Syndication Investing During a Recession

Multi-Family and Apartment Investing
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Syndication Investing During a Recession

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

Investing in real estate during a recession makes many people feel like a long-tailed cat in a room full of rocking chairs. For others, it’s an exciting opportunity.

In my 30 years of real estate investing, I’ve seen my share of market cycles and felt the pain they deliver, but I managed to get through all of them without losing any of my investor’s money. Losing my own, on the other hand—well, that’s a different story!

Most at-risk during times like this are the investments you’ve already made. If you are invested with the right sponsor, who implemented the right structure, you’ll stack the deck in your favor for a good outcome. Thanks to recent economic events, it probably won’t be the outcome you planned for, but one that you can live with, all things considered.

But what about new investments? I’ve found that the best investments are ones made at the trough of an adverse cycle, and ones made during the initial climb back up. A notable example is when I bought 120 houses in the San Francisco Bay Area from 2010 to 2012 at the depth of the last cycle. When I sold them 5-6 years later, they had gone up in value by 2-1/2 times. That trade underscores the importance of timing. This cycle isn’t likely to duplicate that result, but it could present some interesting opportunities.

So, what about investing in a passive real estate syndication now? Making the right decision is more important than ever. That means that BiggerPockets’ launch of my new book is perfect timing (The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications). It is critical that you invest with the right syndication sponsors and in the right real estate. This book will show you how to do both.

In talking with our investors about the current state of affairs and how they are planning their investment strategy from the short to medium term, we’ve heard responses ranging from hoarding cash out of absolute fear to those who view this as a chance to take advantage of opportunities that arise from the ashes, to just about everywhere in between. Where do you find yourself on that spectrum?

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Greg Dickerson
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
Originally posted by @Brian Burke:

Investing in real estate during a recession makes many people feel like a long-tailed cat in a room full of rocking chairs. For others, it’s an exciting opportunity.

In my 30 years of real estate investing I’ve seen my share of market cycles, and felt the pain they deliver, but managed to get through all of them without losing any of my investor’s money. Losing my own, on the other hand—well, that’s a different story!

Most at risk during times like this are the investments you’ve already made. If you are invested with the right sponsor, who implemented the right structure, you’ll stack the deck in your favor for a good outcome. Thanks to recent economic events, it probably won’t be the outcome you planned for, but one that you can live with, all things considered.

But what about new investments? I’ve found that the best investments are ones made at the trough of an adverse cycle, and ones made during the initial climb back up. A notable example is when I bought 120 houses in the San Francisco Bay Area from 2010 to 2012 at the depth of the last cycle. When I sold them 5-6 years later, they had gone up in value by 2-1/2 times. That trade underscores the importance of timing. This cycle isn’t likely to duplicate that result, but it could present some interesting opportunities.

So, what about investing in a passive real estate syndication now? Making the right decision is more important than ever. That means that BiggerPockets’ launch of my new book is perfect timing. The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications. It is critical that you invest with the right syndication sponsors and in the right real estate. This book will show you how to do both.

In talking with our investors about the current state of affairs and how they are planning their investment strategy from the short to medium term, we’ve heard responses ranging from hoarding cash out of absolute fear to those who view this as a chance to take advantage of opportunities that arise from the ashes, to just about everywhere in between. Where do you find yourself on that spectrum?

I have been in the business since 1997 and was heavy in real estate in 2009. I had several ground up projects I had just completed. I was in the process of converting the construction loans to perm financing and all lenders went dark. Not only did they go dark but they started calling the loans. I had $35 million in loans at 9% and close to $300k going out each month to keep the properties going. The Fed was nowhere to be found and there was no talk of forbearance. I was very fortunate as I had cash, great cashflow, I pulled all my equity out through the construction loans and all my loans were non-recourse and guaranteed by the entity holding the property so the lenders had to work with me. I funded all the deals on my own so no investors were at risk. Others were not so fortunate and the banks as you know were foreclosing on properties left and right. I finally persuaded the banks to extend the loans and sold through all my properties over the next two years so everything worked out but it was definitely a scary time and a great learning experience. I had never been through anything like that and didn't even know what a work out was prior to 2009. I continued to do deals and develop properties even during that period as I had cash and cashflow so even though these deals were technically in default and in work out a few other banks were still lending. 

Fast forward to today. This is a very different environment mainly because of the moves on the part of the Fed and the Treasury. They are not going to let the banks, credit and debt markets collapse like they did last time. Especially given the fact that Neel Kashcari is largely influencing the policy makers as he had a front row see at the treasury in 2008-2009. 

The only caveat is we do not know how long this is going to last and what the real and lasting effects will be on the consumer. The longer this goes the more likely things will take longer to recover. What we do know is there are always opportunities in every economic cycle. There will be opportunities in retail and office if you have the stomach and the capital. There will likely be several multifamily properties that will take a hit if the shutdown continues into June or July. Storage will most likely weather the storm and continue to perform however new developments may take much longer to fill so there may be some opportunities there. Mobile home parks are also very recession resistant and given the unemployment benefits the Fed is backing up the states with they should continue to perform. Industrial is booming right now due to the rise of e-commerce but you need to pick your spots as the old "build it and they will fill it" doesn't work everywhere when it comes to industrial. 

Personally I am opportunistic so it's a bit too early for me to jump unless its a really compelling deal. Investors are eager. I get calls every day from people looking to deploy capital. These are relationships I've had for years and they have all been sitting on cash waiting for a time like this. What I have found is those in my network who are liquid (over $100 million) are not concerned and are ready to deploy but they are looking for much more yield than 2 months ago. I have also found that less sophisticated investors especially those who have not been through 2009 are much more conservative and are not comfortable investing in anything right now. 

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  • Danny RandazzoPro Member
    Apartment Syndicator · Charleston, SC · Member since 2016 · 973 posts · 728 votes
    6y

    The best investment opportunities will go to the buyers who have a track record of closing deals. I don’t think there will be a huge volume of awesome acquisitions but you should be able to find some if you have great broker and seller relationships

    2Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    6y

    @Kathleen D.

    My suggestion is to find real people (in person) and build real relationships with those (mostly accredited) investors actually putting their money in these deals. A lot of people say they are investing but its tough to verify. I lost my money on my first deal in 2013 because the referral I got was unverified and I did not have a strong network.

    1Reply
  • Account Closed
    Realtor · Portland, OR · Member since 2020 · 87 posts · 43 votes
    6y

    Great Post... I understand your point. I just dont think we have reached a "trough" yet! When mortgage deferrments are no longer offered, stimulus checks have run through etc. Credit Cards are run through then I think we'll be reaching a trough 8-12 months from now. 

    0Reply
  • Account Closed
    Realtor · Portland, OR · Member since 2020 · 87 posts · 43 votes
    6y
    Originally posted by @Roni E.:

    If you are investor I would look at deals with Syndicators understand their method, process, deal flow and so forth. Get on their on list. I would be hesitant to jump in right now. We are early into this cycle. Focus on cash flow. I would also try to ask the Sponsor or find one that distribute monthly. 

    Great point. Too Early.  

    0Reply
  • Ivan Barratt
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Eric Bilderback @Brian Burke is spot on with diversification.  Asset allocation is critical to an "all weather" portfolio. Remember to keep cash on hand as well. If you don't have cash on hand for at least 6 months (preferably a year) of living expenses; an illiquid syndication may not be suitable. There could be a lot of deals that don't distribute at all from here till a capital event.  Of that group many of those deals will be held longer than expected.

    3Reply
  • Collin Corrington
    Investor · San Antonio, TX · Member since 2016 · 242 posts · 126 votes
    6y

    Head down and go!  I have a feeling there are going to be a lot of absentee owners that will get tired of their rental property with all this.  Not investors per se, but more of the people that have rental properties more by accident than design. That's my focus. 

    0Reply
  • Adam Blachnio
    Rental Property Investor · North East US · Member since 2019 · 114 posts · 31 votes
    6y

    @Brian Burke

    This is a perfect time for me to create more opportunities 🥳

    0Reply
  • Duke Giordano
    Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    6y

    I agree with above.  "Current deals are not pricing in future risk", this is really the key.  As much as it would be nice to keep doing deals and finding bargains in any environment, this is not realistic as it's difficult as a GP to know how to underwrite accurately in this environment.  Underwriting is the basis for eveything.

    Remember, the bedrock of underwriting is assumptions on previous performance/events in the past. For example, assuming a certain worst case vacancy rate in previous recessions is what every underwriting does, but is this really accurate now? Another example, assuming current rent rates compared to current comps (is this really accurate now). Assumptions on economic vacancy, is this really accurate when people have no penalty for not paying their rent? Assuming that a value add will raise rent then NOI, but are people really going to put capitol in to value add and raise rent right now? If not how are you adding value, and increasing NOI? Are GP underwriting common area improvements such as Gym, pool, etc. to increase income when nobody is congregating. Were these changes priced into underwriting. In sum, how can you increase rents at this time in any way with no value add, no common area improvement, no clear improvement to management inefficiency can be assumed in this environment.

    Thus, I agree with most that an LP right now should really be on the sidelines for a bit, if even to get a better feel for where deals are going, vacancy issues, rent price movement and what the new normal to be.  It is likely that an LP would not be collecting distributions for at least 6 months to a year anyway as many syndicators will consider freezing distributions in the near term (I realize not all GP have done this yet, but we are not that deep into this).  Does anybody really believe a deal today will be better than a deal 6-12 months from now?  Nobody (not even the best syndicators) know that answer right now in reality, not yet...

    4Reply
  • Steven Pesavento
    Investor · Denver, CO · Member since 2015 · 177 posts · 71 votes
    6y

    Such a well timed topic, I pre-ordered the book when I saw it while preparing for an interview with Brandon Turner.

    Lots of oportuntity will come, if you're working with the right syndicator & are patient. 

    1Reply
  • Ivan Barratt
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Duke Giordano your defensive strategy is good one. After all, you can't lose money if you stay on the sidelines.  

    I would however like to ask a question. What do you think happens to B/B+/A- (basically mid/upper end of workforce) apartment cap rates if those assets come out of "the covid recession" relatively unscathed vs other asset classes AND interest rates remain at zero?

    1Reply
  • Kou Moua
    Accountant · Clovis, CA · Member since 2014 · 16 posts · 2 votes
    6y

    Yes, the best investments are made during the purchase and not the sale as stated. Always buy below market value, but even though we'll never know the bottom until we look back, we bought it while it was a good deal at the time. I think the key take away is how well we adapt during these difficult times and what strategies to employ to come out ahead or survive. Every markets different in some aspects and it's important to know your markets now more than ever.

    0Reply
  • Michael Tempel
    Property Manager · Minneapolis, MN · Member since 2014 · 380 posts · 167 votes
    6y

    @Brian Burke

    I have seen very interested and aggressive cash rich owners excited about future opportunities in Commercial and MF the last few weeks.

    We keep getting off market sellers looking to sell off assets and re-allocate into preferred investments.

    There are opportunities always, but I am really seeing the strong sideline investors starting to participate.

    0Reply
  • Duke Giordano
    Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    6y

    @Ivan Barratt

    I hear what your saying is that the classA-B+ assets should be able to weather the storm, in that people do need a place to live in but the question is whether for an LP looking at investments opportunities for a long perspective (3-7 years) is the time really now to get the best deals?  

    That is the true question, in that why would someone lock up capitol for a deal now that will be a better deal 6-12 months from now. At that time, vacancy rate may be worse, NOI will be worse, rent comps will be worse. All of those paremters will have a resultant effect on sale price, and cap rate. I agree in the MF space class A/B are most likely to weather the storm, but not sure the current value is there as most people/sellers are pricing things based on the past, which is not the current nor the future. Once prices seem to reflect the current environment then I have no problem deploying powder, just not there yet.

    In my opinion, some of the overarching key components to a good syndication deal relate to the fact that money is made on purchase, and hold time (ties up my money).  In this environment, the purchase price at the moment has not yet reflected the true risk/value in this market so harder to make the overall deal a good deal.  When one needs to lock up money for a period of time, thus leading to an opportunity cost of cash one really needs to be sure the asset is priced at a value.  I dont know that there yet to reflect current market conditions...

    3Reply
  • Ananda Mahesh
    Member since 2019 · 1 post · 0 votes
    6y

    I would also point out interest rate as additional factor to all the things mentioned by @Duke Giordano. Yes, rates have been low and projected to be low in current environment. For a long term deal (exit 5 to 10 years), interest rate is a factor IMHO. In the next 5 to 10 years interest rates could very well rise above the current 3 to 4%.  What happens to sale price or refinance to hold when rates are 5 - 6%?

    0Reply
  • Ivan Barratt
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Duke Giordano I get what you're saying. If that's the case in the markets you're evaluating then it's probably best to wait and see. 

    What I'm referring to is the growing probability that in my market and asset class; vacancy and rents won't be affected beyond 90 days. Currently I have a deal under contract that came to us off market. 4 months ago, on the open market it likely would have been bid ~1 million over my line in the sand. Further; it's coming out of the LIHTC program and average management which equals a large value add play. Although I could be wrong I'm paid to take smart risks. As a fund manager I'd be short sighted to let this one get away by attempting to time a bottom. I'm further bolstered by a 5 to 7 year hold. My conclusion is that those who wait 6 -12 months will likely miss opportunities. Again, just speaking to my marketplace and asset class; NOT real estate in general. Also remember; yes we have to underwrite to actual trailing/current performance (this helps set a minimum/downside return) however the majority of the return comes from the ability to add value. It's what the management team, armed with fresh capital; can execute. :)

    Cap Rates:

    The current spread between my market cap rates (call it ~5-5.50) and the risk free rate (US10yrTreasury) (~.60)) is 440-490bps which is way fatter than the average. For the best operators debt terms will be little changed. The idea that cap rates will rise in this environment may be "painting with too broad a brush." Europe for example (who has had zero rates) has an average real estate cap rate of 3.25%. Cap rates however will rise when inflation kicks in down the road and interest rates come off the bottom. At that time smart operators won't sell. They'll wait to raise rents with inflation to offset the cap increases. Best part of multifamily is the ability to hedge against/manage debt maturity and not sell when not appropriate.

    4Reply
  • Blake Dailey
    Investor · Ogden, UT · Member since 2018 · 295 posts · 208 votes
    6y

    @Brian Burke I've spent the time at home since the military base I am stationed at is all but closed refocusing my way forward on multifamily. Uncertain times like this open up opportunities for those that are well capitalized, don't over leverage, and invest for cash flow. I have followed those rules in my own investing thus far and have been fine through this scare. I am not succumbing to fear but preparing to buy multifamily deals with 75% or less leverage that cash flow and by raising adequate reserves. Preservation of investors capital is my number one goal followed of course by making good returns on safe (comparative) assets.

    I have seen lenders tightening requirements on new loans so that is a big focus of mine within this space in the near future.

    1Reply
  • Adam Young
    New to Real Estate · Laguna Beach, CA · Member since 2020 · 15 posts · 6 votes
    6y

    @Brian Burke

    I’m new to this game and scrambling to build up the equity and education as I try to wait patiently to find a way into Real Estate.

    I moved here to US three year ago from the UK on a work visa and I feel like I’m staring at a blank slate and assume I’ll struggle even speaking to the banks for mortgages, especially now during the prime opportunity which could very well prevail if there is to be an economic contraction and downward cycle in the market.

    It seems your book could be the insight I need to get my money working for me!

    Cheers

    Adam

    0Reply
  • Ashish Mike Angelo
    Investor · Chandler, AZ · Member since 2018 · 25 posts · 8 votes
    6y

    @Brian 

    @Brian Burke Totally agree that there will be great buying opportunities in the near future. I'm already seeing some aggressive movement on pricing of multi-family due to sellers buying poorly a few years back or are anxious to liquidate. If the deal cash flows with extremely conservative underwriting, in a stabilized area,  then it's likely a good deal. I'm excited to read your new book. 

    0Reply
  • Jon Zhou
    Sacramento, CA · Member since 2017 · 20 posts · 28 votes
    6y

    this is a very good thread, thank you for posting it, I am leaning to holding onto cash until this virus settles down or we see an end in the long term before putting lots of $$$ into a 5-10 year hold syndication that is not liquid.  Main concern is buying an complex valued at $10 million in April, but may be worth significantly less in July if tenants have issues paying, with many states having no eviction clauses.

    Anyone else more optimistic and investing this very moment into syndications?

    0Reply
  • Daniel Ryu
    Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
    6y

    @Brian Burke

    Looking forward to reading the book - I still remember about 5 years ago listening to you on a BP podcast (or reading an article) and then diagramming the ownership structure you recommended on a piece of paper. Always gain insights from your content.

    As far as the mobile home park space, the news about rent collections has been good - UMH (3rd largest publicly-traded MHP focused REIT) reported 86.6% April collections through the first week of April. Sun Communities (largest REIT and owner / operator in the space) reported 98% April collections as of April 22 - although their seasonal RV business took a big hit. Frank Rolfe & Dave Reynolds, 5th largest owner / operator, reported April collections, year over year were on par with last year and last month.

    However, Frank also mentioned that a Las Vegas owner was struggling with 10% collections.

    (For those interested in the mobile home park industry specifically, I've been compiling and reporting on some of the latest MHP news and posting on YouTube. You can find the channel in my bio if you're interested.)

    As buyers, when we're looking at specific properties, we'll have to a good job of distinguishing between Noise and Signal:

    Noise: Rent collections

    Signal: Unemployment rates of the immediate area and affect on residents

    Noise: Purchase Cap Rate
    Signal: Area employment prospects going forward

    Noise: When will business reopen?
    Signal: How does consumer and job demand look for those businesses reopening?

    (The Signal and the Noise is a book by political forecaster Nate Silver in which he talks about finding relevant data when we're drowning in info)

    1Reply
  • Alesandro Breguez
    Investor · NEPA /NJ · Member since 2019 · 44 posts · 15 votes
    6y

    Here some variables that might influence the dynamics of the Supply/Demand of the market:

    Supply:

    More distressed sellers:

    1. According to the Mortgage Bankers Association (MBA) the number of loans in forbearance in mortgage servicers' portfolios grew to 6.99% (as per May 5th, 2020). The coronavirus pandemic has already cost more than 30 million jobs, approx. 18% unemployment rate

    Demand:

    1. Less qualified buyers due to the increased lending requirements 
    2. Buyers more cautious waiting for the ‘’ expected housing crash’’
    1. BUT Inventory still low in some areas – this is a general statement as it has to be evaluated in specific by area

    Do you see other drivers? Any thoughts?

    0Reply
  • Jason Debono
    Specialist · Orlando, FL · Member since 2020 · 27 posts · 18 votes
    6y

    @Brian Burke Congratulations on the book! 

    0Reply
  • Randy Bloch
    Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
    6y
    Originally posted by @Ananda Mahesh:

    I would also point out interest rate as additional factor to all the things mentioned by @Duke Giordano. Yes, rates have been low and projected to be low in current environment. For a long term deal (exit 5 to 10 years), interest rate is a factor IMHO. In the next 5 to 10 years interest rates could very well rise above the current 3 to 4%.  What happens to sale price or refinance to hold when rates are 5 - 6%?

    This is actually my biggest concern...with national debt out of control we could get massive inflation at some point causing the need for much higher interest rates and large change in cap rates.  Am I making this out to be a bigger risk than it is?

    0Reply
  • Ashish Mike Angelo
    Investor · Chandler, AZ · Member since 2018 · 25 posts · 8 votes
    6y

    @

    @Jon Zhou, I'm actively working on several deals right now with the goal of syndicating 3 of them. Still raising capital, and noticing that certain brokers are sharing more information and pricing guidance than ever before. For those sellers that did not underwrite conservatively enough for times like these, it may create an opportunity for a ready buyer. Time will tell, but you should be ready. 

    Mike

    1Reply
  • Kayla V.
    Rental Property Investor · Denver, CO · Member since 2016 · 66 posts · 44 votes
    6y

    @Brian Burke I pre-ordered the book a while back and am working my way through it now! My husband and I have owned rentals but we recently sold our last one to capture the appreciation and had our first baby. We've decided at least for the next few years, we'd prefer to be passive to leave more time for family. I've been researching syndications and private lending for 6+ months and was frustrated with the lack of information for investors compared to syndicators. Thanks for writing this book!

    1Reply
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