experience and the ability to execute, but not the right market. Just because apartments are a good asset does not mean that the particular deal you invest in will match your predictive analysis.
@Kurt Granroth thanks for the update. I am mostly studying up on syndications for when I want to start possibly exiting my own rentals in 5-10 years. I figure that should give me enough time to figure it our ;-) .
If I can ask, what is the range of projected returns on the ones you are in right now?
@Lane Kawaoka@Mike Krieg - Yeah, the MHC market is a notable focus of mine right now... but I honestly don't know if I'll invest in that space or not, because of the ethical considerations involved.
I know that taking ethical or moral factors into account is a bit verboten in many investment forums, but it's important to both my wife and myself. I don't want to get more wealthy by preying on those that are far more vulnerable. An ideal investment will be one that is truly win-win for all involved.
Mobile Homes really skate that line. They are so hot right now at least partially because so many cities are bulldozing them over in favor of master planned communities. That's happening right now in the suburb just north of me. These people getting evicted from their homes when the community goes away are essentially screwed because there's literally nowhere they can go with the same monthly price. Many will end up homeless. People in Mobile Homes are among the most vulnerable out there.
So when I look at MHC deals, I focus on what the deal entails. If the profit is going to come by "improving" the property to hike rental income, then I'm out, because those are literally stepping on those that can least afford it. At not point do I want my investment money being part of making somebody homeless.
If the profit is going to come by increasing the number of spaces and increasing choice, then I'm far more interested because then I can make some money off of this while some families can now have a place to live that they otherwise wouldn't have. Win-win.
But that's me. I've already turned away from some variations of BRRRR w/ lease options due to who the people I'd be making money off of are. It's absolutely had me leaving money on the table, but so be it.
There is likely not a single person in the country that has been made homeless by a MHP re-positioning. I think you have the wrong idea about the resident class in parks...or maybe the resident class in apartments. In most cases, these residents own the homes..and are in a better financial position than many C and D class multifamily renters.
These sponsors are cleaning up parks, kicking out the deadbeats, and providing the most affordable housing that exists. Or, the county knocks them down and developers build latte shoppes.
I fully understand and respect your position though.
I just syndicated 2 deals around the corner from you, one next to GCU and the other in South Mountain. Nothing wrong with your thinking. We are able to pencil 2X multiple on a 5-year hold and 2.6x on a 10-year, at 17% IRR and 14% IRR.
Noticed in your earlier post that you quoted the CoC returns of the deals you're invested in.
Before I look at CoC I want to know what the cap rate is. I can give you CoC returns of 10% from a deal with a cap rate of 5% because of high leverage. I wouldn't want to be in a deal like that. Especially when prime rates right now are 5.5%.
Or, I can give you CoC returns of 8% from a deal with a cap rate of 10% and very low leverage. This is the kind of deal I would feel safe in.
So, without knowing the cap rate it's difficult to know the risk of the deals you're invested in, no matter how experienced the operators are.
@Lance Langenhoven - Honestly, I have mostly passed over the cap rate on all the deals I have looked at because -- without exception -- those rates were nearly identical. That is to say, every deal I've seen has a cap rate between 5% and 6%, depending mostly on long the planned hold is for.
A cap rate of 10% for an apartment syndication today may well exist... but if so, those deals are well out of my league and their sponsors certainly aren't showing them to me!
@Kurt Granroth You are on the right track. What you have outlined is EXACTLY how I was able to leave my W-2 job last year. Took about $500K and 4 years. Happy to chat about it, but I can't say enough about multifamily syndications done right.
I'm in exactly the same boat, except my money is sitting in equity in properties ($3.1M in equity on $4.4M of investment property, another $1.1M in equity on my primary residence. And I'm basically thinking the same thing. Can't beat the returns of syndications if you're looking for passive income. I'll be tapping into it via leverage, but not borrowing past the cash flow from the properties.
But I wouldn't bank on the exit at the end of 5 years. To @Todd Dexheimer's point, the exit is a big piece of your math, and if the timing isn't right to exit, you don't want to be banking on the exit. Smart syndicators won't be forced to sell because of the way they've structured the deal. So, don't spend the money from the exit until you have it... aka live below your means and everything on top will be gravy.
Also, if you have $500k in cash now, I wouldn't worry about staggering the investments. In reality, if you invest in 5 different deals (presumably across multiple syndicators) and you do them all at the exact same time, you'll probably exit at least 3-4 of them in different years. And that's a good thing...you don't want 5 deals all exiting at the same time, your tax hit would be absurd.
@Ian Ippolito, @Kurt Granroth -- Picking this thread from last year. Great conversation and awesome feedback. I am in a similar situation and bumped into this thread.
I am in the market and evaluating Remote SFRs vs syndication strategy. I like the passive nature of syndication. Can you please share pointers on how to find reputable syndication/fund operators as I would like to diversify the operators as well as the asset class such as lockers and mobile homes.
@Ian Ippolito, @Kurt Granroth -- Picking this thread from last year. Great conversation and awesome feedback. I am in a similar situation and bumped into this thread.
I am in the market and evaluating Remote SFRs vs syndication strategy. I like the passive nature of syndication. Can you please share pointers on how to find reputable syndication/fund operators as I would like to diversify the operators as well as the asset class such as lockers and mobile homes.
You can find them via crowdfunding sites, through a good investor club and by networking with other investors. If you're an aggressive investor, it is super easy to find deals to pull the trigger on. If you're conservative then it takes a lot more time and work to find one that's a good fit.
For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence:
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
Okay, it's been three years since I originally posted this and at the time it was all theory and no practice. I now have three years of following this ladder in practice and so it's time for a checkpoint.
Here are my results from the past three years:
Yeah, I'm missing my target by a notable amount. It's a mix of changing market conditions and just practical effects vs theoretical.
In no particular order:
1. The listed "preferred rate" these days is more commonly 7% than 8 2. But even then, that rate is only applicable retroactively after the deal completes. Precisely one of my deals (BAM Multi Fund) hit the preferred rate in the first two years -- most are notably less the first year. 3. Those CoC numbers aren't annualized, which they should be to be accurate since none of the deals happened at the beginning of the year and, in fact, all were initiated between June and October of each year. Still, even annualized, only one deal hit the preferred rate at all. 4. 2020 has $50k less invested than predicted since I was furloughed and we were keeping our cash close to the vest as a "just in case" 5. 2020 didn't do as poorly as I would have expected, though. I mean, they were all low (except one - yep, BAM Multi Fund for the win) but not as low as I thought they'd be.
I am back to work and we have a healthy liquid funds buffer built up so the goal is to invest $150k this year to catch up in the 5 year plan. It'll be very interesting to see when the first sale will be and how it'll impact all this.
The question I asked to start this thread was "What beats apartment syndication returns for passive income?" and it's far to consider if index funds in the stock market fit that bill. I do have precisely one data point in that regard, now, as my very first deal has sold. Now that its cycle has completed, I have final numbers that can be compared to alternate options.
In particular, what if I had used the initial capital to invest in VTSAX, the Vanguard Total Stock Market Index. That is as "passive" as you can get. In the alternate timeline, I simply collect the dividends rather than re-invest them and sell the stock on the same day as the MFA deal closed. Here are the results:
MFA Multiple: 1.32x Annualized CoC: 11.24%
VTSAX Multiple: 1.51x Annualized CoC:17.5%
So, yeah, in this specific case, the stock market easily beat the syndication for passive returns.
Yes, I do get that the stock market returns are largely due to the inexplicably bullish 2020, whereas MFAs all tended to do relatively poorly that specific year. This deal was also considered somewhat under-performing which is why it was even sold so early, and so doesn't necessarily (hopefully) reflect the rest of my portfolio. I also still have tax benefits from the MFA including the 1031 where I'm pushing my sale proceeds plus the remaining excess passive losses that should be shielding me in the future. And finally, this is literally just one data point out of what will be many data points, so I really can't read anything meaningful from it.
The question I asked to start this thread was "What beats apartment syndication returns for passive income?" and it's far to consider if index funds in the stock market fit that bill. I do have precisely one data point in that regard, now, as my very first deal has sold. Now that its cycle has completed, I have final numbers that can be compared to alternate options.
In particular, what if I had used the initial capital to invest in VTSAX, the Vanguard Total Stock Market Index. That is as "passive" as you can get. In the alternate timeline, I simply collect the dividends rather than re-invest them and sell the stock on the same day as the MFA deal closed. Here are the results:
MFA Multiple: 1.32x Annualized CoC: 11.24%
VTSAX Multiple: 1.51x Annualized CoC:17.5%
So, yeah, in this specific case, the stock market easily beat the syndication for passive returns.
Yes, I do get that the stock market returns are largely due to the inexplicably bullish 2020, whereas MFAs all tended to do relatively poorly that specific year. This deal was also considered somewhat under-performing which is why it was even sold so early, and so doesn't necessarily (hopefully) reflect the rest of my portfolio. I also still have tax benefits from the MFA including the 1031 where I'm pushing my sale proceeds plus the remaining excess passive losses that should be shielding me in the future. And finally, this is literally just one data point out of what will be many data points, so I really can't read anything meaningful from it.
Still... VTSAX for the commanding win, this time.
I think that says more about the MF deal you invested in than it does the stock market, or even MF in general. A 1.3x after nearly 3 years is not good. Especially being over the last three years, which have been some of the best ever for MF. Even a mediocre deal should have been able to match that 1.5x.
