Buy or Invest in Syndications?

23 Replies

Just curious - If you had 250K, would you buy real estate on your own or invest in a multifamily syndicated deal and why?  I realize there are many variables, but let's assume the IRRs are comparable.  The building(s) you can buy is in the midwest with an assumed appreciation rate of 3% annually and you are putting down 20-25% depending on the type of building(s).  The syndication fund is assumed to be a 10-year hold with the return of investment after year 5 through a refinance and subsequent earnings rates would be infinite.  

If I wanted to be an active investor I'd buy my own deals.

If I wanted to be passive I'd invest in a few different syndications.

@Ariel K.

Great question... It depends on your goals and what you're trying to achieve. A key factor to consider is how much time you want to spend managing your investments. Multi-family as an asset class is more efficient than SF, but you can go about investing in MF in multiple ways depending on your situation i.e. if you invest as passive, you're not doing any work beyond vetting out the team/market/etc. If you have the time/capacity/desire, you can invest actively, which will require a lot of work up front to get yourself to a place where you understand the business and have formed the relationships, etc. There is no "wrong" answer. 

@Ariel K. personally, I’d rather own an appreciating asset so I can collect income, have a piece of the upside in equity and be able to depreciate it. It’s a no brainer for me. A little more involved but I think it’s worth it.

@Ariel K. it really depends on whether you want to be active or passive and whether you are more comfortable with your own ability to run a successful real estate portfolio vs that of someone (or a group) who has a proven track record doing so.

I'd also caution against any deal that counts on underwriting to a refinance to make the deal attractive. Refinance, supplemental loan, etc. should be a BONUS, not a a necessity.

Depends on your goals and resources. If you want to be an active investor then focus on active investments. If you're a busy professional looking to make a return, invest in syndications.

I wouldn't assume future appreciation unless you have a solid reason to back it up, regardless of property. Don't assume you'll get 3% a year growth on any one property unless you have a specific reason for it.

I also wouldn't put all of the funds into one syndication. Break it up into chunks and invest in a few syndications if you're going that route.

@Ariel K. such a good question and so many bad answers! Everyone saying it depends what “you’re” looking for but you’re asking what each person would do if they have the money.

I would buy and hold because I have a lot of time to actively manage and participate in the deal. I like the idea of building wealth through equity and generating cash flow at the same time.

If I had less money (0-50k) I would probably participate in a syndication or an investment. Reason being, Id like the chance to get an education and investment at the same time.

Thank you all for your input. I participate in both syndications and own properties. I think owning my own real estate will give me consistent income (hopefully) and the ability to pass down assets for future generations. I think investing in syndications with proven operators is great for returns and allows for higher velocity of money.  
I was also curious because I couldn’t find many debates on this. Keep the responses coming!

Originally posted by @Ariel K. :

Just curious - If you had 250K, would you buy real estate on your own or invest in a multifamily syndicated deal and why?  I realize there are many variables, but let's assume the IRRs are comparable.  The building(s) you can buy is in the midwest with an assumed appreciation rate of 3% annually and you are putting down 20-25% depending on the type of building(s).  The syndication fund is assumed to be a 10-year hold with the return of investment after year 5 through a refinance and subsequent earnings rates would be infinite.  

If the IRR is comparable, then passively investing is the way to go. Less work for the same return.

I would also caution assuming 3% rent growth in the midwest. I could get behind 1-2% growth and the same for expense growth. 

 

Agree with @Todd Dexheimer . If it's the same return; passive requires far less bandwidth. BUT! In either case; get educated. A fool and his money are soon parted.  If you're a great operator; you should make much more in doing it yourself. If you're not you might be setting yourself up to lose it all. Small apartment deals are freaking tough. Good property management is hard to find and you still have to be a capable asset manager.  Conversely partnering with a great operator can achieve high returns with far less risk however you'll need to get good at underwriting the operator/sponsor. Solution: evaluate a lot of offerings. Crawl, then walk. :)

@Ariel K. it really depends what your goals are when it comes to investing. If the IRR is the same, I think most would opt to invest passively since they wouldn't have to work for the same amount of return (not to mention the additional tax benefits on larger deals).

I have investors who have 10+ units and now would rather invest passively now since the extra few % they can make on their own portfolio isn't worth the additional headaches that come along with it. 

@Ariel K.

The question is one of passivity. Do you want to be active in the management of the property? Do you plan to make a career doing this? 

Many smart syndicators buy their properties off other investors that got in over their heads on the management side. I wouldn't underestimate that as the key variable. 

@Ariel K. I do both and enjoy doing both. Buying a property yourself I see as higher risk/reward/work for the larger properties. When you're in syndications the risk is spread out better amongst the pool of investors and the sponsors. Also, I think many of the syndicators I look at have an easier time finding good large deals because that's all they do full time. And most of them have existing relationships with property managers, contractors, etc. I don't have that advantage. However, if I can find a good deal on a larger property that I can take down myself I will do it if the returns look good enough.

If the returns are equal AND I BELIEVE THEIR NUMBERS, I would be lazy and go with the syndication all day long.

@Ariel K.

There're many good responses. I'd start with how you make money otherwise and determine what is the time value of money to you? If hypothetically speaking you're making a lot more outside of real estate and your time is limited, then let others do the work for you and diversify across multiple offerings with different sponsors to minimize the risks. If however you have all the time in the world and looking to get the highest bang for the buck yourself, then you know the answer. Here're a few articles to give you further guidance: 

https://www.biggerpockets.com/member-blogs/10850/84064-what-type-of-investor-to-be-when-i-grow-up-active-or-passiv

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

https://www.biggerpockets.com/member-blogs/10850/87253-should-i-scale-my-investment-from-single-family-homes-to-multifamily

@Ariel K.

I am a syndicator for both real estate and real estate notes.

Most passive investors investing in real estate syndications don’t spend enough time and effort vetting the property, the terms of the offering and the syndicator. Many if not most syndicators will syndicate deals that shouldn’t be invested in, because they need to pay their overhead. This becomes a real issue when we have the periodic recession.

Further, most investors in syndications don’t fully realize that they give up almost 100% control over their money. Even if they understand that the sponsor controls 100% of the decision making, and they have a voice in the decisions in only rare and extreme circumstances, they usually don’t understand that syndications are not the same as investing in listed securities. Almost all the time you can liquidate a listed security, although you may take a loss. When investing in a syndication liquidation is very difficult and when available usually at a large discount.

One of the investor’s in our syndications called me some time back to tell me about a syndication he invested in “similar to mine” that projected a return 35% higher than ours. I asked him to send me the PPM. When I glance through it I saw that the risk involved was off the charts high. About 18 months later he called me to ask if I could recommend an attorney to represent him in a lawsuit against the sponsor. The deal had already gone south, and the investor thought he had 100% loss of equity. Which brings us to the final piece of the puzzle many syndication investors either don’t evaluate or are not sufficiently knowledgeable to be able to evaluate; the risk involved in the deal.

@Ariel K. everyone's goals are different. Are you looking to be active in the business or find the right operators to work, with to design your lifestyle around. For me personally with 250K expendable, I'll put together my own syndication as the lead operator. But if you're looking to learn investing passively is not bad at all

Depends on the money level.

Some ultra high net worth investors with 50 to 100 million can do spreadsheet investing and manage nothing.

I have some clients that do want to own some directly. They are looking for yields slightly better than syndications when they choose to own directly.

I find my clients worth 5 to 10 million want more control over their planning and like to own directly for the most part.   

Forgot to mention it also varies on your income. Someone could have 250k from an inheritance or business sale but no additional cash flow or income. Conversely they can be a doctor making 1 million a year doing surgery and their regeneration of capital monthly is high to reinvest.

Investing is like taxes in that everyone's situation and circumstances is different.  

Originally posted by @Ariel K. :

Just curious - If you had 250K, would you buy real estate on your own or invest in a multifamily syndicated deal and why?  I realize there are many variables, but let's assume the IRRs are comparable.  The building(s) you can buy is in the midwest with an assumed appreciation rate of 3% annually and you are putting down 20-25% depending on the type of building(s).  The syndication fund is assumed to be a 10-year hold with the return of investment after year 5 through a refinance and subsequent earnings rates would be infinite.  

What are your goals? Do do you want to manage your own property or manage a property manager? 

I am a syndicator.  I have clients that do both but prefer investing in syndication. They are a lot of benefits. Not all syndications are a 10-year hold and a 5-year refi. I would make sure you feel comfortable with the syndicator before investing. In my opinion, I would invest in syndication. Let me know if you have any questions. Good luck and looking forward to your success. 

Asset class is something else to consider here.  On your own, $250k may not control the type of asset class (or size) that your $250k pooled with other investors will.  Depends on your strategy.  
A good Sponsor will also be able to place more favorable debt terms. The debt should/could also be structured so that it is non-recourse to investors, so that only the Sponsor is responsible for loan guarantees. This, coupled with the fact that they will (should) be invested in the deal themselves is additional incentive for the Sponsor to perform, keeping interest aligned. A Sponsor that has a CRE services platform will have a solid reputation with brokers, sellers, financial partners and managers in the markets in which they invest and they will leverage those relationships for efficiencies and deal sourcing. I think learning from your Sponsor(s) can be extremely valuable when it comes to fine-tuning your own strategy, should you want to take on a more active role. Being a true Sponsor is about educating as much as it is about building wealth. Trust and transparency is key.