Passive RE investment diversification
Member since 2020 · 8 posts · 7 votes
Passive RE investment diversification
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Realtor · Columbus, OH · Member since 2016 · 170 posts · 227 votes
5yIt depends on what returns you hope to see. I will never invest in REITs because the returns are abysmal compared to what I can make full time or even part time investing in rental property here in columbus ohio. Syndications are great for someone that wants to remain a passive investor or has too much money and needs to invest in bigger assets that they can't handle with their team. I like control of my money therefore I won't give it to a GP to manage in a syndication. However if you lack time either of these options are better than not investing in real estate at all :)
30 Replies
- Rental Property Investor · Smyrna, GA · Member since 2018 · 974 posts · 645 votes5y
Hi @Ashish Rizal, always good to diversify your holdings in different asset classes and investments. To vet sponsors, look at their partners and track record. With syndication it comes down to you trusting the sponsor team and understanding the individual opportunity itself, mitigating risk where you can and ensure you are asking the right questions of the sponsor team. Make sure to take a look at things like whether the business plan has multiple exit strategies, whether there are signs of conservative underwriting, and double-check whether the proposed business plan makes sense given the asset class, submarket, and current economic cycle. Research market trends in job and population growth. Review minimum investment requirements, projected hold time, and projected returns. Finally, attend the investor webinar and ask tough questions.
- Rental Property Investor · Newport News, VA · Member since 2018 · 264 posts · 130 votes5y
There are some good questions to ask syndicators in the following books:
- Best Ever Apartment Syndication Book by Joe Fairless
- The Hands‑Off Investor: An Insider's Guide to Investing in Passive Real Estate Syndications by Brian Burke
Best,
- Real Estate Consultant · Member since 2020 · 80 posts · 102 votes5y
Agreed with everything above. I will add that diversification is almost always recommended and is a tenant of modern portfolio theory. But...you do what you can with what you have and there are many ways to diversify. There is nothing wrong w/ having some tactical asset allocation in your portfolio (e.g. undiversified, "bets") and you can diversify by other asset classes. So, if you have a small cash reserve (emergency fund) and a 401k, and maybe are investing in some equities (mutual funds, stocks, ETF)...then maybe you only have "X" amount for real estate and what to focus on a single play/strategy/deal that you believe in.
I really like the approach @Joseph Firmin lays out and I think a lot of individuals get overwhelmed - "wait that sounds like a lot of work/time...I have to do that for every deal?". So, if you are limited in time or money, you may want to lay out a logical timeline for due diligence/research and really dig into a potential investment and make your "play". Assuming your are reasonably invested elsewhere.
All the best!
Caveat: I am not a financial planner, CFP, or anything like that.
- Member since 2020 · 8 posts · 7 votes5y
Originally posted by @Joseph Firmin:
Hi @Ashish Rizal, always good to diversify your holdings in different asset classes and investments. To vet sponsors, look at their partners and track record. With syndication it comes down to you trusting the sponsor team and understanding the individual opportunity itself, mitigating risk where you can and ensure you are asking the right questions of the sponsor team. Make sure to take a look at things like whether the business plan has multiple exit strategies, whether there are signs of conservative underwriting, and double-check whether the proposed business plan makes sense given the asset class, submarket, and current economic cycle. Research market trends in job and population growth. Review minimum investment requirements, projected hold time, and projected returns. Finally, attend the investor webinar and ask tough questions.
Awesome. Thank you @Joseph Firmin. This will definitely help me get started to analyze a deal and list out questions to ask during webinar. Thanks again!
- Investor · Brooklyn, NY · Member since 2019 · 57 posts · 51 votes5y
As far as passively investing REITs and syndications offer pro/cons that may influence your decision. A REIT is easy get into and out of. It is like buying into an ETF or index fund. Oftentimes there is no minimum or a low minimum. Some cons to investing via a REIT are that there are often less tax benefits and lower potential upside as compared to a syndication. A syndication will have a higher minimum investment, often around $50K and you have less/(often no) control of the exit timing as the passive investor. Once you're invested in a syndication, the cashflow is usually higher than a REIT dividend and depending on the structure can pass tax benefits to the passive investor.
I agree with what is posted above for evaluating a syndication opportunity: you'll want to get to know the sponsor team and feel good about their plan with multiple exit strategies. Additionally, you'll want to see if the plan aligns with your goals. Some will cash flow more than others and some may have a strategy of larger upside at the exit but minimal cash flow during the hold period.
- Member since 2020 · 8 posts · 7 votes5y
Originally posted by @Thomas Greer:
Agreed with everything above. I will add that diversification is almost always recommended and is a tenant of modern portfolio theory. But...you do what you can with what you have and there are many ways to diversify. There is nothing wrong w/ having some tactical asset allocation in your portfolio (e.g. undiversified, "bets") and you can diversify by other asset classes. So, if you have a small cash reserve (emergency fund) and a 401k, and maybe are investing in some equities (mutual funds, stocks, ETF)...then maybe you only have "X" amount for real estate and what to focus on a single play/strategy/deal that you believe in.
I really like the approach @Joseph Firmin lays out and I think a lot of individuals get overwhelmed - "wait that sounds like a lot of work/time...I have to do that for every deal?". So, if you are limited in time or money, you may want to lay out a logical timeline for due diligence/research and really dig into a potential investment and make your "play". Assuming your are reasonably invested elsewhere.
All the best!
Caveat: I am not a financial planner, CFP, or anything like that.
Thanks @Thomas Greer. Appreciate your insight. I was fully invested in stocks market (taxable and 401k) until I came across RE investment. Once I started learning more about RE investment (and still learning) realized that its more predictable and less volatile and most importantly cash flow along with capital appreciation. I recently liquidated 80% of my stock portfolio to start investing in RE and have been doing lots or reading and research. I am in Northern VA (DC suburb) and when I looked into couple of SFH/condo, its really hard to get a positive cashflow in this market. So while I dig more into it and even consider OOS investing, I was considering some passive investment with syndication and some in REITs.
Thank you again.
- Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes5y
@Ashish Rizal to truly see a significant amount of passive income by investing in REIT's you'd need to invest about the same amount as a property costs. My suggestion is to really hunker down and focus on purchasing a multifamily unit. You will see a return that is 4x the REIT and you'll get incredible tax benefits!
- Realtor · Columbus, OH · Member since 2016 · 170 posts · 227 votes5y
It depends on what returns you hope to see. I will never invest in REITs because the returns are abysmal compared to what I can make full time or even part time investing in rental property here in columbus ohio. Syndications are great for someone that wants to remain a passive investor or has too much money and needs to invest in bigger assets that they can't handle with their team. I like control of my money therefore I won't give it to a GP to manage in a syndication. However if you lack time either of these options are better than not investing in real estate at all :)
- 5yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Originally posted by @Ashish Rizal:
Brand new to BP, just getting started with RE investment and am looking to invest in multifamily, duplex/triplex eventually once I have solid understanding of it. In the meantime, I would like to have some passive investment going on to generate cash flow. I am considering investing in syndication deals and some into REITs (for dividends) . Is it a good strategy to diversify?
Also, how would one vet for the sponsors running syndication with good returns?
Any thoughts or insights would be greatly appreciated.
TIA
Are you looking to just invest your money or have people invest in your deals. I would try to get off-market deals below market value. That is what I do here in Columbus, Ohio. If you find a deal then money will follow.
- Member since 2020 · 8 posts · 7 votes5y
Originally posted by @Reece Iovine:
It depends on what returns you hope to see. I will never invest in REITs because the returns are abysmal compared to what I can make full time or even part time investing in rental property here in columbus ohio. Syndications are great for someone that wants to remain a passive investor or has too much money and needs to invest in bigger assets that they can't handle with their team. I like control of my money therefore I won't give it to a GP to manage in a syndication. However if you lack time either of these options are better than not investing in real estate at all :)
Thanks @Reece Iovine for your thoughts. My plan is to put 50% of my RE investment into one or more Syndication deal and remaining 50% to invest in SFH or MFH on my own at some point. As I am still learning on RE investment, researching markets, verifying numbers to make sure it generates positive cashflow, in the mean time I am considering to invest on syndication to get myself started with RE investment.
- Realtor · Columbus, OH · Member since 2016 · 170 posts · 227 votes5y
@Ashish Rizal Great idea. I would use investing in a syndication as a learning opportunity as well. The yare taking your money, a return on that investment is expected but not all syndicators will take the time to educate their investors. Try to find someone that puts on group webcasts to review financials etc. Best of luck!
- Member since 2020 · 8 posts · 7 votes5y
Thanks @Steven Foster Wilson. Appreciate your feedback.
- Member since 2020 · 8 posts · 7 votes5y
@Remington Lyman , I am considering investing some portion of my money to the syndication deal. I am in Northern Virginia and the price are too high for SFH/MFH here, so I am considering OOS investing as well. It's just that I want to be closer to where I live, but not sure if that matters a lot if I can find a good property manager.
- 5yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Originally posted by @Ashish Rizal:
@Remington Lyman , I am considering investing some portion of my money to the syndication deal. I am in Northern Virginia and the price are too high for SFH/MFH here, so I am considering OOS investing as well. It's just that I want to be closer to where I live, but not sure if that matters a lot if I can find a good property manager.
@Donny Thompson and @Mitch Deminski are solid property managers in Columbus, Ohio
- Burnaby, BC · Member since 2017 · 282 posts · 268 votes5y
REITs and syndicates are a great option if you're looking for better RE diversification. It'll allow you to own buildings you would not be able to afford on your own.
Every syndicate is structured differently so I would scout out a few and see which one fits your investment strategy the best. - Investor · Centereach, NY · Member since 2018 · 20 posts · 16 votes5y
I have a few rental units in Metro NY, which we are thankful to have and just renovated one of the units after a deadbeat tenant was using the eviction moratorium to hide behind and not pay rent. I also have a small stock portfolio that is generating good returns via dividends and options income. I do like the fact that I have multiple streams of income coming from different directions. Real estate is by far my favorite- being the most stable - but I cannot dismiss the returns that I have been generating in options. I am using my investment account to loan money to my business to fund the renovations!
- Investor · Northern VA · Member since 2020 · 124 posts · 87 votes5y
@Ashish Rizal A lot of folks are turning their noses up at REITs, but you are on the right track. The biggest difference between the two as far as the plan you expressed is liquidity. Should you need to get your hands on some money because of unexpected life events, you're going to want to have put that "quick access" money in a place that is far easier/quicker to liquidate than syndication shares or physical real estate.
- Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes5y
Originally posted by @Chris Mills:
@Ashish Rizal A lot of folks are turning their noses up at REITs, but you are on the right track. The biggest difference between the two as far as the plan you expressed is liquidity. Should you need to get your hands on some money because of unexpected life events, you're going to want to have put that "quick access" money in a place that is far easier/quicker to liquidate than syndication shares or physical real estate.
The con of liquidity is volatility. You can sell at any time, but so can everyone else. Many REITs got whacked earlier this year due to Covid and have not recovered. If you need to sell it's still there, but you may be forced to take a loss depending on when you bought and sold. I think for many investors the liquidity can be a bad thing, because it promotes/allows the panic sale. We can't panic sell our apartment complexes with 3 mouse clicks, but we can easily panic sell an entire stock portfolio with that same degree of effort. When we own physical real estate we have to plan for down markets, come up with creative solutions, and do everything we can to ride those down markets out.
I have both REIT and Syndication investments, so I am not opposed to REITs. They aren't the same as syndication investments, though.
- Investor · Northern VA · Member since 2020 · 124 posts · 87 votes5y
@Taylor L. Great point. It's not uncommon for people to go into it without a plan. They see their equity market related holdings drop with the market, they freak out and sell, then it goes back up without them. I wouldn't recommend REITs in a lot of cases for liquidity/diversification from syndication. There are better alternatives, but which is best is extremely case by case. Happy to chat offline with anyone who is interested.
- Realtor · Columbus, OH · Member since 2016 · 170 posts · 227 votes5y
Originally posted by @Lauren L.:
@Reece Iovine
What are the typical returns of a good syndication?
I commonly see a 15% IRR. However I'm sure there are others out there that offer better returns.
- 5yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Originally posted by @Ashish Rizal:
Also, how would one vet for the sponsors running syndication with good returns?
Any thoughts or insights would be greatly appreciated.
TIA
For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence:
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
The Real Estate Crowdfunding Review - 5yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Ashish Rizal I'm with @Steven Foster Wilson. I really don't see how investing in a syndication as a beginner is a good strategy for parking money in the short term. If it's something you're interested in long term, great - follow the advice in this thread.
With interest rates so low, the answer for where to park money in the short term is... there is no good option. Syndications are not like savings accounts.
Do you already own? There are places in the DC suburbs where house hacking is possible. There are a bunch of threads on this.
- Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes5y
Originally posted by @Nicholas L.:
@Ashish Rizal I'm with @Steven Foster Wilson. I really don't see how investing in a syndication as a beginner is a good strategy for parking money in the short term. If it's something you're interested in long term, great - follow the advice in this thread.
With interest rates so low, the answer for where to park money in the short term is... there is no good option. Syndications are not like savings accounts.
Do you already own? There are places in the DC suburbs where house hacking is possible. There are a bunch of threads on this.
Yes good point about interest rates, its practically free money!
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