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@Carlos Ptriawan an additional question is why Bigger Pockets does not print more posts about how to analyze syndications and the red flags involved.
honestly I do not think that is their responsibility on the forums. They are starting passive pockets which appears geared toward passive investments. Most of the posts are from members, which there are a lot of posts about there how to analyze them, the issue is most people IGNORE them.
Now when you want to talk about BPCON or other events and books, podcasts etc. They are a business, and not knocking them, but what sells? Someone getting rich quick in real estate and sharing their story or the guy who builds a $25M portfolio over 10-20 years? It is the former because people want it now.
the problem started when people is buying without thinking of the risk.
most people only want to buy the income stream from rentonomics.
the problem with basic investors are they do not understand when we invest to equity or even debt is that we are buying the spread actually.
in cheap money financial regime, with interest rate of 1% and cap rate of 7% we have positive 6% spread which I feel the risk/reward is sufficient to proper for any rentonomics to run.
but we're in expensive money regime now with interest rate of 5% and cap rate of 3-4% (depending on class) so we have negative spread of 1% where it's guaranteed investor would lose money.
there's also issue with supply especially in sunbelt.
i meant it's not the fault of GP but it is the fault of LP mosty because they do not understand all these risk.
when interest rate is high like these, obvious choice is to move from equity investment into debt investment (conservatively of course).
when cash could generate s much as money as when we work, obviously we can also try to add more allocation to cash position rather than equity investment.
And all of these are actually predictable, when Fed prints gazzilion tons of money during covid, the problem in 2024 is expected to happen.
What? The GP’s are not at fault?? Are you serious? Do you even know how the syndicators operate? The GP’s take advantage of unsophisticated retail investors and lure them in with promises of high returns, then they take stupid amounts of risk with that capital - acquiring run down properties at ridiculous prices (2%, 3%, 4% cap rates)and leveraging them so much with FLOATING rate debt that they basically have 0 equity in the deal. Look at Tides Equities, who is the most prolific offender. Between 2020 and 2022 they acquired something like $6B worth of real estate, more than tripling their portfolio…it is impossible for all those investments to be purchased at reasonable prices because if they were, competitors would also acquire them. The ONLY way for these syndicators to win every deal is by paying way over the competition. And why do they do this? Fees, fees, and more fees. LP’s are charged a fee at acquisition, renovation, asset management, disposition, so when the investment goes south, only the LP’s lose money while th GP’s made it out like a bandit with all the fees and 0 equity in the deal. This is how syndicators operate and you have the balls to say that they are faultless? That’s the equivalent of your financial advisor charging you a management fee, investing all you capital into crypto or penny stocks, and when your portfolio goes to 0 they say to you “well you should have known the risks.” And you’re saying the financial advisor is free of fault? I’m not saying the LP’s are faultless, but they unsophisticated and naive. The GP’s know this and prey on them. So no, the blame does not primarily lie with the LPs. The GP’s are primarily to blame.
> GP’s take advantage of unsophisticated retail investors and lure them in with promises of high returns
The reason syndications are restricted to accredited investors is an attempt to restrict the offers to sophisticated investors. You could state high income or high net worth does not equate to financial literacy, but without an actual test it may be the best indicator.
Investors have to do their due diligence. They have to recognize risk versus reward. They have to take responsibility.
Between 2012 enter and 2021 exit or near exit, virtually every RE syndication performed well. Many returned near 20% annualized returns. Did you think these returns came without risk?
I am in a syndication that for the first time I am concerned about loosing some of my investment. Did I think this investments had zero risk? I posted multiple times over the last few years that the previous returns of RE syndications were unlikely to continue. Even though I posted this, I chose to enter 3 new syndication (2 fully RE related and one an RE hybrid). I recognized there was risk. I thought the reward justified the risk, but it appears one may not preserve my investment (time will tell). Regardless if I lose my initial investment or not, I am responsible. I analyzed the risk and reward and decided to invest. I knew the fed had announced intent to raise rates. I thought it unlikely that any time soon we would see mortgages at or near 3%. I still chose to invest believing in their plan and their ability to still produce an LP return that warranted the risk. I was not investing in RE syndications that were solely going to rehab and improve management. I was investing in more sophisticated value add offerings.
The GPs find the best opportunities they can recognizing that the risk/return outlook needs to be able to get LP investors. The present their syndication opportunity to potential accredited LP investors who do their due diligence and either invest or don’t. The due diligence The GP then attempt to maximize the profits for their benefit and the benefit of the LPs.
I have little doubt that active RE investors can produce a better return than RE syndications. However, RE syndications can produce good passive returns, but they come with risks. LPs need to understand the risks versus rewards and make educated decisions. They must recognize their responsibility.
I wish those invested in Ashcroft capital a best case outcome.
I'm not really sure why you are responding to my comment with this wall of text that at first glance appears to refute my position that GP's are to blame, but does not actually provide any argument. As I stated, LP's are not without fault, so your rambling about LP's needing to understand risk does not refute anything that I've said. I agree that LP's need to know the risks of their investments, but you can't provide a blanket argument that anytime LP's lose money that it is their fault for not knowing the risks. Every situation is different and in this specific case in regards to the syndicators, I am saying that the syndicators are primarily to blame. Let me provide you with a couple scenarios and see if you can draw some parallels to the syndicators.
1.) Leading up to 2008, mortgage brokers and banks participated in predatory lending. They would target low income borrowers with low credit scores (hence the "sub" in subprime mortgages) and foreigners who were not fluent in English and provide them mortgages, often times more than one. These borrowers who, in reality, could not actually afford these mortgages and were not financially literate were crushed under the weight of all the debt and forced to file for bankruptcy, while the mortgage brokers and banks collected their fees. This would eventually cause the 2008 Financial Crisis. These mortgage brokers and banks, who are suppose to have the borrower's best interest in mind, took advantage of naive, unsophisticated borrowers to make a profit.
2.) Juul, an e-cigarette company, was initially founded with the mission to help cigarette smokers break their addiction. However, they eventually became blinded by profits and began heavily marketing to high schools students. These marketing techniques included bright attractive ads, giveaways at concerts and festivals, flavors, and even going so far as giving presentations...in high schools. These were the same tactics that the big tobacco companies used in the mid to late 1900's. Juul took advantage of naive high schoolers to make a profit and was eventually banned by the FDA
3.) Scams on the elderly. This is pretty self-explanatory, but in case you are not familiar with what these are, scammers target the elderly with promises of winning free prizes or scare them into believing they have lost money and the only way to win the prize or recoup their money is by providing their financial information. These scammers take advantage of naive seniors to make a profit.
Now let's analyze what syndicators do. Syndicators primarily use social media (Linkedin, Instagram, TikTok, etc...) to boast their financial success and reach their target audience and potential investors (Do you think social media such as TikTok is a great place to find sophisticated investors? Or do you think it is a great place to find unsophisticated investors)? Once the syndicators have successfully raised funds from
very sophisticated investors through TikTok (this is in italics to indicate sarcasm) they then use those funds to purchase as much real estate as possible. These syndicators have a financial obligation to their investors, but proceed to overpay for all their properties and encumber the properties with as much floating rate debt as possible. The syndicators then charge fees that are much higher than their institutional counterparts such as 5% acquisition fees, asset management fees, disposition fees, etc...).
Are you able to draw any parallels between the mortgage brokers/banks of 2008, Juul, and elderly scammers to the syndicators?
If you are able to draw parallels, but maintain your position that syndicators are not to blame, then do you also agree that the mortgage brokers/banks are not to blame and that the financially illiterate borrowers ShOuLd HaVe KnOwN tHe RiSks Of OwNiNg ReAl EsTatE AnD MoRtGaGeS? Do you also agree that Juul is not to blame and that the naive high schoolers ShOuLd HaVe KnOwN tHe RiSks Of VaPiNg? Do you also agree that the scammers are not to blame and that the elderly (who are all adults) ShOuLd HaVe KnOwN tHe RiSks Of FrEe PrIzEs?
If you are unable to draw parallels, then let me help you. Similar to the mortgage brokers/banks preying on low income/low credit borrowers, Juul preying on teenagers, and scammers preying on the elderly, the syndicators prey on unsophisticated, naive investors. The key words here are unsophisticated and naive. The mortgage brokers KNOW the low income borrowers are financially illiterate and target them as a result, Juul KNEW teenagers were naive and easy to manipulate, and the scammers KNOW that the elderly are easy to trick. In all three of these scenarios, the perpetrators are very aware that their victims are unsophisticated and target them due to their lack of sophistication, just as the syndicators do - someone with an MBA/finance degree, who works in real estate finance, who understands risk, and who understands there is no such thing as easy money does not reach out to the syndicators. It is the naive recent college grad, who worked for a year and saved up a couple thousands dollar and sees the lavish lives of these syndicators who does. The syndicators use social media to filter out the sophisticated from the unsophisticated.
Now that we have covered how the syndicators raise funds, let's discuss their actual investments. In order to win every deal, the syndicators must overpay. How do I know they overpay? Because they are paying 2%, 3%, 4% cap rates for the properties. New York City doesn't even have cap rates this low, let alone Fortworth, Texas or Tempe, Arizona. Any sophisticated and honest real estate investor would know these cap rates are ridiculous and you could easily verify their absurdity with cap rates of comparable properties that have sold. The syndicators then leverage the properties up to 80%-90% LTV, which once again any sophisticated and honest real estate investor knows is ridiculous.
So just as I told Carlos Ptriawan that he is wrong, so too will I tell you. You are wrong.
