living off syndication income

23 Replies

Is anyone currently supporting themselves primary with cash flows from syndication as a passive investor (or contemplated doing it)?  If so, how have your stress tested your returns to ensure sufficient cash flow during economic downturns?  Do you have any literature or resources on living off syndications as a passive?  For the syndicators or investment club members out there, feel free to jump in with your thoughts.  Thanks.

Mike

@Mike Dymski that's tough to pull off until you've been at it for 10,000 hours or more.  However, many people live of the acquisitions fees but that sacrifices wealth tomorrow for cash today. I started a management co so that I could re-invest my acquisition fees back into my deals. My management fee income keeps "the lights on" and more; so my investment dollars can funnel back into my wealth building bucket.  Robert Kiyosaki explains it best in my humble opinion. Build an operating business (in my case property and asset management) that generates income that can be funneled into assets that also generate income.  

Originally posted by @Ivan Barratt :

@Mike Dymski that's tough to pull off until you've been at it for 10,000 hours or more.  However, many people live of the acquisitions fees but that sacrifices wealth tomorrow for cash today. I started a management co so that I could re-invest my acquisition fees back into my deals. My management fee income keeps "the lights on" and more; so my investment dollars can funnel back into my wealth building bucket.  Robert Kiyosaki explains it best in my humble opinion. Build an operating business (in my case property and asset management) that generates income that can be funneled into assets that also generate income.  

 Thanks Ivan.  I am referring to the passive investors living off the investment income, not the sponsor living off syndication income.

@Mike Dymski lol! you clearly said that! :)

One more unsolicited opinion and then I'll shut up. I get this question a lot from potential LP's. My answer is nearly always the same now having been doing this a while. In most cases; unless you're allocating ~2million or more in capital, spread over a handful of deals; I wouldn't invest in a syndication for steady passive income. If you need the money to live, DON'T lock it up for 5+ years in a real estate deal you don't control. As a GP I'm extremely mindful of the personality of the investor. In other words I won't take someone's money just because they qualify. There's other factors. Hope that helps!

I have some commercial clients that do that as a part of their portfolio. They basically look at a spreadsheet each month. They have extraordinary wealth though with mid 8 to 9 figures net worth. They can put 500k here, another 1 million there etc.

Living off of passive income as an investor investing in syndicates you might need to be very conservative on numbers. You invest in 10 different ones as an example and plan on 2 to 3 failing and taking a small loss, a few that do a little bit better than break even, and 4 to 5 that do really well.   

There are plenty of funds that pay out quarterly dividends which in my experience have been quite reliable over the last 5 years. I just reinvest to compound but if I pulled them out it would be regular income.

@Mike Dymski we have hundreds of investors, each with their own unique story, but I'd be surprised if any live off of syndication income alone. Most make their living from a profession or a business and invest capital in syndication investments as a part of their diversified investment portfolio. 

That said, I sign the checks to these folks and we have a lot of investors that could live a pretty comfortable life from those checks alone...but people with that size of capital base typically don't live what ordinary folks would describe as "comfortable" lifestyles--their above average cost of living keeps them doing the things that built them that capital base to begin with.

There are plenty of funds that pay out quarterly dividends which in my experience have been quite reliable over the last 5 years. I just reinvest to compound but if I pulled them out it would be regular income.

Originally posted by @Anish Tolia :

There are plenty of funds that pay out quarterly dividends which in my experience have been quite reliable over the last 5 years. I just reinvest to compound but if I pulled them out it would be regular income.

Thanks Anish. Most everything has been quite reliable over the past 5 years...it's been one of the best real estate runs in history. I'd like to understand what the returns look like during a downturn.

@Mike Dymski every downturn will be different. 

That last crash one of the worst in generations, did not hurt multi family much. The crash of SFH sent people into rentals. Vacancies went down and rents went up. Banks did "extend and pretend" on performing properties rather than foreclose. Of course some properties crashed and burned but Multi family did much better than expected and probably the least hurt real estate category by the crash.

This is my perception as an outsider so People like @Brian Burke  or @Joel Owens , @Ben Leybovich please correct me if I am wrong.

Great conversation! I want to try and respond to the original question and reply to several comments:

@Mike Dymski I am not currently living off of my own passive investments through syndication but I am working towards exactly that goal. However, I do work for a firm that does real estate syndication and about 1/3 of our investors do live off of their passive income from syndication.

In reference to your questions about stress testing and how a real estate investment handles economic downturn:

This website is full of individuals who are working towards or who have achieved the ability to live off of passive income from their own single family home cash flows. I would put syndicated investments up against any of those because of a few simple points.

  1. It is more easily diversified. You can more easily own different types of property in different markets without building your own teams or relationships, and instead leaning on a group that does it professionally.
  2. Leverage is powerful. We all know it, but we don't want to have our butts on the line for too much debt. In syndication the limited partner is not on the hook for the note. So you get the benefit of using leverage to make bigger deals but you are not personally on the hook for the loan.
  3. It is ACTUALLY PASSIVE! I don't like when my "side" job takes up as much time as my 9-5! (This is after I have spent a good amount of time getting to know the sponsor)

So how do you know how it will do in an economic down turn? @Ned Carey made an excellent point that MFH did the best of any commercial segment during the crash. But, even so, the guys that had deals that weren't speculative, were in good locations (like any RE investment should be) and weren't over leveraged survived and thrived. Rather than worry about stress testing a single syndicate, I would suggest following these guidelines when looking at each individual syndicated deal:

  • Don't invest in a syndicated deal that is speculative. (Construction, development, is reliant on new deals yet to be inked. If you do, make sure you are being properly compensated for the additional uncertainty.
  • Don't invest if the debt isn't locked in long term
  • Don't invest if the deal isn't the kind of real estate you want to own in 10 years.
  • FINALLY...Don't invest in a syndicate that can't explain exactly what they did in 2008-2010 (This is a great question to stress test any syndicate in a single question!)

The truth of the matter is, that many of the people who live comfortably off of real estate investments are deploying upwards of $20MM into real estate and can comfortably live on $1MM a year. For those guys the investments we do are CRAZY good, because the average $20MM investor isn't buying a ton of $60k SFR. But for people like me, I would rather keep plugging away at my day job and create a steady TRULY PASSIVE stream of income. I will take the slightly lower return in exchange for being able to insulate myself by buying more doors, not have my name on the loan, easily get into different markets, and not need to spend 20 hours a week on my "side" business.

@Ivan Barratt I couldn't agree any more with your statement about the need to know your LP's finances, and being mindful of it as a GP. We do the very same when putting together an investment. Great advice and input.

@Ingrid J. I think anyone in syndication would agree with your statement, and say that the sponsor (your trust in them and relationship with them) is the most important success factor of a syndicate.

@Joel Owens Your comment "Passive income as an investor investing in syndicates you might need to be very conservative on numbers. You invest in 10 different ones as an example and plan on 2 to 3 failing and taking a small loss, a few that do a little bit better than break even, and 4 to 5 that do really well." Is essentially the warning and concern given to any investment in any asset class. You can live off of passive real estate investment in the same way someone can live off of any other investment. 

This is the second discussion about syndication I have seen in the last two weeks. I love the dialogue!

@Mike Dymski , the entire reason why every retirement projection software in the business allows you to quantify performance of a retirement portfolio is for exactly that goal - can you live of the passive potential income.  The psychology of the confluence and flow between desired active returns, vs desired passive returns, and industry created expectations is a really fascinating study.  

This may not be as nuts and bolts as your question desired but I'd say that you can absolutely do what you're doing if...

1. You can adjust your life style to accommodate your portfolio and leave the race of making the portfolio fit your life  style like @Brian Burke was saying.

2. You can generate real numbers.  What do you need in retirement - First see #1.  Secondly what can you really make.  It's counter intuitive but real passive returns that are lower than projected active returns can actually be better because you will again look at #1 and reality doesn't surprise you like it does so many investors who buy a duplex expecting unrealistic returns only to be experience the negative consequences of false expectations.

3. You can mitigate risk.  The reason active managed and speculative returns are sometimes higher is in part because of the risk factor.  But as several posters pointed out - not ever lower return has factored in risk correctly.  Returns these days are as likely to be based on what the market will absorb and what the syndicator desires.  And since the pressure of money looking for a passive home due diligence is lessened and you have a double edged crowd effect.  Returns drive down because of drive pressure and yet risk is not factored in because of the land rush to buy by unsophisticated buyers.  I see it all the time.  

One of the beauties of the syndicated or passive fractional markets is that you can do a great amount of due diligence and select where the national credit tenant and financial statements of the many times publicly traded companies guarantees are strongest and of have the longest track record (your comment about the life span of todays syndications is spot on).

The media has made us believe that we can work forever.   But the bottom line is that we'll all be passive investors one day.  Some never left their parents basement.  some will become passive in order to leave their energy to living life in other directions.  Some will only get there when active investing is no longer a physical or mental option.  Some will be forced into relying on the worst passive investment of all time - Social Security.  Since it's inevitable it's a good goal.  Just approach with thought and transitional planning.

@Mike Dymski In the 2008 crash there was NO safe asset class. Unless you were hoarding gold. If you want safe returns buy treasury notes but you need a lot of capital to live off passive income at 2% returns. I only have 5 years ish of data on real estate cause thats the time frame Ive been investing. But Im in a high paying W2 job so now just building capital. Final exit strategy may be a large apartment building or something like that for tax deferred higher returns. MF cap rates are way compressed now but hope for a a better opportunity in a few years.

@Mike Dymski and @Ingrid J. Hello - I'm an investor in non-performing notes. I frequently do analysis of my portfolio and - so far - for every $1000 I invest in notes, I'm getting $26 in passive income per month. That equates to a 31% return. On the road to getting an NPN to reperform, things are not always predictable but when you buy 1st mortgages as I do and know how to buy well, you generally always have multiple good exit strategies. I've also had several windfalls along the way. It's a pretty exciting business that I highly recommend! It might just be what you're looking for.

Gail

Thanks for everyone's replies...great dialogue and I appreciate the input. Is anyone willing to suggest a rate of return they would expect from a well diversified portfolio of syndications during good and bad times? I understand this is a loaded question and will vary based on asset class but think in terms of how you would position a portfolio and what you would expect if it were your sole source of income (and you were not ultra-wealthy). The cash flow on my direct owned real estate portfolio was largely unaffected during the last recession...my rents actually went up some.

@Gail Greenberg Interesting. Where do you buy those? Through official dealers? Why don't you PM me. I'd like to look into it.

As for the general discussion on syndication here, I gotta ask: many people who talk about syndication say it's risky. I can appreciate the warning, but in general is there a statistic that proves it? Like for instance, "30 % of all syndication deals fail to generate expected returns?" Link some articles here if you've come across something like it.

@Mike Dymski You have raised a very interesting question. I do believe that it's possible to live off passive income from syndications but amassing the capital needed to generate that kind of income will likely be a gradual process. I have been searching for formal literature about living off syndications but haven't found anything concrete. 

For my own planning, I have made conservative assumptions - during good economic times with no headwinds, I expect my syndication portfolio to provide 12% IRR averaged out across all deals. I expect some deals to do better than others and I expect some deals to barely break even. I invest conservatively, so barring catastrophic events, I do not expect complete principal loss. But @Joel Owens makes a good point that some deals will likely lose principal partially and I will need to take that into consideration. 

I also make the assumption that during a downturn affecting RE, my portfolio will provide 8% IRR averaged out across all syndicated investments.

On the other hand, I have "active" investments that I use primarily for long term wealth building and appreciation and they have some "speculation" built in. If these succeed, these investments will provide additional capital for passive investments.

It would be nice to hear from an investor who actually is already living off syndications. 

@Manish Bahety 12% is a solid figure to use however most deals won't achieve 12% till year 3 or more. Most C+/B assets start out in the 6% to 9% cash on cash range initially IF you're aiming for well operating assets that don't pose significant proforma risks.


Personally, I use the RichDad philosophy of build businesses that generate enough excess cash flow to allow me to buy income producing assets. It's why I started a management company first. Further, the forumla allows me to reinvest my passive income (instead of needing it for living life) into more deals, thus building momentum faster. If one doesn't find and develop other streams of income that buy the real estate it's usually a get rich very very slow outcome.

Happy Hunting 

I think this question was asked 3 years too early. I am not sure whether right now is the beginning of an economic down turn, but the syndication deals I invested in has had some decrease in distribution. I have had 2 that cut distribution in half and changed from monthly distribution to quarterly. I have only invested in deals with a preferred return. The majority is still distributing as promised. But because these are preferred returns, it should be paid out/caught up in future years. I have also noticed the projected IRR is lower this year compared to 2 years ago. Of course we won't know what the real return is until the property is sold.

Really interested in learning what other investors experience is, especially those who participated in deals without any preferred return (ie. straight split) .

let's say your monthly burn rate is $10k which is 2x of the average American's monthly expenses. in order to get $10k/month, you will need $1.7M deployed at 7% preferred return. any additional return will grow monthly passive income for the future (assuming reinvestment).

Being able to invest $1.7M in syndication while being diversified across multiple asset classes probably means lifestyle needs more than $10k/month.

Originally posted by @Mike Dymski :

Is anyone currently supporting themselves primary with cash flows from syndication as a passive investor (or contemplated doing it)?  If so, how have your stress tested your returns to ensure sufficient cash flow during economic downturns?  Do you have any literature or resources on living off syndications as a passive?  For the syndicators or investment club members out there, feel free to jump in with your thoughts.  Thanks.

Mike

Yes, the cash flow from my passive investments support myself and my family.

1) What I personally do is stress test every potential real estate investment with local data real estate for that asset class (multifamily, single family homes, office etc.) from at least one recession and preferably multiple. That provides stress levels for vacancies and rental drops. (And I usually assume the investment is able to hold until price drops recover...unless it is a short-term investment in which case that has to be stress tested as well).

Every recession is different and the great recession was actually not that bad for multifamily but some other recessions were worse. So it's better to get multiple recessions worth of data when possible. And then I usually add a safety factor (for example I will apply 1.5 X or 2x stress) since it's possible future recession could be worse.

I take the pro forma at the worst point (which is usually year zero) and then apply that stress and see if I could live with the results or not.

2) I tie this into a timing bucket portfolio allocation strategy to keep cash flow steady. Someone who depends on their investments for income cannot afford them to suddenly dry up. On the other hand, many of the good opportunities require tying money up for a significant period of time and not receiving any income.

So, I split my portfolio up into multiple timing buckets. There is the portion for cash and cash equivalents that cover living expenses and emergency expenses. Then there is the short-term bucket for less than one year. Another bucket is 1 to 3 years. Another one for 3 to 5, 5 to 7, 7 to 10, 10+ etc. The idea is that this creates constant cash flow, even though many of them may not be producing income right away. And when one of the buckets empties its income/cash flow, that is redeployed to other buckets to maintain that flow.

3) Core-satellite approach: and I also pair this up with a core-satellite approach. I have the majority of my investments in very conservative, boring assets that aren't high-yield, but provide the boring core of my portfolio. And this then enables me to feel safe enough putting a small amount (the satellite) into riskier investments. 

It’s totally possible to use the cash flow from any investment (real estate or otherwise) to live a middle class life, as long as the investment is at least 5-10 MM$. But those who have 5-10 MM$ to invest are not looking to live off the cash flow from the investments - they have enough cash holdings and other income streams to keep reinvesting the cash flow.

Though I’ve heard the folks from FIRE movement can live off $1k/month since they are happy to live as students forever.