Syndication Investing During a Recession

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?

99Reply
1,435 views

Most Popular Reply

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. 

See this reply in the discussion

248 Replies

Jump to latestLatest
  • Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y
    Originally posted by @Duke Giordano:

    For those operators who feel there is nothing to worry about from a multi-family standpoint, and all is well in the MF world you may truly be right.  I actually hope you are right...

    However, if you could please answer me then a few fundamental questions:

    1. Why is it that you think the non-agency debt and lending has dried up?  Hard money loans are more difficult to come by and rates are inflated?

    2. Why is it that agency debt now requires 9-12 month reserves, debt to income requirements more strict?

    3. Why is it that some operators have frozen LP distributions or decreased them at this time (I know there are some GP who still are distributing at least for now, I am simply stating that many are not)?

    My answer to my own question comes down to RISK.  Its that simple, and the fact of the matter is that risk is not currently priced into deals as some people still living in the Pre-COVID world.  Thus, one of two things need to happen for the deal to work.  Either sellers will eventually need to price in the aforementioned RISK, or that perception of that risk will eventually go away.  As of now, my questions above outline why it is still very much here.

     1) Non-agency debt typically refers to bank lending other than agency, not hard money. Could be portfolio loans, could be MBS. It hasn't dried up but their criteria got a lot tighter very quickly. Many banks are overwhelmed with requests right now and are taking their time to respond.

    2) Requirements from all lenders got more strict because they were (and are) expecting a drop in rent collections. They want to stop marginal deals in their tracks and make sure borrowers are adequately capitalized to handle the downturn. The precipitous drop they expected has not yet materialized across the market.

    3) Distributions are largely frozen because operators don't know what the rest of the year will bring in terms of rent collections. Some parts of the country are talking about banning evictions for the rest of the year. If tenants don't have to pay (or think they don't have to pay) many of them will just stop. Companies and operators that are not adequately capitalized will not be prepared to deal with that situation. 

    At the end of the day, operators have to be willing to make tough decisions to keep their properties afloat and make sure the bills get paid. We could have a second wave of the virus, and we're still not on an upward trajectory economically. We would all be smart to acknowledge that and plan accordingly 

  • Developer · Charleston, SC · Member since 2015 · 100 posts · 91 votes
    6y

    I'm not slowing down at all.

    Picked up 200 multifamily units in Alabama in April. Closing on an $18M self-storage development in New Jersey in June. And closing on another 230 multifamily units in South Carolina in July.

    There were good deals & bad deals a year ago. There will be good deals & bad deals a year from now. And there are good deals and bad deals today.

    If you have sound buying fundamentals, -- buy at a wholesale price-- never speculate-- create appreciation through value-add improvements-- buy for cash flow-- obtain favorable financing terms-- stick to workforce housing areas-- don't skimp on due diligence-- stress your underwriting-- have multiple exit strategies...

    If you think you're limited on deals & capital.. you will be.. regardless of what's happening in the marketplace.If you think there are great deals & lots of money out there.. that's what you'll find.. regardless of what's happening in the marketplace.

    Scarcity mindset tells people to "wait & see" & "play it safe".What does that even mean??Pass on good deals?Don't grow your business? Wait for your governor to tell you it's ok? Be a sheep?

    Don't be influenced.Do the influencing.

  • Investor · Blackwood, NJ · Member since 2015 · 91 posts · 36 votes
    6y

    Tim, very inspiring.. I am with  50 single rental homes in NJ. trying to move out but face the all issues you mentioned in this post.  How do I get started with syndicating and out of state multi units or portfolio deals?

  • Investor · Blackwood, NJ · Member since 2015 · 91 posts · 36 votes
    6y

    Thank you for your reply

  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y
    Amen brother!

    Originally posted by @Tim Bratz:

    I'm not slowing down at all.

    Picked up 200 multifamily units in Alabama in April. Closing on an $18M self-storage development in New Jersey in June. And closing on another 230 multifamily units in South Carolina in July.

    There were good deals & bad deals a year ago. There will be good deals & bad deals a year from now. And there are good deals and bad deals today.

    If you have sound buying fundamentals, -- buy at a wholesale price-- never speculate-- create appreciation through value-add improvements-- buy for cash flow-- obtain favorable financing terms-- stick to workforce housing areas-- don't skimp on due diligence-- stress your underwriting-- have multiple exit strategies...

    If you think you're limited on deals & capital.. you will be.. regardless of what's happening in the marketplace.If you think there are great deals & lots of money out there.. that's what you'll find.. regardless of what's happening in the marketplace.

    Scarcity mindset tells people to "wait & see" & "play it safe".What does that even mean??Pass on good deals?Don't grow your business? Wait for your governor to tell you it's ok? Be a sheep?

    Don't be influenced.Do the influencing.

  • Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    6y

    @Tim Bratz

    Tim,

    Would you care to share how you adjusted your underwriting assumptions Pre- and Post COVID on the three deals you mentioned (2 Multi-Family, 1 Self Storage)?  

    Did you change any variables in relation to specific components of the deals you mentioned (MF and Self Storage) such as your:

    1. Value Add plan: timing of value add, amount per unit in Multi-family deals

    2. Rent growth assumption in your deals

    3. Debt structure assumption/type: LTV, DSCR etc.

    4. Reserve requirements

    5. Occupancy assumptions -what break even occupancy rate were you underwriting?

    6. Planned Hold time

    7. Are you underwriting in any renter concessions?

    Would be great to learn from your experience on these specific deals you mentioned.

    Thanks in advance

    7. Are you telling LP's to plan on now cash flow/preferred return year one if you offer a Pref?

  • Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    6y
    Originally posted by @Duke Giordano:

    @Tim Bratz

    Tim,

    Would you care to share how you adjusted your underwriting assumptions Pre- and Post COVID on the three deals you mentioned (2 Multi-Family, 1 Self Storage)?  

    Did you change any variables in relation to specific components of the deals you mentioned (MF and Self Storage) such as your:

    1. Value Add plan: timing of value add, amount per unit in Multi-family deals

    2. Rent growth assumption in your deals

    3. Debt structure assumption/type: LTV, DSCR etc.

    4. Reserve requirements

    5. Occupancy assumptions -what break even occupancy rate were you underwriting?

    6. Planned Hold time

    7. Are you underwriting in any renter concessions?

    8. Are you telling LP's to plan on no cash flow/preferred return year one if you do offer a Pref?

    Would be great to learn from your experience on these specific deals you mentioned.

    Thanks in advance

  • Rental Property Investor · CT · Member since 2017 · 22 posts · 8 votes
    6y

    @Brian Burke and others, I am stoked I found this thread. I have been running a wholesale business and flipping in Connecticut. Reason I am excited about this thread, is I am currently half way raised on my first multifamily apartment syndication. Do you have any advice for a first timer on the apartment syndication side of things? For the projects I am looking at I would need $1.2-1.4MM in equity (including the value add strategy).

  • Rental Property Investor · CT · Member since 2017 · 22 posts · 8 votes
    6y

    @Duke Giordano Surprisingly I have not seen any price concessions on the multifamily deals I work on. I do agree that current potential buyers are hesitant about going to market in this environment (low supply of new deals). The economic stimulus is propping up the multifamily market (at least in the b/c class assets). I have very little deal experience on the A class or even higher B class assets so I will refrain from any insight on that. I anticipate seeing some more distressed property probably around Q1'21.

    Thanks for a great post!

  • Lender · Member since 2018 · 48 posts · 11 votes
    6y

    @Brian Burke congrats on your new book ! I believe the focus moving forward due to stipulations in the cares act is to double down and focus more or so on the quality of the renter before you lease being that the eviction process is a bit tricky at the moment. I believe even if you have high occupancies in the near future the focus should be on the percentage of rent being collected consistently during this covid era we have entered.

  • Rental Property Investor · Melbourne, FL · Member since 2017 · 114 posts · 108 votes
    6y

    @Brian Burke great post Brian. I am using this time to learn about multifamily investing and take advantage of the opportunities that this current climate will bring in the coming years, similar to past recessions.

    Nothing is new under the sun. We can learn from the past.

    As Buffett, known for his strict composure and self-control, stated, “Be fearful when others are greedy and greedy when others are fearful.”

  • Investor · Norman, OK · Member since 2017 · 75 posts · 53 votes
    6y

    A couple of things that we have learned over time through investing and raising capital, is that there will always be good deals and there will always be capital needing to be placed. The key is finding great sponsors/GP's.  I say it often, but there is no such thing as a good deal with a bad sponsor.  

  • Hollywood Florida · Member since 2019 · 90 posts · 46 votes
    6y

    i am new to investing thank for sharing the mindset of success.... got dream big ! 

  • Investor · FL · Member since 2017 · 247 posts · 245 votes
    6y

    Great topic. I can't believe this topic is still relevant 6 months later. Who knew COVID would be such a game-changer for so many? Knowing your goals, sticking to a strategy and working with the right team is key, at least from an LP (limited partner) standpoint. I have continued to invest in a number of real estate private placement deals since March 2020. Not much has changed in my investing world, just some deals are more conservative or purchased at a slight discount. I remember a very smart "guru" in the multifamily space told me in 2015 "Travis, we're not going to do any more deals for the foreseeable future, because I believe 2016 will be a MASSIVE meltdown in the economy and stock market". Well...here we are. Two different philosophies on investing, two different outcomes. 

  • Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y
    Originally posted by @Travis Watts:

    Great topic. I can't believe this topic is still relevant 6 months later. Who knew COVID would be such a game-changer for so many? Knowing your goals, sticking to a strategy and working with the right team is key, at least from an LP (limited partner) standpoint. I have continued to invest in a number of real estate private placement deals since March 2020. Not much has changed in my investing world, just some deals are more conservative or purchased at a slight discount. I remember a very smart "guru" in the multifamily space told me in 2015 "Travis, we're not going to do any more deals for the foreseeable future, because I believe 2016 will be a MASSIVE meltdown in the economy and stock market". Well...here we are. Two different philosophies on investing, two different outcomes. 

    People have been waiting for Great Recession 2: The Recessioning since the very second it was clear we had gotten past The Great Recession. Sitting on cash for years and years and 'waiting for the crash,' either in real estate or the stock market. Meanwhile the Fed has printed trillions, watered down that cash, and has firmly stated that they intend to keep doing so for years to come. 

  • Investor · Charleston, SC · Member since 2018 · 31 posts · 8 votes
    6y

    I loved the book cited in the original post. Very thorough and detailed, yet simple explanations.

    I am starting a fund for physicians to pool capital and invest in multiple syndications with the fund. We have 1350 physician members thus far. Goal raise for fund 1 is 3million. 

    We don't need fund #1 to be a homerun. Just want to get on base with IRR 10%+. With the right sponsors are we looking at at least hitting those numbers in 2021-2022? Or could we see negative returns for part of this period?

  • Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    5y

    @Brian Burke Following up on my initial response to this post. I am near finishing the book, "The Hands-Off Investor" and all I can say is, WOW. What an amazing resource for any passive or active investor. I highly recommend to any syndicator or passive investor or anyone looking to learn how large real estate acquisitions are structured.

    I also recommend purchasing a physical copy for maximum learning :) I did start with the audio, but the book has too much value and a physical version is a great point for reference.

    Congratulations @Brian Burke . Quite the achievement.

  • Brian BurkePro Member
    OP
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    5y

    Thanks for the feedback, @Chris Levarek!  I’m glad you enjoyed the book.  I knew when I wrote it that it would be available as an audiobook, but I never understood it. The content is so much better in physical form...but maybe I’m just old-school.  I’m glad you found value in it. I wish that no one would invest in passive real estate offerings before reading this book, but of course I’m biased...

  • Investor · Hendersonville, NC · Member since 2013 · 757 posts · 282 votes
    5y

    Boy, are we in trouble if something like a serious threat from China mixes and mingles with the political polarization, hate, extremism, white supremacy, violent protests, grievance, income inequality, poverty, health-related SNAFUs, and conspiratorial/irrational stuff that we have seen really perk up in the past 4 years....

    Originally posted by @Eric Bilderback:

    I hope you are right and you very well could be.  I consider myself a pessimistic-realist and I give ourselves a solid chance of a real conflict with China.  America is just starting to realize who the gangsters are that run China.  My fear is China will realize that they can’t get rid of Trump by having the media parrot what a Xenophobe he is.  Then China may feel they have nothing to loose and attack Taiwan (or some other semi desperate action). Unfortunately we have a military pact with Taiwan like we do half of the rest of the world.  Full disclosure I like Trump and think he is right about China.  So if we get into any sort conflict with China even a proxy conflict through Taiwan, Hong Kong, Japan, etc. this fluffy, create nothing economy we currently have will be brought to its knees.  The thing that gives me solace is if that happens it doesn’t really matter what you invested in its all going to hell LOL!  Bottom line is I don’t see how China says, “thats fine go ahead and take all of your production out of here and leave us to figure out how we keep all of our people working and not getting disgruntled."  In my view China never comes as close to measuring up to the West as it does right now.  Sorry for the China rant there my point was I can see a scenario where this recession could get scary bad.  

  • Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    @Jason Debono

    Looks like China will get away scott free for the most part.  Trying to keep conspiracies out of it and believing that the virus did come from a bat in China (which I doubt), China still locked travel in their country while allowing travel abroad to the US and Europe so the virus could spread.  Apparently Americans are not going to hold China accountable.  Interesting how being woke always seems line up with exactly what the guys making money off China want.  Allowing China to disrespect us will undoubtedly embolden them.  

  • Investor · Hendersonville, NC · Member since 2013 · 757 posts · 282 votes
    5y

    I suppose there is some wise path between courting and kissing the butts of dictators, and running around like a Tweeting bull in a China shop, writing checks you or your country really can't cash. Sorry to mix metaphors :) 

    As if you haven't guessed, I'm very excited that the Mad King is going to be shown the door in January, and BIden can tax me however he wants as long as he is friggin presidential, rational, and stable! I dare say, traditional, respectful, and ethical, too. "Normal" and "not gravely mentally ill" are what markets like, which is why I imagine 75% of serious investors supported Biden for president. You can't safely invest in a country where you have no idea what Fox News is going to say one night that is going to lead to an Executive Order the next day. SMDH... 

    The lengths to which that man would go to cheat and manipulate, AMAZING. The last thing this country needed was for us to lower interest rates in a great economy. We will be paying the price for a long time on that. We used up our last bullets on a phantom.

    Anyway, not trying to hijack this thread. I think it's very valuable and I would like to read "the epilogue" so if anyone who previously posted wants to kind of update me/us with more current info/predictions, have at it!

  • Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    @Jason Merchey

    Oh yeah I guessed.  Jeez, I wonder way so many people voted for him?  They most are probably just as horrible of people as he is, although some are probably just stupid.

  • Investor · Hendersonville, NC · Member since 2013 · 757 posts · 282 votes
    5y

    Hello. As to your question, I think the answer lies in the following:

    a) some folks have an authoritarian personality, and are attracted to strong men and cult leader types. 

    b) there is a lot of economic suffering in this country, esp non-college-educated white men. They have similar grievances to those Trump espoused.

    c) there are a lot of prejudiced people in this country. They are resentful, scared, and amped up by right-wing media.

    d) the Right has done a pretty good job ginning up class differeences, racial differences, etc. Just the other day the remaining Koch brother expressed regret for this activity on his part

    e) the media is just really polarized and weird now. Social media allows for folks to live in bubbles. There isn't much shame for being foolish or extremist like there was in a bygone era when you can surround yourself with your echo chamber

    f) some people feel really strongly about abortion restriction, gun ownership, and law and order. THey are willing to vote for a narcissistic prick con man because they know he will put federal judges on the bench, etc.

    And yes, as you say, some folks are attracted to him because he "owns the libs" or whatever. Basically a nasty person.

  • Member since 2020 · 18 posts · 16 votes
    5y

    Excellent article and outstanding book!

  • Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    5y

    Love it!  I also operate multifamily syndications.  We are having to look at LOTS of deals to make one work.  I think staying strict on underwriting is key right now.  Some things I'm factoring to be conservative include a higher bad debt rate, higher vacancy, higher exit cap, and no rent growth in the first two years.  That being said, we are still buying deals!

Join the conversationCreate a free account to reply, vote on answers and follow this thread.