Is real estate syndication worth the wait?

16 Replies

Hi all. I'm looking at syndication opportunities, and it just doesn't seem worth it. For a minimum investment of $25k, I can get an IRR after sale of nearly 20% in 7 years. That's about $5k. I would also get a share of the rents averaging about 8.5% of my investment (roughly 2500 per year). In total it would take me 7 years to make an additional $20k from my initial $25k ($25k would turn into $40k if they hit all the numbers). To me this seems like a very long time to tie up $25k with no real equity, and not receiving a true multiple on my investment. I feel like I could be liquid if I did small deals with that money and took on the debt of the mortgage. What are peoples' thoughts around this? I can see the benefit of being the syndicator with all the fees, but I feel like you need to partner with an experienced GP to get started there.

First of all, I would say a 20% IRR is well better than the stock market in most 7 year periods.

I would also tell you that not all syndications are created equal.  I've been in, and delivered myself, IRRs in the 30s.  Be careful.  Many syndicators pay themselves acquisition fees, asset management fees, property management fees, construction management fees, refinancing fees, and disposition fees on top of a percentage of the profits.  Too many fees and it drains the total return for the limited partners.

Related to your question on small deals, I often got better returns on my single family than I have on syndications. If you have only $25K to invest, it may be better to go the single family route.  One of the main benefits of the syndication route is that you can deploy large amounts of capital quickly.

@David Stelzer

I think there is a misunderstanding of what IRR is. 20% IRR over 7 years means your $25k investment will be around $90k in 7 years.

This $90k will include 8.5% distribution over 7 years (~$15k) + $25k initial investment + sales profit ($50k).

High IRR is more difficult to archive as the investment time frame gets longer.

The typical syndication number people use is 16% IRR over 5 years - which doubles your investment in 5 years ($25k -> $50k).

I think the problem might be the return you are promised is too good which could mean there is a higher risk associated with the investment.


I used

https://www.thecalculatorsite....

to get $90k figure.

@David Stelzer,

The opportunity to invest either in a SFR or small multi-unit versus a syndication is really about your time. Because both can perform well. The real benefit to Syndication is about your time. How much involvement do you want to have? additionally with 1 single family home your vacancy rate is very digital meaning it is either 100% or 0%. In a Value added syndication they may be working on a cash flowing project with 100s of units which actually can reduce the risk.

Good Luck,

Originally posted by @Daniel Han :

@David Stelzer

I think there is a misunderstanding of what IRR is. 20% IRR over 7 years means your $25k investment will be around $90k in 7 years.

This $90k will include 8.5% distribution over 7 years (~$15k) + $25k initial investment + sales profit ($50k).

High IRR is more difficult to archive as the investment time frame gets longer.

The typical syndication number people use is 16% IRR over 5 years - which doubles your investment in 5 years ($25k -> $50k).

I think the problem might be the return you are promised is too good which could mean there is a higher risk associated with the investment.


I used

https://www.thecalculatorsite....

to get $90k figure.

 This is a good point. Most sponsors will also show a chart of predicted returns if you invest a certain amount (typically the chart will be a round number like $100k).

@David Stelzer It's worth it if it's worth it for your lifestyle and situation. If we compare just returns, I'd say you most definitely can get a better return flipping or managing your own rental. Because you control all the outcome with your resources. You have the ability to produce any return if you have the skillset and time.

However the reason people invest into an opportunity is they don't want to have to control the deal. As mentioned, time is a big one but here are the top reasons I see people invest into passive investments such as syndications :

  1. Time - They do not have the time to spend on managing their own rental or real estate property investment.
  2. Taxes - Syndications can offer up paper losses on investments for even up to 100% of the investment. ex. 100k invested, 100k in paper loss. Traditionally 30-40% is the norm.
  3. Passion - Passive investors are focused on another career, hobby, family, etc. They don't want to learn the skills for manage or rent properties. Thus, managing their own isn't a priority.
  4. Experience - These investor do not have the experience to take down a 100 unit apartment. Leveraging other's who are specialized in these areas becomes a priority.
  5. Return - Equity upside and preferred returns are some attractive syndication return components. A return on self run deal is not as "preferred", ie. if it goes sideways, the investor pays the cost regardless.
  6. Risk/Responsibility - Syndications with credible operators lowers risk profile and responsibility for the investor. ex. Risk profiles on a B class 100 unit apartment with experienced teams are far different then risk profiles on a B class duplex an investor might be able to afford. 

So return is only one reason someone might invest into a syndication. In my experience, tax benefits is the number 2 reason while Time is the number one reason.

@Joe Archbold makes a great point, the advantage of syndication is time and the ability to leverage the experience of the sponsor. As @Greg Scott mentioned, you very well may be able to achieve higher rates of return doing your own project whether that be a SFH or a duplex. The problem comparing MF syndication to doing a project yourself is the value of time. If you have an incredible amount of free time and you decide you want to spend it managing real estate, then doing your own projects may be the way the way to go, assuming you have the experience and the know how to execute.

Even factoring in time, I often see syndications out performing direct projects as the scale and leverage syndications can provide and the power of full time real estate professionals managing the investment as opposed to someone managing a few rentals on the side as a more or less hobby. 

The question becomes, do you want to be an investor or a landlord?

All wonderful answers.  My wife is not working and we are looking to make a business of this and leverage her time/availability.  If we were to do syndication, I think we would want to partner with someone and be the syndicator (GP), but it looks like I need to read and invest a bunch first to fully understand everything.

@David Stelzer , you mentioned "My wife is not working and we are looking to make a business of this and leverage her time/availability." If you are alluding to real estate professional status for your wife, then you would need "active participation" in a real estate endeavor.  I am not a CPA but basically 750 hrs annually and >50% of her time to qualify.  Thus, investing in syndications by itself does not typically qualify you since you are not actively participating.  However, if you are a GP on a deal, or if you couple your passive syndications, with active rentals you own then she may be able to qualify.  Once again, consult a CPA if you are considering this designation.

@David Stelzer it all depends on what you are looking for with sweat equity and how valuable is your time. Some of the benefits of syndication are that you can enter a market you may not be able to before or invest in a project that you alone could not have. Syndication is great for either someone who is focused on cashflow or longevity of the project. Have you looked at any markets in particular? Good luck

Some great responses here so far. 

@Chris Levarek made some great points that I agree with wholeheartedly. I'd like to highlight a few of them with my own thoughts:

Risk
- Diversification: I've seen 25k go across a 1,000+ units vs. just one unit. How many meth-houses does it take to mess up an investment that consists of one SFR? Operational Risk: the operational risk of doing it yourself may completely offset the potential higher return. Take an honest assessment of your strengths and abilities.

Time - are you okay finding and managing deals actively, taking late-night calls, dealing with lenders, paperwork, property managers, etc or would you prefer to stay hands-off?

Taxes - over time, syndications typically prove to be much more tax-efficient

Hope that helps!



If you had $50K to invest would you invest in one stock or build a diversified portfolio of 10 stocks. The problem with investing in syndication deals is that it requires a fairly large capital commitment to build a diversified portfolio. With a minimum investment of $25K- $50K per deal, you need at least $300K to build a diversified portfolio that spans multiple states and asset classes. I believe the solution to this is a customizable fund that allows you choose individual deals but invest a smaller amount per deal. 

This all really depends on what you're trying to achieve. If you are looking to be an active day to day real estate investor, putting in the time and energy, then investing in your own deals is going to make you the most amount of money. If you are looking for passive income, then investing in a syndication may be the best option. 

As for returns, getting a 15%+ IRR will double your money in 5-7 years. Repeating that will fairly quickly increase your capital and provide you a very passive investment. Also, all things equal, the risk is much less on a larger property, than a house.