Solo 401K Investing in Syndications

22 Replies

I've got some money in a solo 401K that I'm considering investing in multifamily syndications, but I'm having a little trouble figuring out to vet syndicators. I've been approached by a couple people and have seen examples of deals, but honestly am not sure how to go about vetting the person/persons putting the deal together. I know there are a lot of people out there doing great things, I'm just not sure how to separate out the winners from the non-winners. Any advice would be appreciated! 

@Danielle Wolter Great topic! Having invested with 14+ syndicate groups, I have learned a lot about vetting the teams. The top three ways I vet a team are #1 Word of mouth testimonials, not ones on a website and not the ones the syndicate groups hand out, usually from current or past investors I network with #2 getting the data/numbers as it relates to the track record of the team (how many deals have they done, what were the results) and #3 finally a gut check. I try to meet the team in person, if that's not feasible, I try to do a webcam call or if they are a public figure, I watch a lot of their content and read reviews online. Among these three ways, you can dig deeper with background checks and having your legal team read through the docs for additional insight. But it usually starts with an in-person referral, then I start digging around for 3-6 months prior to investing. Happy to be a resource anytime. 

@Danielle Wolter That's a topic I know all too well. I personally know of 40+ syndications and have invested in 7 of them. The experiences were quite varied which is what I was expecting. I started a meetup to meet like-minded people and compare syndicators, and really learned which are the good/bad syndicators. That has helped me to operate my active deals the right way. 

A lot of folks say to meet the sponsor and get a feel for their style. That will only go so far as what they say and what they do don't always line up. In fact I find the sleekest talkers to be the worst performers. The ones that aren't busy shining themselves for more deals are more productive. 

Here are a few things I look for: 

1. The deal structure: It's all talk until you learn to read their numbers. Ask for a sample project and look at their projections. Are they assuming crazy rent growth? Unreasonably low expense ratios? Underestimating economic vacancies?  There's some education involved so learn as much as you can or meet a fellow passive investor who knows how to check the numbers. 

2. Sponsor reputation: Talk to other passive investors. How are past deals doing? Are they hitting their projections? Is the group communicating frequently and sharing financial data? You get the best background check by talking to others. 

3. Do the sponsors have money: Not always fair but I look for sponsors who already have money. They put more skin in the game with their own investment into the deal. They're also much more inclined to use their own money as a loan to save a floundering deal through tough times. They care about their reputation and having the capital as backup is important. 

4. Are they doing too many deals: There are syndications that are successful then ride that success to acquire as many properties as possible. The team obviously can't manage that many assets as well as when they were focusing on just a couple. 

5. Type of deal: New construction deals have more obstacles and delays. I would stay away from these in the beginning and take their timeframe and add 1-2 years on top of it. 

Originally posted by @Danielle Wolter :

I've got some money in a solo 401K that I'm considering investing in multifamily syndications, but I'm having a little trouble figuring out to vet syndicators. I've been approached by a couple people and have seen examples of deals, but honestly am not sure how to go about vetting the person/persons putting the deal together. I know there are a lot of people out there doing great things, I'm just not sure how to separate out the winners from the non-winners. Any advice would be appreciated! 

"I've been approached by a couple people"? can you please expand this?

syndicators are supposed to have an established relationship with someone before doing business with them

aloha

steve

 

@Steve K. I’ve had a couple people send me examples of projects they’ve done only after talking on BP and showing interest in syndication. They didn’t just approach me cold. I just wasn’t sure what to look at to evaluate them as syndicators.

Originally posted by @Danielle Wolter :

@Steve K. I’ve had a couple people send me examples of projects they’ve done only after talking on BP and showing interest in syndication. They didn’t just approach me cold. I just wasn’t sure what to look at to evaluate them as syndicators.

ok, cool 

@Michael Bishop @joe fairless @david Thompson give good info on syndications and how to vet operators. as do @alina trigub and @ian Ippolito.

Originally posted by @Danielle Wolter :

@Tony Lin Do you focus a lot on the area they are investing, or are you more concerned about the actual deal and the reputation of the operator?

I focus on the operator first, then the area/property. A good operator will know where to find good deals. 

 

@Danielle Wolter Hey Danielle, just to add to some of the great comments above. 

As a syndicator, I think the most important attribute to consider, first, in a sponsor is an alignment of interest with you, the investor, and to see if that matches your investing goals.

Initially, the way to do this is by talking to the syndicator and asking them about their deals and investing style. 

To conclude, you want to ensure that you don't mind being a business relationship with this sponsor for some time, which is typically 5 - 7 years. At the end of the day, people do business with people they like and trust. Yes, the quantitative matters but the qualitative plays a pivotal role too. 

@Danielle Wolter You, my friend, have the same problem as everyone else! Unfortunately, 99.9% of sponsors who have put deals together in the last market upswing have made money. 50% of those sponsors more than likely made money in spite of themselves. Some of the ways sponsors shot themselves in the foot were by placing the wrong debt structure on deals, under raised on capex items, doing capex out of cashflow, buying in poor markets etc. They now like "geniuses" and will show you how much % return they made for their investors but in reality, were saved by the market. The market saved these sponsors by extreme rent growth, length of market cycle, interest rates dropping, and the biggest factor cap rate compression!

The three most important things to look at in order are: sponsor, market, deal. 

Sponsor: What is their character and integrity like? What is their own financial history like? Why are they even syndicating deals to begin with? What is their goal within real estate? How have they bounced back from previous deals that haven't succeeded? 

Market: Does it have job growth and population growth? Is it landlord or tenant friendly? Does one employer make up 30-40% of the jobs? Does one job sector dominate the market? 

Deal: What is the story with the asset? What is their business plan and how does it align with the market today? Have they put the best debt option on it? Are they well capitalized for capex and have a robust operating account coming into the deal? What is their exit strategy? How have they determined their exit cap for the deal? How thoroughly have the shopped the comps to truly know they can achieve X in rent bumps based off Y on unit renovations?

There are so many factors that make a deal worthwhile to invest in. I would suggest finding a few reputable sponsors to heavily vet and then pass on a deal or two before jumping in with them. Hopefully this helps and happy investing!

@Danielle Wolter

A ton of great feedback already provided here. @Travis Watts and @Ola Dantis summed it up well. 

What is sounds like to me is that you need to spend a little more time educating yourself on how to read and understand the Offering and its' content.  You can do that through books, and podcasts. You can start by reading a few books on the asset classes you'd like to invest. For example if you want to learn more about multifamily, then start by reading the two books by David Lindahl and so forth. 

Networking is absolutely essential. Speaking with other passive investors to get their perspectives and then make a decision for yourself is encouraged!

Here're a few articles that should give you additional guidelines as to what to look into:
https://www.biggerpockets.com/member-blogs/10850/76728-questions-to-ask-a-syndicator

https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndication

https://www.biggerpockets.com/member-blogs/10850/79257-deciphering-syndication-investment-terminology


Completely understand how you feel @Danielle Wolter you just want to find comfort with a team that you can trust. This is a process that you have to create where, just like a syndicator has to qualify, underwrite, bid (submit LOI), perform due diligence, close the deal and then execute the business plan. You have to create your process to qualify, interview, align your investment goals with the qualifying company and then invest.

Of course there is more to that but you have to be comfortable at the end of the day with the team/company you are going to invest with. Ultimately, its the first steps to help you get to your financial goals. I truly hope this helps and feel free to reach out anytime. 

Happy investing!

@Ola Dantis Thanks so much! Those are great tips - I do think it's important to like the people you are working with. BTW, I've read your comments on a lot of BP threads and you always have such great information to share - thank you!

@Scott Morongell Thanks so much for the great tips. You're right that it has definitely been easier to make money in this hot market. I'll definitely spend some time to heavily vet some sponsors. The importance of the integrity, character and background of the sponsor themselves seems to be a common thread!

@Alina Trigub That is totally true! I definitely need to spend more time understanding the actual offerings. Thanks for the book recommendations, I can't wait to check them out. Also great tips on speaking with other passive investors - I'm sure I can learn a lot that way too. Thanks so much!

Originally posted by @Danielle Wolter :

@Scott Morongell Thanks so much for the great tips. You're right that it has definitely been easier to make money in this hot market. I'll definitely spend some time to heavily vet some sponsors. The importance of the integrity, character and background of the sponsor themselves seems to be a common thread!

 Absolutely, pick sponsor over deal every single time!

Originally posted by @Danielle Wolter :

@Ola Dantis Thanks so much! Those are great tips - I do think it's important to like the people you are working with. BTW, I've read your comments on a lot of BP threads and you always have such great information to share - thank you!

 Thanks a lot for the kind words. 

My philosophy is based on Zig Ziglar's quote: “You will get all you want in life, if you help enough other people get what they want” 

Originally posted by @Danielle Wolter :

@Tony Lin Do you focus a lot on the area they are investing, or are you more concerned about the actual deal and the reputation of the operator?

I didn't pay much attention to the location of the deal until I invested in one deal in TX. First TX syndication the sponsor wasn't local. I had good experience with him, so location wasn't a big deal. Second TX syndication the sponsor was local, and could very easily explain to me why that first deal is not performing as anticipated. So now I look at location of sponsor.