Best and Worst Syndication You've Invested in

22 Replies

I'm hoping to speak about just deals you've invested in since 2018 since most deals between 2012-2017 we're pretty much home runs regardless of the GP's. I've invested in 8 multi-family syndications over the past year. I'd say 3 are doing well, 3 are doing great, 1 is doing ehhh and 1 is going dreadful. 

The best deal I've invested in over the past year is about to go back on the market after just closing in September 2018. This is a deal that will produce a 90% total return in 15 months time. Occupancy remained high, lack of housing in the area caused tenants to accept 15% rent bumps without even doing any renovations (plan was to jump rents to encourage people to move out so $4.5k/door could be spent to get those 15% rent bumps), unit mix was all townhome style units 3 and 4 bedrooms. This was also the GP's first deal but he was a guy I got to know and trust and knew he was serious about his craft. 

The worst deal I've passively invested in has dropped down from about 92% occupancy at takeover all the way down to around 62% occupancy within 1 years time, renovations have gone poorly, unanticipated expenses have popped up such as having to hire security staff at the property due to all the crime, break-ins, homeless problem on the property, management changes. New mgmt company in place is doing a better job getting occupancy back up but I'd honestly be happy here if the deal sold and I just got my initial capital back. 

Curious to hear some of the best deals you've invested in since the start of 2018 and the worst ones and why you think they're the best and worst. 

@Kyle Kovats

I'm curious to hear more about your worst deal so far. Were there any signs initially that it could go either way? How would you classify the area where it's located?  Do you think it could have been run differently (aka "better") by another operator or you were the operator? Any lessons learned to share with BP audience from this deal so far?

Good thread, @Kyle Kovats are you able to share what market the worst one was in?  Im just curious if its one of the mkts you hear come up over and over. 

@Account Closed honestly I really chalk it up the the GP’s not doing the necessary due diligence that they should have done. They seemed like the screw it just do it type. As a passive investor in this deal I shouldve done more homework on the GP’s. Had I asked the questions that I shouldve asked and now normally ask, I wouldve passed. Ive developed a list of 12 questions that I ask GP’s before I invest passively since that time. These are the same questions that I ask myself before I consider GP’ing a deal myself now. 

Bottom line I’d say, anyone can land a deal, acquire it and raise equity. The really money is made with operational efficiency post acquisition. 

I should've added this earlier but these are 13 important questions I ask GP's before investing now. 

  • Are you putting your own money into this deal? Not from an acquisition fee but are you putting current liquid capital into the deal and if so how much? Reason: I want to make sure they have at least some skin in the game

  • Will there be an acquisition fee? Reason: I understand a nominal flat type of fee, it's a pain in the *** to put together a syndication. However, when syndicators are buying communities for $40 mill., beating out other syndicators and institutions and then on top of it asking their LP's to pay them an extra $800k-$1.6 depending on the acquisition fee I want to know why you think you've earned that. I think is is a conflict of interest as they know all they have to do is push the deal across the finish line and whether it winds up being crap or great, they've made a good nut up front. 
  • What is the asset management fee? Reason: Ideally I want to see 1.5% or under. I also want to know if they plan on re-investing any of that into the property. 
  • Is there a preferred rate of return or straight equity split? Reason: I personally am not a fan of the pref structure, I think it doesn't keep LP and GP interests lined up. What if there's an 8% pref and year 1 is only 4%? Year 2 is only 5%? Now in year 3 the GP is starting the really get behind the ball and if they can't catch up I worry they sell at an inopportune time. Also, usually when there's a pref there's usually waterfall structures on the back end. I prefer just a simple straight split no higher than 20GP/80LP. 
  • At the time of sale, do I get my initial capital back before you get a dime? Most of the time the answer is yes for obvious reasons. 
  • Have you personally “shopped the comps” and visited them and why are you confident that this property is comparable or better? Self-explanatory. I want to make sure they honestly know the market and didn't just underwrite from another time zone and have never visited the property. 
  • What is the number one concern you have with this deal? There should always be a concern or two that the sponsors have, if not they're lying. I appreciate the honesty and want to know how they plan on tackling this concern. 
  • How did you come up with your numbers for property taxes on the pro-forma? Depending on the state this can make or break a deal. 
  • Does your insurance policy cover loss of rental income in case of a fire and does your insurance policy cover the FULL cost to rebuild in the case that 5 or 25 units are damaged by fire? very very very very important that the property has comprehensive insurance. I want there to be code upgrade insurance, replacement cost, debris removal, business interruption, etc. 
  • I’m not going to hold you to it but what upside is there that wasn’t spoken about? Sometimes there's some real nice value-add components that the GP's don't talk about because they don't want to set expectations too high so I always like to ask this one. 
  • What Is your relationship like with the property management company and how many properties do they manage in the area? Also are those comparable properties? Extremely important. The PM company will make or break the deal. 
  • What is the most recent deal you did and how is that performing? Can I see the webinar/projections of that deal along with your most recent monthly report to compare it with actual performance? I want to see how they're on previous deals they've done. Are they the type to over promise and under deliver or vice versa. 
  • Are any of your family or friends investing in this deal? I know it's a weird question but I think it's important. If there's one people you don't want to let down it's your family and friends and I feel GP's feel an extra level of accountability to family and friends. 
In the last year I have invested in 7 syndication deals, all are doing good. None have sold or are up for sale so I don't have any great ones yet. I guess all my deals are doing about the same at this point.

One is not too far from where Apple announced they are spending a billion dollars to hire 15,000 high tech employees, so that has got to help, and it might even push that deal into the great category.

Investing in someone's first deal sounds pretty risky to me, but that is great it's working out for you.

Good list of questions, the more information you have the better decisions you can make.



Originally posted by @Brent Shields :
In the last year I have invested in 7 syndication deals, all are doing good. None have sold or are up for sale so I don't have any great ones yet. I guess all my deals are doing about the same at this point.

One is not too far from where Apple announced they are spending a billion dollars to hire 15,000 high tech employees, so that has got to help, and it might even push that deal into the great category.

Investing in someone's first deal sounds pretty risky to me, but that is great it's working out for you.

Good list of questions, the more information you have the better decisions you can make.

Ya know, I've actually found zero correlation between sponsors level of experience and deal performance. Because lets be honest with ourselves for a second here, syndicators who yell from the rooftops about their track record, ask them when they started syndicating. If it was Between 2011-2016ish, more or less if they had a pulse their track record will look good and sometimes I think causes complacency. In fact the one really crappy deal I'm in is with 2 very experienced syndicators. My two best performing deals, one which will give me a 90% return over a 15 month hold and the other pumping out 13% COC in year one are both sponsored by first time GP's. Granted these arent just any first time GP's they paid alot of money for coaching and mentorship which I know people have varying opinions on but I find it important.

 

Kyle,
Great learning lesson! Thanks for sharing with the BP community! 

Originally posted by @Kyle Kovats :

@Account Closed honestly I really chalk it up the the GP’s not doing the necessary due diligence that they should have done. They seemed like the screw it just do it type. As a passive investor in this deal I shouldve done more homework on the GP’s. Had I asked the questions that I shouldve asked and now normally ask, I wouldve passed. Ive developed a list of 12 questions that I ask GP’s before I invest passively since that time. These are the same questions that I ask myself before I consider GP’ing a deal myself now. 

Bottom line I’d say, anyone can land a deal, acquire it and raise equity. The really money is made with operational efficiency post acquisition. 

 

Originally posted by @Alina Trigub :
Kyle,
Great learning lesson! Thanks for sharing with the BP community! 

Originally posted by @Kyle Kovats:

@Account Closed honestly I really chalk it up the the GP’s not doing the necessary due diligence that they should have done. They seemed like the screw it just do it type. As a passive investor in this deal I shouldve done more homework on the GP’s. Had I asked the questions that I shouldve asked and now normally ask, I wouldve passed. Ive developed a list of 12 questions that I ask GP’s before I invest passively since that time. These are the same questions that I ask myself before I consider GP’ing a deal myself now. 

Bottom line I’d say, anyone can land a deal, acquire it and raise equity. The really money is made with operational efficiency post acquisition. 

 

My pleasure! I hope to become more active on here as I've been a lurker forever. 

 

@Kyle Kovats great topic. Thanks for sharing. It's not easy to share when things go poorly. What lessons have your learned that have helped you vet sponsors better? 

Also, can I get you on my podcast to talk about your passive investing experience? 

@Kyle excellent post with a helpful list of questions. Unfortunately, I’ve found some sponsors get agitated when too many questions come their way. It’s almost as if their expectation is no deep dive will be done by investors or they’d prefer those who are less inquisitive. It can be frustrating as an investor. It would be very beneficial to see more posts like this one.

Originally posted by @Lucas Miller :

@Kyle Kovats great topic. Thanks for sharing. It's not easy to share when things go poorly. What lessons have your learned that have helped you vet sponsors better? 

Also, can I get you on my podcast to talk about your passive investing experience? 

 Hey Lucas, I've learned a ton of lessons, most of which I outline in an above post of 13 questions I use to vet sponsors now. That pretty much helps me decide whether or not I will invest my capital with them. I am on a ton of syndicators lists and get on a ton of webinars and some of the deals I see some people putting together right now just make me shake my head. 

If I were to say what the #1 thing you can do is, I'd say ask them for a copy of their recorded webinar and investor marketing material for their most recent syndication and along with that ask them for their most recent monthly report on that property that was sent out to investors along with financials. I basically want to look to see what did they project vs. what actually happened. In other words I want to know if they're all talk and no walk.

I'd be happy to come on your podcast, shoot me a PM and we can discuss dates and times further. 

Originally posted by @Barry Dameshek :

@Kyle excellent post with a helpful list of questions. Unfortunately, I’ve found some sponsors get agitated when too many questions come their way. It’s almost as if their expectation is no deep dive will be done by investors or they’d prefer those who are less inquisitive. It can be frustrating as an investor. It would be very beneficial to see more posts like this one.

do not deal with sponsors who will not take the time to answer questions... 

Originally posted by @Steve K. :
Originally posted by @Barry Dameshek:

@Kyle excellent post with a helpful list of questions. Unfortunately, I’ve found some sponsors get agitated when too many questions come their way. It’s almost as if their expectation is no deep dive will be done by investors or they’d prefer those who are less inquisitive. It can be frustrating as an investor. It would be very beneficial to see more posts like this one.

do not deal with sponsors who will not take the time to answer questions... 


I'll play devil's advocate here. While I completely agree that you shouldn't invest with a sponsor that won't answer your questions if you don't feel comfortable, I will also say that, as a sponsor, we get TONS of questions from lots of different investors on any given deal.  There are some investors who are confident in their investment education to recognize a great deal when they see one so they have very few questions. Other investors aren't as informed so they expect you to educate them on why it's a good deal and take up a bunch of your time. 

It goes back to the 80/20 rule! I'm going to put my effort towards that which is the highest and best use of my time. 

That being said, I am still building an investor base so I will still spend hours with whomever to educate them on our deals. 

Originally posted by @Steve K. :
Originally posted by @Barry Dameshek:

@Kyle excellent post with a helpful list of questions. Unfortunately, I’ve found some sponsors get agitated when too many questions come their way. It’s almost as if their expectation is no deep dive will be done by investors or they’d prefer those who are less inquisitive. It can be frustrating as an investor. It would be very beneficial to see more posts like this one.

do not deal with sponsors who will not take the time to answer questions... 

I'll play devil's advocate here. While I completely agree that you shouldn't invest with a sponsor that won't answer your questions if you don't feel comfortable, I will also say that, as a sponsor, we get TONS of questions from lots of different investors on any given deal.  There are some investors who are confident in their investment education to recognize a great deal when they see one so they have very few questions. Other investors aren't as informed so they expect you to educate them on why it's a good deal and take up a bunch of your time. 

It goes back to the 80/20 rule! I'm going to put my effort towards that which is the highest and best use of my time. 

That being said, I am still building an investor base so I will still spend hours with whomever to educate them on our deals. 

Originally posted by @Kyle Kovats :
Originally posted by @Lucas Miller:

@Kyle Kovats 
If I were to say what the #1 thing you can do is, I'd say ask them for a copy of their recorded webinar and investor marketing material for their most recent syndication and along with that ask them for their most recent monthly report on that property that was sent out to investors along with financials. I basically want to look to see what did they project vs. what actually happened. In other words I want to know if they're all talk and no walk.



Kyle,

A great suggestion in today's world of communication.  Track record is very telling.

Originally posted by @John Corey :
Originally posted by @Kyle Kovats:
Originally posted by @Lucas Miller:

@Kyle Kovats 
If I were to say what the #1 thing you can do is, I'd say ask them for a copy of their recorded webinar and investor marketing material for their most recent syndication and along with that ask them for their most recent monthly report on that property that was sent out to investors along with financials. I basically want to look to see what did they project vs. what actually happened. In other words I want to know if they're all talk and no walk.



Kyle,

A great suggestion in today's world of communication.  Track record is very telling.

All also add that I like to see HOW they generated their returns on their prior deals. Was cash flow pitiful but they just benefitted from a rising tide and 90%+ of the total return came from cap rate compression? How the return was generated is telling.  

Our "worst deal" was a perfect storm of problems from the beginning. I've invested in over 30 syndicated deals on the LP side as well as the GP and this was by far the worst project to date, however things have turned around. Problems started when we took over, it was evident that the seller and the onsite staff had completely checked out and were simply not doing their job from the end of DD on. It was a FHA/HUD assumption so it takes longer to close than straight to agency or doing a bridge -> HUD and again, the onsite team checked out. When we took over the asset and discovered the situation we immediately replaced the PM. It took about 3 months to figure out that the now new PM wasn't working out so we had to replace the PM again, and luckily we found the right person for the job.

At this point the property is already having occupancy issues from both the previous poor management as well as a significant($8-9k) value add. We were at about 87% occupancy at this time.

Then a fire broke out and completely destroyed 32 units. Luckily everyone was ok, no one hurt, but several buildings were totaled. Eventually insurance paid to rebuild the buildings and covered lost revenue, however it took another year to crawl out of a low occupancy hole that bottomed out around 80%, right at our breakeven point.

2 years later the buildings have been rebuilt, rehab completed, occupancy is in the low 90's and the pref is being caught up. Currently the average cash on cash return to LP's is about 5%. We were invested as an LP and I credit the sponsors team for navigating through and not loosing the deal. 

Originally posted by @Kyle Kovats :

I should've added this earlier but these are 13 important questions I ask GP's before investing now. 

  • ...
  • Will there be an acquisition fee? Reason: I understand a nominal flat type of fee, it's a pain in the *** to put together a syndication. However, when syndicators are buying communities for $40 mill., beating out other syndicators and institutions and then on top of it asking their LP's to pay them an extra $800k-$1.6 depending on the acquisition fee I want to know why you think you've earned that. I think is is a conflict of interest as they know all they have to do is push the deal across the finish line and whether it winds up being crap or great, they've made a good nut up front. 
  • ...
  • What is the number one concern you have with this deal? There should always be a concern or two that the sponsors have, if not they're lying. I appreciate the honesty and want to know how they plan on tackling this concern. 

  • ...
  • I’m not going to hold you to it but what upside is there that wasn’t spoken about? Sometimes there's some real nice value-add components that the GP's don't talk about because they don't want to set expectations too high so I always like to ask this one. 
  • ---

These 3 quoted items stood out (all were good). "number one concern..."  question is great on, thanks!

On the acquisition fee, it's earned in most cases, yet on the larger deals with high 6 to 7 digit acquisition fee (exclusive of recovered DD costs also reimbursed by the LLC investors), it's a clear win for the GP day 1 regardless of deal performance. The overused "alignment of interest" starts to fall apart in some of these configurations where it's basically impossible for the GP to ever lose.

On the topic query, mine are too young but events show that managing/overseeing the PM is critical. Not a bad idea for the AM to also be skimming/reviewing the maintenance tickets in the system for patterns of un-adressed root cause resolutions. Fixing items is one thing. Learning and then preventing more of the same is another. Reactive vs proactive can easily cost thousands extra.

Passives: Look at the OA & PPM to be sure all of your capital is actually returned upon any profitable sale. I see profitable deals that, as worded, would earn the GP a promote on sale yet there is not enough to actually recover LP capital due to the way it's configured. Worse, on some losing deals the GP still profits. READ the agreements closely! Some may know it's there but assume the market will continue to minimize that type of risk.


 

Great thoughts here.  When vetting operators, I like to ask if they have been operating in this asset class with this strategy since before the great recession.  And if they have a coherent, in-house team.