Honest Question about alternative strategies

[Edward Parker Parker]

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

[Bruce Lynn]

#1.  Typically you will need to be an accredited investor to invest in syndications, so need to have significant net worth.

#2.  Deals very tough to get done right now....fairly big gap between what sellers want/need and what buyers/lenders willing to pay.

#3. Your numbers might be off for most deals today with higher taxes, higher interest rates and less leverage. I think most of the deals I'm seeing now are pitching more like 15% IRR.

#4.  Capital raises seem to be pretty tough today for many great operators....so you may commit and send in your money and they sit on it for 6 months until the deal happens, or they send it back to you (hopefully) if it doesn't happen.   So your best laid plans for returns go to zero.

[Don Konipol]

Quote from @Edward Parker Parker:

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

@Bruce Lynn gave a very good reply

No need to go over the ground Bruce already covered.

Some additional points

Syndicated deals have an EXTRA element of risk vis a vi direct investment.  It’s the risk that the person running the syndication may (a) resort to fraudulent behavior, (b) not be competent to deal with the subject property, and or economic climate we encounter in the future (c) may become incapacitated and their replacement below par (d) have a “conflict of interest” between your best interest and their highest compensation.  Some if not most of this risk can be handled through due diligence, IF you have a great enough understanding of the specific real estate type and subject market; the time to perform a thorough vetting and the knowledge/ability to perform a proper due diligence.

You may be seeing 20% + as a target return, usually for deals on the riskier end of the spectrum.  And during real estate bull markets even less risky deals may show these returns. But over the long haul everything reverts to the mean, i.e., the greater return requires greater risk.  And the kicker is that riskier deals are MUCH HARDER to properly evaluate than less risky deals, as more speculative assumptions are necessary.

I’ve been a real estate syndicator for over 22 years.  I’ve syndicated about 200 deals/properties, and run four funds that purchased or lent on over 400 properties.  I’ve read numerous (100s) offerings of other syndicators.  Here are my (admittedly  biased) conclusions

1. Syndications admitting non accredited investors are of such low quality/high fees that I’ve NEVER come across one worth investing in.

2. 2 or 3 out of 100 accredited investor syndications have the risk/reward balance, the sponsor experience/ability, and the sponsor/investor alignment of interest to make them worth investing in.  The others lack something, or everything in these categories, and therefore your expected return will range from total wipeout to less than needed to meet the risk involved.

3. The syndications with the BEST investor risk/reward returns (and sponsor/investor alignment as well as sponsor relevant experience and depth) are only open to QUALIFIED PURCHASERS, who are investors with investments totaling a minimum of $5 million.  These deals require a minimum investment of $1 million or more, sometimes as much as $5 million.

So, what's a regular thrifty saver who wants a passive real estate investment to do? My recommendation is REIT mutual funds or REIT ETFS. Professional management of the underlying assets, SEC Public Corporation compliance, quarterly financial reporting, diversification, and liquidity. No, you won't make 20%. But long term 10-12% is realistic.

[Ian Ippolito]

Quote from @Bruce Lynn:

#1.  Typically you will need to be an accredited investor to invest in syndications, so need to have significant net worth.

#2.  Deals very tough to get done right now....fairly big gap between what sellers want/need and what buyers/lenders willing to pay.

#3. Your numbers might be off for most deals today with higher taxes, higher interest rates and less leverage. I think most of the deals I'm seeing now are pitching more like 15% IRR.

#4.  Capital raises seem to be pretty tough today for many great operators....so you may commit and send in your money and they sit on it for 6 months until the deal happens, or they send it back to you (hopefully) if it doesn't happen.   So your best laid plans for returns go to zero.

 I invest in both direct real estate (via residential rentals) and syndication/crowdfunding passive investments. In my opinion, both have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both.

Directly owned properties are great because they give you maximum control and the ability to tweak them exactly how you want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.

Also direct control means you know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.

The flipside of having the power to control everything is that can be alot of work (and a full-time job if you are putting in sweat equity). Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes.

On the other hand, one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself. And once you finish the due diligence, your work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

The downside is that someone has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.

Good luck with your search.

[Jim Pfeifer]

@Ian Ippolito made some great points and I will add a few additional thoughts.

You do not need to be accredited to invest in real estate syndications and there are quality operators who offer investments to non-accredited investors.  It is simply not true that any syndication that is open to non-accredited investors is low quality (I think when people post these generalizations with confidence that they are correct - you might want to seek an alternate opinion - it is an opinion after all...).  It is true that non-accredited investors need to look harder for investments because there are fewer opportunities out there.

If you are going to compare the risk of syndications vs direct investments, you need to go beyond just talking about the risks of syndications.  While I agree that you have risk from the person running the syndication - fraud, competence, experience, conflicts of interest - all of that needs to be evaluated.  But you can't just talk about the risks of syndications without talking about the risks of direct investment.  In direct investment, to achieve returns that beat a typical syndication, you will some type of experience or expertise that gives you a competitive advantage over professional active, direct investors.  You will need greater market knowledge or some skill that allows you to generate greater returns than the professionals.  If you are just starting out - do you have that?  With syndications, you are hiring professional asset managers who (if you are selecting the right partners) have more experience, resources, knowledge and ability than you do - and they have a team working for them.  With direct investment, you will either need to do all of it yourself - or you will need partners - and then you will be right back to the risk mentioned for syndications in that your partners could have issues with competence, experience, fraud and conflicts of interest.

I have invested directly and in syndications.  I had very little knowledge or expertise that set me apart from the competition when I was investing directly.  I was not a good asset manager - I was lucky and got saved by market increases, but my properties did not perform how they should have, or how they would have with a more competent asset manager.  Now, I am a full time passive investor and I hire asset managers, through syndications, and my results are much better than when I was an active investor.

As mentioned above, the most critical action that a passive investor makes is selecting the operator/asset manager.  This is the active part of passive investing - you need to be able to vet the operator to make sure they are going to be a good steward of your capital.  It took me a while to find a process to vet operators effectively and now I only invest in a new operator if they are recommended to me by someone in my Community who I know, like and trust and who has already invested with that operator.  I still do all of the due diligence I normally do, but because trust transfers - I am starting ahead of where I would be if I didn't rely on my Community.  This is the reason that I believe that to be a successful passive investor in real estate syndications, you need to join a Community.  These are long-term, illiquid investments that are totally out of your control, so finding a group of like-minded people to vet operators and analyze deals is critical.  There are quite a few Communities out there, starting with BP and there are several that are more targeted directly to passive syndication investors.

Good luck!

[Carlos Ptriawan]

Quote from @Edward Parker Parker:

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

 syndication in multifamily is having more problem as well and most of the time is overrated, residential is essentially still performing better.
With syndication there's chance of 10-15% of your money being wiped out based on statistical track record.
You said 2% multiplier ?

based on statistic in good year their return is only 1.9% ; most median return is only 1.3-1.4%, you could get the same return via direct investment. 

with syndication you are essentially buying the economy, with direct rental you purchase something that you can manage by your own economy.

[Colin Higgins]

Lots of information in these comments, lots of views. I guess it boils down to what your end goals are. I personally am trying to collect homes that can produce income when I'm not using them. I like the idea of having something I can book in advance, use, and is paying its self off when I'm not using it. I like the idea of return on equity, I like that I can borrow against them, I like that they are in MY name, I like the idea of providing an experience and being of service to my guests. But if just want a return on your money and objectively are't attached to one strategy or another, then ya syndications have their perks in market like this.

[Ian Ippolito]

Quote from @Jim Pfeifer:

@Ian Ippolito made some great points and I will add a few additional thoughts.

You do not need to be accredited to invest in real estate syndications and there are quality operators who offer investments to non-accredited investors.  It is simply not true that any syndication that is open to non-accredited investors is low quality (I think when people post these generalizations with confidence that they are correct - you might want to seek an alternate opinion - it is an opinion after all...).  It is true that non-accredited investors need to look harder for investments because there are fewer opportunities out there.

If you are going to compare the risk of syndications vs direct investments, you need to go beyond just talking about the risks of syndications.  While I agree that you have risk from the person running the syndication - fraud, competence, experience, conflicts of interest - all of that needs to be evaluated.  But you can't just talk about the risks of syndications without talking about the risks of direct investment.  In direct investment, to achieve returns that beat a typical syndication, you will some type of experience or expertise that gives you a competitive advantage over professional active, direct investors.  You will need greater market knowledge or some skill that allows you to generate greater returns than the professionals.  If you are just starting out - do you have that?  With syndications, you are hiring professional asset managers who (if you are selecting the right partners) have more experience, resources, knowledge and ability than you do - and they have a team working for them.  With direct investment, you will either need to do all of it yourself - or you will need partners - and then you will be right back to the risk mentioned for syndications in that your partners could have issues with competence, experience, fraud and conflicts of interest.

I have invested directly and in syndications.  I had very little knowledge or expertise that set me apart from the competition when I was investing directly.  I was not a good asset manager - I was lucky and got saved by market increases, but my properties did not perform how they should have, or how they would have with a more competent asset manager.  Now, I am a full time passive investor and I hire asset managers, through syndications, and my results are much better than when I was an active investor.

As mentioned above, the most critical action that a passive investor makes is selecting the operator/asset manager.  This is the active part of passive investing - you need to be able to vet the operator to make sure they are going to be a good steward of your capital.  It took me a while to find a process to vet operators effectively and now I only invest in a new operator if they are recommended to me by someone in my Community who I know, like and trust and who has already invested with that operator.  I still do all of the due diligence I normally do, but because trust transfers - I am starting ahead of where I would be if I didn't rely on my Community.  This is the reason that I believe that to be a successful passive investor in real estate syndications, you need to join a Community.  These are long-term, illiquid investments that are totally out of your control, so finding a group of like-minded people to vet operators and analyze deals is critical.  There are quite a few Communities out there, starting with BP and there are several that are more targeted directly to passive syndication investors.

Good luck!

Every investor comes from their own unique place: unique financial situation, financial goals, risk tolerance etc.. So an offering that's great for one investor will be terrible for another and vice versa. So it's only natural that there will be differences of opinion.

As a conservative investor, the things that are important to me are factors like full real-estate cycle experience with little to no money lost, high skin in the game, conservative loan to value debt, no floating-rate debt, competitive fees and promotes, no juicing of returns with nonreal estate or junk-grade real estate debt etc.

 So for this reason I greatly prefer accredited offerings over non-accredited (where it's very difficult or impossible to find all of those things).

[Chris Seveney]

Quote from @Edward Parker Parker:

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

anyone noting 20%+ annualized returns right now would give me cause for significant concern. I would want to see the sensitivity analysis on that asset.

[Carlos Ptriawan]

Quote from @Chris Seveney:

Quote from @Edward Parker Parker:

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

anyone noting 20%+ annualized returns right now would give me cause for significant concern. I would want to see the sensitivity analysis on that asset.

 The problem with newbie investor is they just accept whatever the salesperson says.
So when an investor is saying "interest rate is high" , but then they can't correlate with the sales guy saying 2.5% EM.
 
There's intricacies why having 2.5EM is almost not possible when interest rate is high.

Until they have learned to understand the RISK (of any investment) and/or ever being wiped out in any investment, then they would accept whatever the sales guy saying to them. 

[Chris Seveney]

@Carlos Ptriawan

Here is the best investment opportunity according to the sponsor…. Proven business model….. his words not mine.

https://youtu.be/-Lnrr-SOvcc

[Carlos Ptriawan]

Quote from @Chris Seveney:

@Carlos Ptriawan

Here is the best investment opportunity according to the sponsor…. Proven business model….. his words not mine.

https://youtu.be/-Lnrr-SOvcc

 Yea that guy was an IT guy turn to multi family, but the way he mentioned in facebook seems like he is a newbie GP LOL.

By the way, for the serious note, here's my way of thinking and question to myself if I invest to a syndication :
- Is this the asset that's something that I understand or not ? yes or no
- If you have the money, can you become the GP/operator of this asset ? yes and no 
- Are you an AI or QP level investor, or not even certified at all ?
- Is this asset niche ? is the location niche ? is the operator specialized ?
- If we know all kind of syndication asset, and/or asset class, is there way for their track record or/and history to be opened just like if the are REITs or public investment ?
- If considered I'm QP, would I invest at asset class A,B,C,D and E? are they having the same reward/risk profile ?
- if no then which asset class has the best reward/risk from statiscal point of view
- what should be the highest performing and ighest reward/risk for future 5 years from now ?
 
Like someone in political-sphere said, "you don't know what you don't know".

Now myself know something that most people know that most people don't know, but I educated myself fast before I put money to someone else pocket. I may not even want to take a look at MF syndication as they're not the best performing asset class.

[Carlos Ptriawan]

Quote from @Edward Parker Parker:

So with Interests rates this high, Housing prices still high (but cooling off), property taxes increasing to catch up with the sudden spike in values; it appears really difficult to get into new a profitable rental property in today's market (Dallas DFW market).  Maybe in a few months or years, things will settle down, but things are very difficult right now.

So why not consider professional syndication investments. 6% CoC ; 2-2.5x multiplier; 20-22% total annualized returns. These results seem like a similar or better outcome than you can get today with a personal investment in a rental property. Plus you would have alot less involvement.

I know there are risks in these investments, but there are also risks in doing your own rental properties.  

So if you could take $100K in today's market, would you invest it in another rental property or would you consider an alternative investment?

Please let me know your thoughts! Thank you

 Here is the number from statistical perspective.

Historical Industrial IRR: 30%-ish with 0% risk default
Historical MF IRR: 15-18%-ish with 5-10% risk default 

Multifamily is not even the best three asset class in syndication world, so why shall I invest in multifamily if the amount of money to be invested is the same ? food for thought.

[Evan Polaski]

@Carlos Ptriawan  I am curious where you are getting the 0% default risk for industrial? In my readings, industrial demand is certainly falling from a tenant interest perspective.  You had Amazon pull out of many deals month ago, but beyond that most industrial demand is generally tied to consumer demand, whether you are looking at manufacturing centers or warehouses.  

To mirror everyone's input, I fall right down the middle.  

Are syndications better than direct investment? It depends on the actual investments you are considering.  There are good syndicators and bad, there are good houses to buy and bad.

Given this, it comes down to the ubiquitous: what are your goals?  REITs are a passive way to earn income through real estate.  They hold a high correlation to the broader stock market, so not the best diversification, and I have seen data they are actually more volatile than equities, but you don't have to be accredited.  You also get a 1099, so any possibility of shielding income through depreciation is not available in REITs.  You are taking on effectively all of the risks of the stock market, short term share value decisions, etc.  Public REITs are at the mercy of Wall Street expectations, so you can't always trust their decision making either.

Direct ownership is not passive to many.  Is it a full time job with one 4plex?  Typically no, depending on the condition of the property.  But you still need to manage the manager and prepare your own books, on top of anything you don't have the manager do.

And syndications have their own risks, as others noted.

[Carlos Ptriawan]

Quote from @Evan Polaski:

@Carlos Ptriawan  I am curious where you are getting the 0% default risk for industrial? In my readings, industrial demand is certainly falling from a tenant interest perspective.  You had Amazon pull out of many deals month ago, but beyond that most industrial demand is generally tied to consumer demand, whether you are looking at manufacturing centers or warehouses.  

To mirror everyone's input, I fall right down the middle.  

This is good discussion. I'm reading hundred of syndication track record including hospitability, self storage and multi-family.
My problem with multifamily syndication for example, is their IRR is pretty much comparable to residential.

Of course if you have more data point that would be great as well.

[Carlos Ptriawan]

Quote from @Evan Polaski:

Are syndications better than direct investment? It depends on the actual investments you are considering.  There are good syndicators and bad, there are good houses to buy and bad.

The biggest problem with syndication, is that they're "closed book". So, the best way to measure the performance of the player is to read their previous track record, but their track record is so private almost hard to decipher unlike public investment.

So what I'm saying is , from the perspective of investor, the biggest problem for us is to find the sponsor that overdeliver, rather than overpromise, based on their track record. 

It's so puzzing though, that different asset class and different sponsor could have different pattern of track record as well.

[Dylan Speer]

I work at a firm that specializes in underwriting DSTs and syndications and helping clients invest in them. Happy to chat.

Most clients find better returns in syndications than in their actively-managed rentals. 

[Bruce Lynn]

and as they all should say, past performance is not an indication of future success.

The last five years will look very different from the next five.

I think a lot of syndicators were/are not great asset managers over the last five years.  Get decent, not even great PM, and execute a very simple basic plan and you got rich...or at least the performance looked good.  I think there was very very little asset management.

This year and perhaps the next few years will be asset management heavy for the successful...and most are not ready for that or even know what it looks like.  Instead of a monthly 30 minute call with the PM, it may mean taking an office in a vacant unit and be there every day for hours checking on PM, checking on construction, assisting with marketing, and so much more.  No more set it and forget it.