Syndications/Crowdfunding projects for financial freedom

17 Replies

So I started with single family buy and hold rentals like a lot of the people here on BiggerPockets. However, being out of state, it seems like the average rental is going to generate 8-15% Cash on Cash returns, depending on the neighborhood, your risk, the deal, etc. I know there are methods like the BRRRR method but I'm mostly talking about passive investing here.

So I've recently stumbled in to the world of Syndications after a real estate conference I attended advertised here on BP. And I definitely understand that you have to do the due diligence as well, both on the deal and on the syndicator, but a lot of the target IRRs are also around the 12-15% mark but with a lot less work. I know one downside is that most syndications or crowdfunding platforms are open to accredited investors only, which I am not one yet. 

So I just wanted to get the thoughts of people who've done both syndications/crowdfunding deals vs single family rentals, what are your thoughts on both? And for an accredited investor, would investing in these large deals only or as a huge chunk of their real estate portfolio be a good way to go?

Thanks!

Syndications have potentially higher returns because they can apply value-add strategies you likely won't as a buy-and-hold investor, such as doing kitchen/bath upgrades on a 200-unit apartment and increasing rent by $150/month. You can also diversify into asset classes that you'd likely never consider on your own, such as commercial real estate. Also, the higher IRR often comes with higher leverage.

Syndications have many more risks.  The hold period tends to be short (3-5yrs) due to investors need for liquidity as the way financing is structured.  That timing may line up with a downturn and you will be forced to sell (no input on decision), whereas for buy-and-hold you have the option to ride it out.  The sponsor rarely has much skin in the game, and thus their interests may not align with yours (e.g. you may want to protect capital, but they don't get paid until they exceed the preferred, so they may take extra risks to try to outperform).

Syndications involve less ongoing work, but still a lot of initial work.  You still have to vet the property as with buy-and-hold.  Now, you also have to vet the sponsor, the business plan, the terms of the deal, layers of fees, etc.

I do both.

@Tony Xu

Remember that syndicating is not the only way to dip into multi-family apartment investments.  Instead you can also be part of a fund OR you can find partners who can operate the property and you play the role of the passive investor in that deal.  

Not all syndicators are created equally. When you find the diamond in the rough they can give you steady passive income.  There are many post on vetting syndicators.  The key is the syndicator is more important than the deal. You need to be aligned with their philosophy, leverage, geography, asset class, fees, promote etc. 

Hi Tony,

Good observations.  As you mention, passive investing doesn't have to mean giving up returns.  Experienced syndicates can deploy strategies especially on larger properties that are hard to beat.  Get a syndicate who focuses on one large metro area, develops great connections w/brokers, property mgt companies and knowledge of the market gives them significant advantages.  @Mark Robertson  mentions, the ability to partner with experts and invest into an array of niches and geographies are difficult to replicate for the DIY investor.

I don't necessarily agree with @Bryant Fong on way more risk.  If you are not going to do due diligence on the operator then yes, you are undertaking more risk but like anything with research there are plenty of excellent syndicates that have a great model, stick to their knitting and have performed well thru market cycles.  Value add syndicates often look to exit after renovations (say 2 years for large apt) but if the market is down, no worries, we don't force a sale. It may be 18 months to 7 years...that's a lot of time to find a better exit (sale) while you continue to earn distributions monthly or quarterly that are hard to beat.

I think you take on a ton more risk as a newbie trying to do this yourself.  Partnering with experts, you can also learn a ton about the business before deciding later if you'd like to do something like this on your own.  It's a great way to earn and learn.  Best of all, if you truly want to be passive, you are not bothered by resident calls, dealing w/paperwork, turnover/makeover duties, etc.  Couple blogs to help your research on vetting sponsors, FAQs on syndication and diversification in some interesting niches that I  particularly like now.

https://www.biggerpockets.com/blogs/9145/53959-vet...

https://www.biggerpockets.com/blogs/9145/59865-div...

https://www.biggerpockets.com/blogs/9145/59865-div...

@Tony Xu

I think @David Thompson and @Bryant Fong are giving you good advice. One thing you mentioned is that you are a new investor to non-SFH deals. In my opinion, participating in a syndication could be a valuable learning experience for you to explore other asset classes with an experienced person navigating the ship.

Since you are not yet accredited though, this will be more difficult to do.  Crowdfunding is an option, but despite all of the SEC's best intentions, I think this is a potentially riskier way to invest than most might otherwise consider.  You won't get access to sizeable deals, since crowdfunding is limited in the raise amount, and you still have to do the work of vetting the sponsors and the deal.  But, you do get to invest less on average, so putting some money in to test the waters enough to get your feet wet may not be a bad idea.

If you've got a good thing going with SFH, why not slowly expand up the line into duplexes and fourplexes? You'll get some experience with MFH and property managers as you build your net worth and/or income to the level of an accredited investor. And that way, you'll have more of a foundation with which to evaluate the deals they put in front of you.

All the best!

Originally posted by @Bryant Fong :

Syndications have potentially higher returns because they can apply value-add strategies you likely won't as a buy-and-hold investor, such as doing kitchen/bath upgrades on a 200-unit apartment and increasing rent by $150/month. You can also diversify into asset classes that you'd likely never consider on your own, such as commercial real estate. Also, the higher IRR often comes with higher leverage.

Syndications have many more risks.  The hold period tends to be short (3-5yrs) due to investors need for liquidity as the way financing is structured.  That timing may line up with a downturn and you will be forced to sell (no input on decision), whereas for buy-and-hold you have the option to ride it out.  The sponsor rarely has much skin in the game, and thus their interests may not align with yours (e.g. you may want to protect capital, but they don't get paid until they exceed the preferred, so they may take extra risks to try to outperform).

Syndications involve less ongoing work, but still a lot of initial work.  You still have to vet the property as with buy-and-hold.  Now, you also have to vet the sponsor, the business plan, the terms of the deal, layers of fees, etc.

I do both.

Thanks for the reply @Bryant I understand what you are saying and I think that's a big part of aligning with the syndicators and reading over their business plan. The one that I'm currently invested in has a hold period of 3-5 years, but has plans for a market downturn and has projections up to 10 years and what the IRR will be for each year.

I definitely agree that its a lot of initial work, reading through all the due diligence, vetting the deal as well as the syndicators, etc.

And yeah, I think my plan would be to keep doing both, or at least for now until I see a couple of these deals finish and then evaluate.

@Steve Kontos

Yes definitely, I'm looking in to those as well. I guess I classified it all as syndications meaning projects where I mainly vet the team and the deal and act as the passive investor. 

@David Thompson

Thanks for the reply. That's actually my thoughts exactly. Because if I can make solid returns and learn about doing these bigger projects while doing it, it sounds like a great deal. And it's not like I'm not doing anything, I think vetting the deals and the syndicators is just as much work as vetting a buy and hold deal, if not more. 

Thanks for the posts, will check them out

@Yousif Abudra

Yeah, I agree that not being accredited is the biggest issue for now. But with my steady W2 income raises at work and some passive income starting to come in, I should meet the income test in 2 years. 

For now, I will still just acquire more properties and generate more passive income. Maybe I will move in to duplexes, fourplexes, etc. 

I just mainly wanted to hear from people on their thoughts about passive investing. BP definitely seems to be a community that's more focused on the active investing side, things like BRRRR, wholesaling, etc. While that's great, and I know it's an amazing way to make money, I want to be more on the side of an investor and less on the side of a new job.

@Tony Xu buying your own 2-4 family deals is a great starting point for getting into bigger deals down the road. Remember to calculate your return on equity every so often. Eventually you'll want to take that equity and move up to bigger deals.

Also, remember to focus on your first income stream (your J-O-B!). The more cash flow you can funnel from stream 1 to stream 2 (income producing real estate) the better.

All the best!

@Tony Xu I would recommend starting with something that you do yourself. Unless you make more than a lot and can save over 30k a year. You can get in the deal with some syndications you just have to build a relationship with the lead. I am not accredited yet but have the ability to get in on 506b deals if I know the lead.

@Lane Kawaoka Yeah, I actually started out buying my first OOS SFR rental. I do actually save way more than 30k a year right now, not even including my 401k, so I do have the money to diversify. The one deal that I did get in is actually a 506b deal.

Thanks for the advice though

@Tony Xu look for a syndication company that will take non-accredited investors. You will have to vet those companies still and go through the same diligence. They will also likely want to vet you, being non-accredited and you should be leery if they don't vet you. 

Turn key vs syndication will depend on you goals. Turn key is going to allow you to have some more control. You get to pick the deal and location, you can fire the manager, you can decide to sell, etc. With that, however, comes responsibility and more effort. I would also say that for the most part the Turn key single families carry more risk with less equity upside (that is my opinion after dealing with a lot of single family rentals). 

Syndication in my mind is less risky with as good or better returns with less work. In a syndication, however, you are not in control. You get to choose the deal, to an extent, but only what is available from the few syndication companies that you have chosen. You don't decide when to sell, when to fire the manager or sponsor, etc. 

@Todd Dexheimer  
What are some of the best ways to look for syndication companies that take on non-accredited investors? The one that I've found I met at a local real estate conference. 

@Tony Xu the best way is to ask.  You can look here on bigger pockets or elsewhere for some of the companies that you feel comfortable with and contact the owner. If the owner tells you they take non-accredited Investors, then talk more with them to get comfortable with their company in order to decide if they are the right fit for you.

Hey Tony.  Well written post and your observations are spot on.  I invest both actively in my own properties and passively in syndications. 

IMO, for active investing at a level that matters, it's important to either add value or to get to scale.  Adding value can generate very high returns and build net worth.  Scale allows you to leverage other people to make the returns you mentioned above more attractive and more passive.  Without either of these two items, the passive returns from investing in syndications can be more attractive than active buy and hold.

Regarding having a large chuck of a portfolio in syndications, that is typical for high net worth individuals.  They are professionals or own businesses and do not have the time or interest in active investing.  You have a number of sponsors on this post who cater to those individuals.  They are on BP to demonstrate their expertise and to get passive investors.

@Tony Xu  Hi Tony, My husband and I syndicate larger Apartment Deals.  We are based in Dallas and own currently in Dallas, Atlanta & Memphis.  We have worked with Accredited and Non-Accredited investors.  There are definitely plenty of syndicators out there that work with both as well.  MeetUps or Investment Conferences specific to SF or MF are a great way to meet other syndicators. The National Apartment Association holds 1-2 big conferences a year (I have not been yet), but this could be a great way to meet future partners/syndicators.  

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