Do syndicators outperform the average investor?

Multi-Family and Apartment Investing
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Do syndicators outperform the average investor?

Jason Powell
Beaverton, OR · Member since 2014 · 118 posts · 119 votes

I'm wanting to enter a more restful season of life after sprinting hard that last few years. Syndications, in theory, sound like a very attractive option to me. I get how they work, but I wanted to ask you:

1) Do average syndications with seasoned syndicators tend to outperform the average person trying to be a landlord on their own? My biggest mental hurdle is whether the fees a syndicator (rightfully) charges makes it so that passive investors only net marginal returns. Also I'm wondering if syndicators take a bunch of mediocre deals in hit markets like this just to keep their own deal flow and revenue going. 

2) any specific recommendations? I'd love to hear from those who have used syndication model long term. I realize that most of the deals in the last 8 years have all probably been great due to huge market tailwinds. 

The passiveness and quality of life aspects of syndications sound great. I guess I'm trying to quantify how delayed one's "financial freedom" target might be if they use this model as opposed to being very active by themself. 

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
7y

@Jason Powell

Full disclosure. I am a syndicator of both investments in performing notes and investments in commercial properties.

I have been investing in real estate and real estate related assets since 1979, so I’ve experienced both booms and busts.

The typical syndications I see use about 50% leverage to obtain 7% current cash on cash return, about 1.5 to 2% loan amortization, and rent increases at current cap rates add another 6-9% to projected returns.

In other words the future returns are based on the real estate market performing as it has since 2008.

Maybe yes, maybe not so much.

The change in tax code in 1987 literally wiped out real estate syndications at the time. So much so that syndicators umbrella association, a par of the National Association of Realtors folded, as membership decreased 90%.

The vast majority of private real estate investment funds, the grandfather of today’s syndications, either went bust or closed their doors in 2008-2009.

Real estate prices in Phoenix, Miami, and Las Vegas fell 60%. Nobody built THAT into their forecasted returns.

So if I were on the other side of the table, I would regard the assumptions made by syndicators (including myself) about sale prices of the subject property 5 years down the road very suspiciously.

I agree with almost all that was said in posts above. However some of the risks of investing in a syndicated investment vs. a property you control have not been sufficiently detailed.

What if we do hit a major real estate recession, and prices drop 20%? The syndicator won’t be able to sell new syndications, so won’t have income from acquisition fees, ongoing management fees for those syndications, and current syndications being underwater won’t have income, realized or unrealized from over ride. Will the syndicator be able, or even be willing to stay in business? If the syndicator folds, what happens to the subject property? I just had a loan request for a large apartment complex where the syndicator went out of business in 2010. Since then the investors had 4 capital calls, received no distributions, and a larger loan was taken out on the property. They are now suing the asset manager they hired in 2010 to replace the syndicator that went out of business.

Being a syndicator, I believe in the advantages of syndications as passive investments. I just don’t think investors realize all the associated risks.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Jason Powell

    There are some reasons you want to go with a syndicator instead of investing yourself.

    1) More passive if you are a limited partner/non-managing member. You don't deal with the tenants, finding properties or the day-to-day operations.

    2) You are able to get into investments that you normally may not have the opportunity to do on your own. Being able to own a piece of a large apartment complex.

    3) Experience - Most syndicated teams have years of experience in the field along with a list of contacts.

    With that said, there are fees paid to the sponsor/fund to operate. 

    With the fees considered, the return from the syndication can generate a return greater than you would normally get if you invested yourself. It can also be less.

    I think you will find varying results based on how much experience and hustle you have.
    If you have experience, time and hustle, I would imagine you can generate a greater return than a syndicated deal.
    If you don't have experience, time or hustle, you may want to consider investing in a syndicated deal.

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  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    7y

    @Jason Powell FYI: I am a syndicator. My experience share: I have owned small rentals (duplexes, triplex, 6 unit deal and small apartments) before getting into large, site managed deals of 150 to 350 units.  I recently sold all my small stuff because the economies of scale and consistent cash flow of larger deals dominate the small ones.  Bear mind however that I'm still the chef in the kitchen.

    If you want to be like me then start small, fail often, learn from your mistakes before taking other people's money. It's the tuition you need to pay before being an operator! :)

    If you want to invest with operators like me then work very hard at underwriting said operators/sponsors/gp's (same thing!).  I have no doubts some great contributors will post some links in this thread on underwriting deal sponsors!

    10Reply
  • Oleg Shalumov
    Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes
    7y

    @Jason Powell the answer is it depends :-). 

    Syndication usually returns 15-20% annually but you could actually get a bettter return if you find a very undervalued property. 

    I see the main benefit of investing in syndication if you would like to be a passive investor. If one does not have a 9-5 job (and not retired person) and sitting home all day watching TV, I would recommend that person to be a more active investor (flipping, PM, etc)

    One the point of syndicator taking a bunch of deals “keeping their deal flow going”, it is a valid point. Expirience syndication would not risk his reputation and money of his investor just to get some fees. He want his investors to come back to him. More importantly, I like to see when syndicator/operator invest his own money into the deal. 

    4Reply
  • John FortesPro Member
    Multi-Family Syndicator · Abington, MA · Member since 2017 · 603 posts · 347 votes
    7y

    As a syndicator you're providing a service to passive investors who don't have the time but are willing to invest in a business model. The benefits are from investor to investor but the time to manage and operate the complex is a hands off approach while reaching the returns they signed up for. I understand the mindset as you shift your philosophy over to the operators side of things when it comes to syndication and its a service you can give busy professionals looking to grow their wealth.

    2Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    7y

    @Jason Powell there's no definitive answer to this question, unfortunately.  Some syndications will outperform some direct investments.  And some direct investments will outperform some syndications.  Just like some direct investments will outperform other direct investments and some syndications will outperform other syndications.  Unfortunately there's no way to know until after the deal is complete and the money is counted.

    Having said that, there are advantages and disadvantages to each approach that have less to do with anticipated performance, but are still important, and can effect actual performance.

    Direct investments have the advantage that you have complete control of the process.  You can decide when to sell, when to refinance, what capital improvements to make, when to raise rent, when to fire the property manager and which property manager to hire in the first place.  The disadvantage is that all of these things take your time, which has a cost to some degree.

    Syndications have the disadvantage that most of the above is out of your hands.  You do have some control, however, by choosing which sponsor to invest with and which deal to invest in.  

    There are plenty of advantages to investing in syndications.  Most people are leveraging the advantage of having someone else do the heavy lifting.  But beyond the obvious there are other advantages as well.  You are also leveraging the sponsor's experience, market knowledge, network and connections, team, deal flow, borrowing capacity and balance sheet.  

    Considering the list of advantages, you can see that the sponsor you choose weighs heavily on how meaningful these advantages are.  If the sponsor is a first-time syndicator with no money trying to get their first "no money out of pocket" deal, they likely aren't contributing much of any of the items on that list.  On the other hand, a group that has a deep bench of experience and a long time in the market and has built up their own net worth can fulfill every item on that list and then some.  Choose wisely and you'll tilt the odds in your favor.  Perhaps even as compared to direct investing.

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  • Kevin Dean
    Rental Property Investor · Chantilly, VA · Member since 2017 · 104 posts · 149 votes
    7y

    Hey @Jason Powell I agree with what has already been said and would like to offer an additional perspective.

    If you believe that you can generate a greater return on your time through your non-real estate related activities, as compared to potential active real estate activities, then you should focus all of your time on those activities and invest your money passively with a proven sponsor.

    If however you believe you can generate a greater return on your time through actively managed real estate activities, as compared to non-real estate related activities, then you should not invest passively and instead focus your time and capital into leading your own deals which will provide superior returns. 

    A hyperbolic example of doing this incorrectly would be a top Sales Executive who makes $1,000,000 who decides to allocate a large portion of their time and focus towards generating an above average return through single family rentals, rather than investing their money passively and allocating all of their time and focus on generating even more income in their full time sales position. 

    This of course does not take into consideration the non quantifiable aspects of real estate investing, but can be a piece of the puzzle when deciding which route you pursue. 

    4Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    7y

    I would say the more seasoned investor typically out performs the beginner in the long run, but not always. As a syndicator, some advantages we see are that we are able to buy large apartments with efficiencies and more stability traditionally. Currently we own many duplexes, triplexes, etc and they do well, however, there are a lot of inefficiencies that come in to effect. Our large multi-family don't have many of the same challenges. 

    As for the returns, you should be expecting between around 14-18% IRR with an annual cash on cash of between 7-10%. That is your profit after the fees from the sponsor are taken out.

    Here is a guide to investing in a syndication: https://www.biggerpockets.com/blogs/10145/83067-li...

    Here are articles written more for the sponsor, but may have good information for you:

    https://www.biggerpockets.com/blogs/10145/73373-op...

    https://www.biggerpockets.com/blogs/10145/72118-sy...

    9Reply
  • Jason Powell
    OP
    Beaverton, OR · Member since 2014 · 118 posts · 119 votes
    7y

    Thanks everyone for all the responses. Lot's of great points brought up.  @Kevin Dean I'm a big believer in backing out the value of one's time from self-managed deals to find the true investment return. Seems like a must if trying to compare apples-to-apples with a syndication.

    @Account Closed Wise input. Thanks! To me, the syndicator is far more important that the deal, as I don't believe in my ability to perform adequate due diligence on the deals anyway (different markets, size of deal, etc that I have no experience with). Speaking of lack on control on when to sell, do you know, if one receives a check back due to sale of a property, would one be able to 1031 that back into another syndicated deal or private personal deal?

    3Reply
  • Jason Powell
    OP
    Beaverton, OR · Member since 2014 · 118 posts · 119 votes
    7y

    Also, do you all have input on what the minimum investment is typically for a seasoned syndicator with deep experience and track record? I would imagine those folks would want a higher minimum than newbies...?

    0Reply
  • Jason Powell
    OP
    Beaverton, OR · Member since 2014 · 118 posts · 119 votes
    7y

    @Todd Dexheimer Thanks! I'd be very happy with a 15% IRR and 7-10% COC. If that's reasonable to expect even when entering deals in a hot market such as today, I'm quite happy with that given the passive nature.

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Jason Powell, You give up control and in 99% of the syndicated deals you give up the ability to use the 1031 exchange. Almost all of what we call syndications these days are set up as entities either LP or LLC. When you invest you are purchasing a membership interest in the entity and not the real estate itself. In order to qualify for 1031 treatment you must sell and buy actual real estate. So the only way it can work is if the syndication is set up where you own a tenants in common % of the actual asset.

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  • Steve K.
    Honolulu, HI · Member since 2017 · 247 posts · 315 votes
    7y
    Originally posted by @Jason Powell:

    Also, do you all have input on what the minimum investment is typically for a seasoned syndicator with deep experience and track record? I would imagine those folks would want a higher minimum than newbies...?

     $50-75k, some groups give preference to $100k or more if the syndication fills quickly

    0Reply
  • Matt Millard
    Lewisville, TX · Member since 2015 · 341 posts · 264 votes
    7y

    As an active landlord for over 10 years & a passive syndication investor & startup LLC owner of two businesses I would say syndication is the way to go. Active businesses are more active & enjoyable at times but things like multiple flips can be stressful & demanding especially if you have a family or don't live in a good geographic area for cash flow like DFW or are investing now at the market peak!

    I really like Paul Moore’s articles on Buffett. I am a syndication investor with Paul now & this marks my 7th syndication deal. I like focusing on things you can control like the deal itself, the operator & the type of real estate you can invest in.

    Jeremy Roll also is a great passive investor & has a great investor list & annual dinner. His videos on YouTube on identifying true cash flow passive investments are top notch.

    Also was a regular at Berkshire Hathaway & many of the private parties & enjoy reading Scott Thompson’s book called the Art & Science of Value investing & fellow author Bud Lubitan.

    Syndication investing all the way especially if you can identify returns at 15% or above in any market. Hard to beat that with the tax advantages & capital gains 1031 rollover like Paul’s income fund is set up to do!

    I would have to fight hours of traffic to invest actively where I live in Dallas’s affluent northern suburbs unlike Norman where the cashflow got me started along with timing & being going in college & learning through real life experience!

    6Reply
  • Steve K.
    Honolulu, HI · Member since 2017 · 247 posts · 315 votes
    7y
    Originally posted by @Account Closed:

    @Jason Powell What's understated in all of this is the benefit of diversification. If you don't have the time or desire to identify one market and build a team in that market to drive your own returns, you can invest passively with multiple sponsors in different areas of the country, different classes of apartments, different strategy, etc. and build a well diversified portfolio for yourself. Sure you pay fees and a promote along the way, but paying the promote (normally) means it was a good deal and you should be happy to pay it! Unlike investing in the markets where brokers or advisers will take a fee of your invested capital regardless of what happens to it....

    Good luck to you, please PM me if you have any specific questions about investing in syndications!

    correct, I am trying to diversify geographically and by asset class (and also sponsor groups). this will hopefully reduce risk (key man, geographic, economic, etc) and spread out the timelines of the projects so I have money to deploy (or re-deploy) every year or so. I call this "laddering".

    2Reply
  • Charles SoperPro Member
    Rental Property Investor · Merritt Island, FL · Member since 2015 · 253 posts · 178 votes
    7y

    Another BP article regarding being an LP and the risks/rewards: https://www.biggerpockets.com/renewsblog/limited-p...

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    I invest both actively and passively.  If an investor is not able to add value, passive syndication returns (mid to high teen IRRs) will likely equal or exceed the returns of active investing.  Active investing is way too much work to not achieve outpaced returns.

    6Reply
  • Matt Skinner
    Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes
    7y

    @Jason Powell

    By definition you would be able to achieve financial freedom faster by outsourcing or “hiring” a syndicator to steward your commercial assets.

    When you invest in a syndication you are “hiring” someone to find the deals, get good bank financing, raise the down payment money giving you and everyone involved diversification, and then they take care of all the tenants, toilets, and tax returns do you can live the “mailbox money” lifestyle.

    In the last 10 years, the lowest annual return my investor team received was 18% a year.

    My investors average about 21% per year in my apartment deals.

    One of my investors has $300,000 in my 12% interest real estate bond.

    She gets $3,000/month passive income - she practically lives on this.

    0Reply
  • Matt Skinner
    Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes
    7y

    @Basit great answer

    1Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    7y
    Originally posted by @Jason Powell:

    I'm wanting to enter a more restful season of life after sprinting hard that last few years. Syndications, in theory, sound like a very attractive option to me. I get how they work, but I wanted to ask you:

    1) Do average syndications with seasoned syndicators tend to outperform the average person trying to be a landlord on their own? My biggest mental hurdle is whether the fees a syndicator (rightfully) charges makes it so that passive investors only net marginal returns. Also I'm wondering if syndicators take a bunch of mediocre deals in hit markets like this just to keep their own deal flow and revenue going. 

    2) any specific recommendations? I'd love to hear from those who have used syndication model long term. I realize that most of the deals in the last 8 years have all probably been great due to huge market tailwinds. 

    The passiveness and quality of life aspects of syndications sound great. I guess I'm trying to quantify how delayed one's "financial freedom" target might be if they use this model as opposed to being very active by themself. 

     I think they are just different strategies. I am experienced in both. Syndications (or equity investments) are more short term and could earn you a high return, but they have a higher entry point. Buy and Holds may have a lower entry point and can be longer term, but their returns are most likely going to be less.

    0Reply
  • Luke Miller
    Investor · Front Royal, VA · Member since 2013 · 586 posts · 418 votes
    7y

    @Jason Powell take my advice with a grain of salt, I'm a syndicator so i'm a bit biased. 

    Basically, just like other real estate deals, it's going to depend on the quality of the deal, how it is managed and the people involved. 

    A good rule of thumb is that the more passive and widely available the investment is, the lower yields. Syndications are almost completely passive (for the LP), but they aren't widely available. When I was flipping my ROI was infinite because I was using other people's money. As you can see, it's hard to compare the two.

    Syndications are a hell of a lot better than the stock market, but probably not as good as flipping/wholesaling. HOWEVER, they are way more passive. 

    You're on the right track if you're looking to take your foot off the gas a bit. Look for a deal with around 15% to 18% IRR and a hold period of about 6 years. In that time, you'll double your money if projections are correct.

    1Reply
  • Jason Powell
    OP
    Beaverton, OR · Member since 2014 · 118 posts · 119 votes
    7y

    @Matt Skinner Good point. My definition of financial freedom includes time as the primary measuring stick. A 21% IRR is stellar, and ample enough for me to never have the desire to personally manage units myself again. Maybe some flips or turnarounds when I had the time and particular itch.

    @Luke Miller True, I like what you say about the passive AND widely available aspect. I don't understand why this isn't talked about more. And frankly, I don't see why so many people go buy low end homes and self manage if these returns are available passively and reasonably reliable over the long term.

    Everyone's responses have been quite eye-opening.

    0Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    7y

    @Kevin Dean "If you believe that you can generate a greater return on your time through your non-real estate related activities, as compared to potential active real estate activities, then you should focus all of your time on those activities and invest your money passively with a proven sponsor."

    100% agree with this. I had a call with a prospective investor this morning. A busy professional with zero additional time to invest in real estate. Half a mil in the bank and zero time to spare. In my opinion he is the perfect candidate for passive syndication investor. We offer him tax advantages and a way to reliably outperform the market, which is a great deal!

    @Jason Powell most experienced syndicators will have a $50k or $100k minimum. They're going after big fish investors, and even the big fish sometimes want to start with $50k to test the waters before investing hundreds or a million plus.

    1Reply
  • Emily Houser
    Rental Property Investor · Portland, OR · Member since 2018 · 32 posts · 44 votes
    7y

    Hey @Jason Powell, 

    My husband and I live in Portland, so we are close to you! My sister lives in Beaverton.  It would be great  to meet up with you sometime. We have been part of a group called Think Multifamily in Dallas, TX.  Amazing group of syndicators and passive investors.  We’ve had the opportunity to invest in several deals both passively and as part of the general partnership in the past year and a half.  We’re planning on hosting a regular meetup group here in the Portland area and should have our first meeting scheduled soon for late February or early March. Maybe you can join us for that 🙂 We’d love to connect with other investors in the area!

    The next Think Multifamily event is the last weekend in March. I’d be happy to tell you more about it if you are interested. Mark and Tamiel Kenney have been amazing mentors!

    Thanks, Emily

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    "I don't see why so many people go buy low end homes and self manage if these returns are available passively and reasonably reliable over the long term."

    For most offerings, the SEC requires the investor to be "accredited"...$1 million in net worth (excluding primary residence) or $200k annual income.

    Syndication investing (done properly) is not a completely passive strategy, particularly in the beginning.  It can take a year or two to develop a good opportunity pipeline and learn how to vet sponsors and opportunities.  Look at a ton...invest in only a few applies.  They all look on paper and in webinars.

    We read posts on BP all the time where members have only looked at one opportunity and they want to know if they should invest, where members invest with only inexperienced sponsors, or all in one investment club, or in only in one geographic area, or asset class, etc...scary.

    7Reply
  • Aaron Taylor
    Olathe, KS · Member since 2018 · 148 posts · 207 votes
    7y

    I think it all depends on how you buy. If you're able to find BRRRR properties where you end up with no money invested but 20% to 30% equity, I think that's going to be better than a syndication over the long term. In fact that's probably the best option for some people, a combo of BRRRR properties with no money in them plus some syndicate deals providing cash flow. That way you're playing both sides of the market.

    3Reply
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