Your Experience as an LP in Syndication?

9 Replies

Hello fellow BPers!

I’m looking to learn from anyone who’s had experience as an LP in multifamily syndication. Ultimately I’d like to contribute as an LP locally (Phoenix, AZ), with the goal being to learn as much as possible from the GP about his/her process and ask questions along the way. I’d also prefer the ability to drive by the asset if needed, but am open to thoughts on this? Lastly, I also welcome any recommendations on GP’s to look into (506B, non-accredited)!

- What do you wish you knew before investing in your deal?

- Did it meet expectations?

- Any added benefits other than the returns?

- Was the asset local? If not, did that pose any challenges?

Any other information that you learned in the process…

Thank you all!

I've been on both sides. Most of the time projections have been met, but the first one didn't. That was due to misbehavior by the property manager. We still made money but much less than expected. Plus, a great lesson learned to apply to my syndication business. So overall a win, even though it was painful at the time. Overall, the GP team navigated the situation well once it all came to light, and I felt that as an investor in the deal my interests were put first. My investments are not local to me.

Other than the returns, there still are plenty of lessons to be learned as a passive investor as long as you're paying attention to what's happening. None of my passive assets have been local to me, they've all been quite far away. Passive investors don't do the work and  get to invest from a long distance if they want to. Particularly beneficial for those who live in expensive and/or landlord unfriendly states.

As a passive investor you put a lot in the hands of the sponsor. Most LPs may be comfortable investing sight unseen, but some are not. There's no issue with that, you just need to be able to get up and go to look at deals before they get filled.

@Luke Grieshop due to the restrictions related to public solicitation, you won't see 506b offerings advertised out in the open. However, if you read between the lines, you should be able to find sponsors like that here on BP. You can also get recommendations to 506b sponsors locally in the Phoenix area from other investors, accountants, attorneys, and real estate brokers.

With that all said, keep in mind the most critical variable in your experience as a passive investor will be the PEOPLE you are investing in, not just the deal you are investing in. As you connect with sponsors that resonate with you, take the time to develop a relationship with them. Trusting the sponsor will be paramount to you sleeping at night, and I can't stress that enough. It does no good to place capital with a sponsor who has an attractive pro forma to find out later they can't be trusted. Making sense of the deal and understanding their track record is important of course, but I believe you should develop TRUST before you invest. Developing that trust with someone you don't know may seem like a challenge, but if you approach it correctly, you should be able to achieve a pretty solid foundation of trust.

The best way is to target sponsor who use professional 3rd party administration that verifies the sponsor, their background, their track record, and their performance. Essentially, their role is to be the neutral party "referee" who's job is to ensure accuracy and report transparently.

Another way is to talk to others who have had an experience investing with the sponsor already. Simply ask the sponsor if they would be open to connecting you to their existing investors who've known and invested with them for a long time. There is nothing that replaces a live conversation with someone who has already built that trust with the sponsor over time. If a sponsor will not allow you to talk to existing investors, that should be a red flag to you.

Also, one of the most often overlooked components of a syndication is the reporting. When you find a sponsor you like, do yourself a favor and get clear on what your experience will be like AFTER you have invested.

Does the sponsor have a communication plan? How often will you receive reporting? How are they delivered? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? Historically, have the reporting and distributions been on time? Also, who does their accounting, and are checks and balances in place to prevent misappropriation of funds, cooking the books, or human error? 

Your overall experience with passive investment involves much more than the yield you could achieve. If you take the time to gain clarity on those items, you should get a pretty good handle on what your experience is going to be like.

The purpose of investing passively is to leverage the sponsor's time, expertise, and ability to source great deals, but if the experience is going to cause you to lose sleep at night, any return you might make simply will not be worth it.

All the best,

Jack

Another question to consider that I forgot to mention is, "do you have a succession plan?" If the sponsor passes away in the middle of the investment, what happens?  Are the LPs left to figure out that mess on their own?  Or has the sponsor been proactive and thoughtful about a solution and established as succession plan that will be triggered upon their death or incapacity to continue?  

@Luke Grieshop - @Taylor L.  and @Jack Martin  already gave you some great advice, but all add my two cents and hope it helps too!

I too was an LP in several deals before I started being a GP. Those were invaluable learning experiences and I'm thankful that my GPs were always willing to answer my questions regarding the investment. I was one of the rare folks who read the PPM, subscription docs etc line by line. You'll learn a ton just by doing that.

And I could not agree more with Jack regarding investing in the people before the project!  I've invested with several syndications only after I got to know the people involved, their investment history, and investment philosophies.  I would add that those who invest with us do so for the same reasons.

All that to say is I there are three things I believe you must evaluate in this order:

1) The Team

2) The Market

3) The Deal

While the deal should obviously be examined, if you have picked the first two correctly, then the third will be less important. Better a "B" deal with an "A" team than the other way around.  The deal/project may change as it progresses and as improvements are needed (ex.  we are LPs in a storage project that has had several government reg setbacks but because we chose a solid team, they have handled them all well and the project is moving forward)

Your question about added benefits? Sure. You get a front row seat to how the deal is structured, what you like, don't like, etc. You get to see OM's, the reporting, be on investor calls, etc. It's all right there in front of you and you get to see how it is done and learn along the way.  

Personally, my investors take a much more passive approach than I do as an LP, but that is because I truly love getting into the weeds with this and investing is my full-time job.

If you have any other questions, please reach out to me.  I have a had so many people share their wisdom with me, I'm always happy to share what I have learned.

- What do you wish you knew before investing in your deal?

Focus on meeting other passive investors who actually put skin in the game. 

- Did it meet expectations?

Some yes and other no - when you are starting out you will only have access to institutional operators and newbies.

- Any added benefits other than the returns?

1.  No more managing tenants, vacancies, maintenance and the managing the manager (who is a $12-20 dollar employee who's compensation structure us not aligned with your goals) By passing the control of the day to day operations to true experts who are literally partners (direct alignment of compensation and motivations), you can assure the investment is being optimized while you spend your time on what you want which is 1) making more money at your day job, 2) spending time with your family or 3) finding that one off deal that you want to do one your own while pairing with a Limited Partner strategy.
2. Asset Diversification: Many commercial real estate investments have high acquisition prices (think $10M+) where most people don't have access to. You want to get away from these other Mom and Pop invests like these 1-40 units. When I was a syndication newbie and thought I could do everything by myself and did not trust anyone. I then realized in a few months that 1-40 unit deals had horrible pricing because all the amateurs were involved and the ones that looked good from a per unit price prospective were under 80% occupied and had ISSUES. Investing passively in a group can allow you to invest in multiple asset classes (apartment/mobile home/assisted living), in multiple locations and with varying business plan duration.
3. Avoid Credit and Liability Risk: Investing passively allows one to avoid being exposed to credit or liability risk. No W2 documented income no problem! You do not need to personally guarantee multi-million dollar loans and and be the fall guy. 
4. Cash Flow: The goal of a LP syndication investor is to create a "ladder" of investment that create accumulated cashflow and cashout at different times. It's like your grandpa's CD ladder strategy but with 10-30x returns.
5. Taxes: All the deprecation benefits of single family home being your DIY direct investing but even better! Bigger deals are able to pay for a cost segregation to squeeze out even more depreciation.

@Luke Grieshop . One of the best ways to get involved in this arena is to hire a paid coach. Joining their mentoring club, so to speak, will allow you to learn from them and to potentially partner with other syndicators. You might be able to figure out which role you really want to play and by finding those with complementary skills you might be able to put together a good team. It’s also likely you’ll have a chance to partner with the coach, Which could be a huge bonus.

You might want to try to track down Ken McElroy who is there in Scottsdale. He is one of the top apartments indicators in America. Happy investing!

@Luke Grieshop

Most sponsors will likely want your capital as an LP and may not walk you through the through the day to day activities.
However, they will walk you through the investment, fund strategy, expectations, etc.

When you investor with a sponsor, you are investing in 'the sponsor more than the asset itself".
Some funds have thousands of investors and some sponsors are active in multiple deals. Imagine having to answer questions from each investor.
There may be an investor relations individual who may be able to help answer questions on the day to day.

If you are interest in learning about real estate in your market, you may want to take a real estate investor / LP investor out to lunch and ask them questions there. You can potentially ask them ask these questions also at a local networking event.

best of luck


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