Looking for experiences form other passive investors
Denise SuppleeBusiness Member
Realtor · Willow Grove, PA · Member since 2017 · 1k+ posts · 657 votes
Spark Rental Co-Investing Club583 Reviews
Looking for experiences form other passive investors
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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votesMy issue with this question is that I don’t think most passive investors can explain where their returns come from. They know whether the checks arrive. You see this on BiggerPockets, where steady payments often seem to be enough for a glowing review.
I review a lot of syndications for LP clients. In many deals promising steady payments and fixed returns, the properties don’t generate enough cash to cover those payments or investor redemptions. The money comes from excess capital raised or continued fundraising. That doesn’t necessarily mean the real estate is bad, but the payments depend on more than real estate performance or GP execution. Early investors may have a good experience and recommend the investment without realizing that the new money their reviews help attract is needed to keep paying them.
Therefore, I would recommend asking those who respond to explain how their investment return and/or capital redemption was generated. With real estate becoming less liquid due to financing constraints and it being increasingly difficult to raise equity you are starting to see what was perceived as the "safe" steady fixed returns that most on bigger pockets write glowing reviews about showing cracks.
5 Replies
- 2dStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
My issue with this question is that I don’t think most passive investors can explain where their returns come from. They know whether the checks arrive. You see this on BiggerPockets, where steady payments often seem to be enough for a glowing review.
I review a lot of syndications for LP clients. In many deals promising steady payments and fixed returns, the properties don’t generate enough cash to cover those payments or investor redemptions. The money comes from excess capital raised or continued fundraising. That doesn’t necessarily mean the real estate is bad, but the payments depend on more than real estate performance or GP execution. Early investors may have a good experience and recommend the investment without realizing that the new money their reviews help attract is needed to keep paying them.
Therefore, I would recommend asking those who respond to explain how their investment return and/or capital redemption was generated. With real estate becoming less liquid due to financing constraints and it being increasingly difficult to raise equity you are starting to see what was perceived as the "safe" steady fixed returns that most on bigger pockets write glowing reviews about showing cracks.
- 1dCraig De BorbaPro MemberInvestor · FORT WORTH, TX · Member since 2020 · 24 posts · 5 votes
@Stuart Udis Sounds like you're almost describing a ponzi scheme.
- 1dRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
My favorite investment is a large retail operator, operating for 40 years. No PG on his debt, but has weathered cycles. Its been over $500k invested across 3 years...
- 1dCraig De BorbaPro MemberInvestor · FORT WORTH, TX · Member since 2020 · 24 posts · 5 votes
I've been a direct owner of SFR and multifamily, and I'm also an LP in two syndications. I would never invest in another one.
I’m fully convinced you won’t get wealthy investing in syndications, but you will help the sponsors get wealthy. I have yet to meet anyone whose syndication return beat a HYSA, and I’ve met about 10 people who either lost money or were very dissatisfied with their return.
I won’t disclose names, but to answer your specific question about “communication, follow through, and how they handled things when a deal didn’t go as planned”:
The groups I’ve invested with positively frame every communication. It’s obvious things are not going well, yet everything is framed as if it’s good. That’s gaslighting.
Most sponsors learn how to raise money, but they don’t know how to run a business. They know nothing about brand building, marketing, or operations, so they outsource everything without any first-hand experience. Don’t get me wrong, you need a team. But when you take people’s retirement money, promise returns that never materialize, and don’t have the experience you portray, what does that make you?
Some sponsors will claim many “successful exits,” but that doesn’t mean what you might think it does.
If you’re considering investing in one:
Have a great attorney fully review the agreement.
Have it revised so it protects you. If the sponsor won’t agree, walk away. Most people don’t know this, but you can negotiate terms.
Speak with as many of their past and present investors as you can.
Research lawsuits, foreclosures, DBAs, and entities. Dig under every rock during due diligence.
I’d also agree with Stuart Udis’s comment. Many people promoting syndications or sponsors haven’t even invested with them.There may be good passive syndications out there, but there are far more that are not good investments.
- 5hStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Craig De Borba It sounds like you’ve had some pretty bad experiences, and sponsors putting a positive spin on bad news deserve to be called out. But I don’t think those experiences support the conclusion that syndications won't beat the yield on a savings account. Especially if you know how to vet syndications properly. The underlying issue continues to be the inability to adequately conduct diligence on the real estate/investment opportunity and if you can't do that successfully then yes, you should not be investing in real estate syndications.
Ask retail LPs what they want, and 99/100 want a short lockup and returns higher than they could achieve owning real estate directly, despite sharing the economics with a sponsor. Those expectations are a major issue that doesn't get enough attention.
The bad sponsors cater to those expectations with high leverage, aggressive underwriting and unrealistic timelines. That leaves very little room for problems. Execution gets rushed, and when something goes wrong, the deals generally implode. These were never viable business plans, they were geared to manufacture exactly what the LP wanted, which was always impractical if not impossible to produce.
Meanwhile, offer those same 100 retail investors a ten-year hold, more modest projected returns, low leverage, solid underlying fundamentals and a meaningful investment from the GP, and they can't be bothered with that investment opportunity. That doesn’t excuse poor management or misleading communication. Sponsors are responsible for what they sell and how they operate but in many instances they are selling exactly what most retail LP's are asking for. Like I said, this deserves far more finger pointing than it does, because its the same LP's who are screaming from rooftops how they were robbed as soon as the deal goes bad.
I’d also push back on the idea that an individual retail LP should expect a sponsor to materially rewrite the operating agreement. Having an attorney explain your rights and the risks is valuable even if nothing gets amended. What I often see is a pile of side letters giving different investors different rights and that turns messy quickly and if a GP is willing to do that, that's a cure to run.
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