Creating a portfolio of Syndications as limited partner only

18 Replies

This might end up being a long post and hoping for some interesting conversation....... here is the bottom line.... Do you think we can build a strong portfolio with just syndication deals being a limited partner.

So lets get started. My wife and I are both active duty and moving every 3-ish years. We are 30 and 28 years old. No Debt. We are trying to get our hands involved in a little bit of everything to see what we want to focus on once we get back from Korea and in the states. We have done one syndication deal so far. Have an offer accepted on a flip that we are partnering with. Have another offer accepted on a duplex that we are partnering with. Alot of moving parts for us as a new investors. The buy and hold and the syndication have simliar ROI around 16-20% (technically the buy& hold return should be infinate after the BRRRR is complete). The flip has a much higher ROI but more risk. We are also hoping to go back to school when we get back in the states. wife-CRNA school. Me- MHA/MBA program.

Back to the original question: Do you guys think it is possible to create a large amount of wealth from just Syndication deals? My thoughts: Very passive.... I mean very much so as a limit partner investor in a syndication.

Pro/cons of syndications (just my thoughts please comment about yours)

Pro: very passive allowing you to focus on creating more income or other objectives such as going back to school/ fixed rate of return/ equity at time of sale/ % of initial investment back within a few years at refinance. Turn around and reinvest into a new syndication. no liability

Con: not in control of anything that is done with the property. money is tied up for up to 10 years and might get a lower then desired % amount at refinance 2-3 years in. Not able to leverage your money.

Pro/cons of buy and hold residential 1-4 units ( again just out thoughts please talk about yours)

pro: LEVERAGE. more control of how property is ran. potential infinate return on investment if the BRRRR is good enough.

con: value probably would fluctuate more than apartment complexs. turnover hurts NOI more. Liability. repairs hurt NOI more.

so....what are your thoughts about building a decent retirement through syndications?

Know anyone who lives off the income just from syndications? I hope this will turn into a decent conversation. 

Investing passively as LP only can be a good strategy if you have enough capital to invest. Depending on the deal you can expect around 12-20% returns. Some deals offer more some less.

I read most of the thread. I think there is a bigger issue.

Forget the focus on wealth. Focus on not getting wiped out. Like software, minimum viable product (MVP), tells us we need to learn from small, short tests. You figure out the biggest assumptions a business or strategy depends on and then you find ways to test (fail fast and keep learning). 

In your case, you and your wife have distance working against you. And you may have day jobs which make it hard to keep your eye on the ball. Better to focus on scale and learning than worry if one or another route is better for wealth.

I am not saying you can not go direct (JVs, etc) or that you should avoid syndication. I would focus on where you can learn the fastest and the safest while you sift through options. If there is a 2-year project vs a 5-year project, the bias will be towards shorter as it lets you create feedback loops multiple times vs the 5-year project.

@Jacob Morris

First of all, thank you and your wife for your service!! 

Second, the fastest way to make more is of course through active investing. The question comes down to: do you have the desire and the bandwidth to be active?! Yes, I know it is a lot harder to do distance investing, but people still do it and some are very successful in it. I actually just "met" a guy virtually on BP that said in all years of investing he hasn't personally seen any of his investments. Rather he partnered up with others that served as boots on the ground and has been doing fine so far. 

If you believe that your bandwidth doesn't allow to spend a lot of time on this business then syndications is one of a better options especially if you accredited and hence will have access to many more options than non-accredited investors would have. 

Here's an article to help sort through this decision making process:
https://www.biggerpockets.com/member-blogs/10850/84064-what-type-of-investor-to-be-when-i-grow-up-active-or-passiv

@Jacob Morris I started out by investing as a limited partner in syndications with the the goal of building a diversified portfolio of cash-flowing commercial real estate, primarily large C-B class multifamily assets. Along my journey friends, family and others have joined me and I've had the privilege of deploying over $20MM primarily as LP equity diversified across 8,000 apartment units. We've also invested in other stabilized cash-flowing asset classes (medical office being the next largest asset class). Since then I've been co-sponsoring syndicated deals with partners while performing asset management for my investors.


So to answer your question about is it possible: yes, absolutely. 

However @Greg Dickerson is spot on: you have to have enough capital to invest to replace your income and leave a significant buffer in the event your portfolio doesn't perform as expected. There are faster ways to multiply equity, but they come with more risk.


Here is my biased pro/con list for syndication vs SFR/small multis.

Syndication Pro: Ability to scale and diversify, economies of scale, aligning yourself with professionals to remove the learning curve and reduce risk, almost totally passive (you still have to do your own DD on the sponsor and need to be able to identify what a good deal is and isn't), limited liability (no debt to guarantee, etc), max leverage LTV is usually around 85% via FHA/HUD, more tax advantages via cost segregation (cash-flow is typically tax sheltered for first 7 years).

Syndication Con: No control over operations, upside is shared with sponsor, fees, no control over sale, sponsor and LP's interest may not always be aligned.

SFR/Small Multis/BRRRR Pro: Total control of business and operations, upside is all yours (higher potential return), control of sale/exit, no fess besides third parties, max leverage via FHA is 90-96%,

SFR/Small Multis/BRRRR Con: Not passive and will require significant time commitment, difficult to scale and diversify, occupancy risk is more significant, major repairs have a more significant impact on returns, mercy of the SFH market, harder to force appreciation via increased NOI.

My bottom line and why I chose to do what I did and why I steer individuals and family offices towards syndication: 

Syndication may not have as high of a potential return vs doing it on your own but it is by far the greatest risk adjusted return. If you need control, you like the emotional aspect of owning a few properties yourself and think that being a landlord is going to be a fun thing to do as a part time job, then doing your own deals is what you need to do.

If you are pursuing real estate strictly as a vehicle to provide cash-flow and to multiply equity over time and you buy into the thesis of Multifamily real estate or other asset classes then syndication is the way to go. 

Let me know if I can answer any questions or go into any more detail of my experience with different sponsors, etc.

@Greg Dickerson  we 100% agree with you!  

@Spencer Gray  thank you for your detailed response. You’re basically summarizing what we have been discussing over the last month.  What made you make the switch from solo investing in syndications to bringing on family and friends? What are a few red flags that you look out for when doing your due diligence on deals? What are some things that you find valuable when looking at syndications?  I’m sure several people would love to read about your experience and what you look for in “good deals “

Originally posted by @Jacob Morris :

This might end up being a long post and hoping for some interesting conversation....... here is the bottom line.... Do you think we can build a strong portfolio with just syndication deals being a limited partner.

So lets get started. My wife and I are both active duty and moving every 3-ish years. We are 30 and 28 years old. No Debt. We are trying to get our hands involved in a little bit of everything to see what we want to focus on once we get back from Korea and in the states. We have done one syndication deal so far. Have an offer accepted on a flip that we are partnering with. Have another offer accepted on a duplex that we are partnering with. Alot of moving parts for us as a new investors. The buy and hold and the syndication have simliar ROI around 16-20% (technically the buy& hold return should be infinate after the BRRRR is complete). The flip has a much higher ROI but more risk. We are also hoping to go back to school when we get back in the states. wife-CRNA school. Me- MHA/MBA program.

Back to the original question: Do you guys think it is possible to create a large amount of wealth from just Syndication deals? My thoughts: Very passive.... I mean very much so as a limit partner investor in a syndication.

Pro/cons of syndications (just my thoughts please comment about yours)

Pro: very passive allowing you to focus on creating more income or other objectives such as going back to school/ fixed rate of return/ equity at time of sale/ % of initial investment back within a few years at refinance. Turn around and reinvest into a new syndication. no liability

Con: not in control of anything that is done with the property. money is tied up for up to 10 years and might get a lower then desired % amount at refinance 2-3 years in. Not able to leverage your money.

Pro/cons of buy and hold residential 1-4 units ( again just out thoughts please talk about yours)

pro: LEVERAGE. more control of how property is ran. potential infinate return on investment if the BRRRR is good enough.

con: value probably would fluctuate more than apartment complexs. turnover hurts NOI more. Liability. repairs hurt NOI more.

so....what are your thoughts about building a decent retirement through syndications?

Know anyone who lives off the income just from syndications? I hope this will turn into a decent conversation. 

 

Jacob, I don't have an employer, so my portfolio has to provide all of the income for myself and my family. 

At the same time, I would add a few things:

1) I also have directly own real estate in my portfolio. Personally I think anyone that tells you one is superior to the other in all situations, doesn't understand the full story. They both have their strengths and weaknesses and in my opinion both of them belong in a balanced portfolio.

2) Direct real estate: If you are cash poor and time rich, a heavy concentration on direct real estate can make sense. The big difference between it and a syndication is that you can build sweat equity and pocket the return that would've been given to the professional manager for yourself. This can be a significant difference for someone that is cash poor and with lots of time.

The other advantage you mentioned is direct control.

The big disadvantage is that you are a newbie, and have a decent chance of making expensive mistakes. That is the risk of essentially going with "do-it-yourself".

Also, you are overseas which probably makes hands-on management impossible. If so, then you would be relying on remote brokers or turnkey operators and remote property management to run the business. I've bought many properties from investors like this and many times they were completely mismanaged or rundown without the investors' knowledge. It's been great for me, but not the original investor.

As a conservative investor, I would personally never be willing to assume this kind of risk. But if you are more aggressive, maybe you might be fine with it.

3) Syndication/passive: if you are cash rich and time poor, a heavy concentration on passive syndications makes a lot better sense. After the initial due diligence there is no time commitment required to generate the income.

The other advantage is that if the investor chooses well, they can hire a manager that has years more experience than they can ever hope to get on their own. So they can avoid making expensive mistakes that are easy for a newbie to make with "do-it-yourself".

The downside is that the return will not be as high because there is no ability to put sweat equity into the deals. And you have to be comfortable venting managers and turning over full control to them. Not everyone can do this, and if they can't then this isn't a good fit for them.

Originally posted by @Jacob Morris :

Con: not in control of anything that is done with the property. money is tied up for up to 10 years and might get a lower then desired % amount at refinance 2-3 years in. Not able to leverage your money.

I have to disagree with this part. Think about this: you invest $100K in a deal. 3 years in it's refinanced and returns $50K, which is a return of equity and is non-taxable by the way. You turn around and invest that $50K in another deal, all while earning returns on $100K worth of ownership in the first. You now have $150K worth of ownership for the price of $100K!

Also I second @Alina Trigub , thank you and your wife very much for your service!

I know multiple people that live an amazing life purely as passive investors.  They had two things in their favor when they started; 1) - they started with roughly 300-400k and spread it over multiple deals and 2) - they got started in the early stages of the recovery (2012-2013).

It is possible to build a nice passive income but as shown above it usually takes some decent capital and the right time in the market to really get it going.

The folks I referred to are making 200-300k a year passively and have grown their net worth to between 2mm and 4mm and travel all the time. This happened because many of the deals they invested in doubled, tripled or even quadrupled and have also done many re-fis or supplemental loans along the way that grew their portfolio exponentially. This good fortune also had some bad deals along the way but has worked out well for them.

As mentioned by others, there are definitely pros and cons but if you have the capital and patience you can build quite the passive portfolio.

Caveat - obviously, these folks go involved at a fantastic time that may not exist currently and they started with a fair amount of capital but you can still start now and end up with a nice little nest egg that pays for a pretty good life passively.  

@Jacob Morris - Having spent the last three (almost four years) building a syndication business I can tell you that if I didn't have an extremely strong desire to build a business I would have taken the profits from my original big hit on my first investment and started investing passively 100% of the time. The experience and knowledge you'll accrue are 10x what you'll get by learning on your own because you'll watch how the PROs do it. 

As my father would tell me, "A good copy is better than a poor design". 

If you have the $$$ to spread across 3-4 deals, IMO, do it first. Then decide if doing it on your own is best suited for you. 

Hey Jacob,

I have done exactly as you describe.  I happened to hold a fair amount of money out of 401K & IRAs.  Then my wife and I happened to run into a great mentor (yes paid a fee) who explained how MF syndications work and who maintains a network of Sponsors and Passive Investors that works like a well oiled machine.  (BTW, I am referring to 70+ units, not small MF, and we always use professional management.) I did my first deal in 2011 but the best return deals were bought in 2015 and sold in 2017 & 2018.   The above comments are accurate:  1. you have to have some money invest to be passive only.  2. you need to spread it around in multiple deals; it is hard to tell which deals will be the home runs and which will be a base hit.  3. it takes a while before it starts throwing off money.  The deals would return about 6-9% cash on cash (most of the time) but the big money was at the sale; the first sale was in 2015, in the 4th year.

To date, we have gotten into 45 deals. 14 have sold; all positive, but a couple have been about 5% IRR (this is the annualized return, not the total return). My average is 30% IRR. We are in around 30 deals at this moment totaling about 5000 doors (but a small % of many of those doors). Now several sell each year and I buy some each year -- it is the "Bond Ladder" of the past with much better than bond returns.

Yes, I expect that there will be a year in the future that will be the wrong year to sell and I will live on other money that year. 

Jacob, the Issue I see for you is distance!  Given that most of these are syndicated using Reg D 506(b), you must have a pre-existing substantive relationship with the Deal Sponsor.  It can be done, but they will need to be accommodating creating that relationship.

Thanks for your service, 

Charles LeMaire

@Jacob Morris I did it in five years by moving money from the stock market. I retired last year and now find deals I love and tell everyone I know. The key is to determine your priorities and find like-minded syndicators to work with.

If active investors are not adding value, passive syndications can provide similar (or better returns) with much less work.  With current market conditions, deal flow is also problematic and syndications allow passive investors to rely on sponsors' full time staff dedicated to it.

Most investment real estate is purchased by pooling money...pension funds, public REITs, private REITs, syndications, insurance companies, private equity, etc.  It's the common way to invest, although, it's uncommon on BP.  Most of the investing discussed on BP is a very small fraction of the investment real estate marketplace.

I invest both actively and passively and am testing the thesis of living off a passive syndication portfolio.

Hi @Jacob Morris

Passive investing is a great option for those who want to invest in real estate but don’t have the time or expertise to manage their own properties. Passive investors who don’t provide the majority of capital have minimal risk as the lead investor is the only one who signs onto the loan; your own risk is limited to your investment amount. Being able to allocate more capital with lower risk can help strengthen your portfolio, you don’t have to worry about paying off loans if the deal goes sideways, which is a comfort for many.

I think if you invest smart and wait for solid deals to come, then I see no reason why passively investing won't make you wealthy. If you’re in it for the long run and aren’t looking to make as much money as possible in a short amount of time, then passive investing is a great option. As @Bruce Petersen said, there are many investors who make hundreds of thousands each year simply due to passive investing.

First off, thank you to you and your wife for both of your service. You are appreciated. 

After reading your post I'd ask you to factor one thing. How much time do you have? Which option would allow for more of your time to focus on doing more of what you love? As much as you can gather the wonderful pro's and con's already suggested, have you considered your time?

Originally posted by @Bruce Petersen :

I know multiple people that live an amazing life purely as passive investors.  They had two things in their favor when they started; 1) - they started with roughly 300-400k and spread it over multiple deals and 2) - they got started in the early stages of the recovery (2012-2013).

It is possible to build a nice passive income but as shown above it usually takes some decent capital and the right time in the market to really get it going.

The folks I referred to are making 200-300k a year passively and have grown their net worth to between 2mm and 4mm and travel all the time.  This happened because many of the deals they invested in doubled, tripled or even quadrupled and have also done many re-fis or supplemental loans along the way that grew their portfolio exponentially.  This good fortune also had some bad deals along the way but has worked out well for them.

As mentioned by others, there are definitely pros and cons but if you have the capital and patience you can build quite the passive portfolio.

Caveat - obviously, these folks go involved at a fantastic time that may not exist currently and they started with a fair amount of capital but you can still start now and end up with a nice little nest egg that pays for a pretty good life passively.  

You've described exactly what I did, and I started offering access to my family and friends because I believe so much in the investment strategy. I did indeed start at the right time, however much of the appreciation that we've enjoyed hasn't necessarily come from the market appreciation, but from our forced appreciation....value-add projects that raise the NOI. In the end though, it's about cash flow and capital preservation. (And let's not forget tax savings)

@Ian Ippolito I second your comments. A big piece of this decision comes down to whether you want to take on real estate investing as a second job. 

The time, energy and skill required to source, execute and manage deals should not be understated. The best have done it for a decade+, and those learnings cannot be ingested overnight.