Posted 29 days ago

Why I do not invest in Real Estate syndications.

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If you're a real estate podcast junkie like me, you definitely have noticed the clear shift towards real estate syndication in the multi-family space over the last couple of years especially.As deals became harder to find in single family and smaller multis across much of the desirable markets,the allure of pooling investor funds to acquire larger assets became a sort of self-fulfilling prophecy.Books that were mostly hurriedly written flooded the market pimping the upsides of this strategy.The argument for was simple and convincing:it is better to own 1% of a large deal than 0% of no deal.

Personally,I could not help but notice that the popularity of the idea coincided with the rise of real estate crowdfunding.The likes of Realty Shares and Realty Mogul raised a bajillion dollars practically overnight making it very easy for everyday real estate aficionados to own small bites of a mega deal in rural Tennessee at the click of a mouse.A few of my friends experimented with the crowd-funding route, tossing $5000 into this debt offer and $10,000 into that equity offering.These punts yielded mixed results anecdotally, as an equal number seemed to have great experiences to share as did absolute nightmares.

To be fair, no real estate niche is 100% fail-safe or iron clad.Money has been lost in a large single family portfolio as well as a personally purchased medium sized apartment complex.It is also certainly true that in the end, every investor will run out of money to invest in more properties if they decide to go it alone trying to rapidly scale up their portfolio, and real estate is most assuredly a team sport at all levels. 

However, running out of capital to invest is not the perfect argument it's crafted to be since the reason we all went into real estate as an asset class to begin with was that we could always partner with banks to fund our deals.The magic of only coming up with a fraction of the cost ensures you are always going into any deal with a partner, except the bank is always the passive partner that is never going to need a K-1 or an offering memorandum. 

As in all things in life (like choosing a spouse)for instance, it's incumbent upon us to examine our individual personalities regarding whether a proposed partnership would be a good fit or a disaster in waiting.In 2007, when I lost more than $130,000 in the stock market,I learnt a permanent lesson that stuck with me till today.I discovered that I was a control freak.I needed to always know how my actions directly related to my results, and most often like to retain the ability to change my mind even if others would find such reversal a stupid idea.

Seeing how much control I didn't have on how my stocks performed in 2008 despite all the information I had consumed for several months regarding value investing and how to analyze a company's fundamentals scarred me for life.It made a real estate investor out of me.The safety and assurance that I was taking sole responsibility for the calls i made and the risks I decided to take was a calming refuge.

Having been a Pro-member on BiggerPockets for as long as I've been has its perks.It gives one a front row seat to see in slow motion the interesting evolution of the component parts that make up this mammoth industry.

I watched in amusement as one member arrived as a total newbie in 2018 with a welcome post, voraciously consuming unsolicited counsel on the member forums for a few months and then posted a "success story" of his deals after 6 months.Within a year, he had his own podcast and is now buying large apartments as a syndicator pooling investors' money.

To be clear, this is not a hate post.I certainly do not begrudge people "crushing it" in record time.Nonetheless, as a 'senior' member of this community who has seen this movie before,I do feel a lonely cautionary voice in the wilderness is needed at this point.

We are in an environment of unprecedented cap rate compression and record low interest rates which is only headed in one direction after this is all over.Yes, make no mistake, the music will soon stop.That has very little to do with an upcoming election and is regardless of who wins the White House or who controls congress after November.

If you've listened to Kevin Bupp and Rod Khleif, you know what happened to their portfolios in 2008.These were no amateurs, as a matter of fact, they had many years of investment experience when the music stopped.They both weathered the storm and came back stronger and that is why I remain a shameless fan of both men till today.Several others were not that lucky, and you will never hear their names.

In this space today, there are investors and there are educators.The educators have taken over the habitat.That is why there are now more podcasts on real estate than I can get through in a working week.Real Estate education is so very lucrative now that it is possible to make way more money from podcasts and books than in actual real estate investment for some gifted marketers with smooth tongues and gifted content creators.

We are in the information age after all, and youtube millionaires are now perhaps outpacing patient real estate buy and hold landlords in the passive income/ cash flow game.Belonging to a $25,000/year mastermind and attending a syndication bootcamp does not insulate anyone from catastrophe.

 More than any other business, deciding to invest in a real estate syndication is a declaration of faith in the deal sponsor.In many ways, that faith far outweighs the faith owners of Tesla shares must have in Elon Musk.And Musk is a one in a generation entrepreneurial genius inventor.

Like many seasoned real estate investors,I decided long ago that wealth-building was a life-long game of patience and perseverance.On both counts,a real estate syndication fails the test.

Most syndicated deals have a hold period of 3-7 years after which the exit strategy involves selling.The few that attempt to hold on to the asset via a refinance run into uncooperative investors who demand their seed capital back for various reasons,often resulting into a compromise to either buy them out or risk a legal battle.The facts of the matter are very basic:if it's not your deal,you don't make the big calls.Conversely,if it's not your money,you don't get to decide it's final destination.

Now there's a good reason I never got into the flipping niche either.I'm not a transactional guy.It always felt like slaughtering the hen that lays my eggs,and I love my eggs to bits every time they are laid.It's why I keep going back to the hen.

In the end,we don't need 1000 units to achieve financial freedom,we just need a handful of well acquired cash flowing assets to arrive at that place of peace.With some patience and due diligence,most people can get there without sleeping with 75 strangers every 3 years only to end up with no portfolio and a bagful of inflation susceptible cash with little to no tax advantages.That's where we did not want to be in the first place.

If you do succumb to the temptation and end up being one of the few deal sponsors that actually look the part and take care of investors' money like it's yours,do make sure you haven't "quit" one job that you hate just to work in another that is even more soul-crushing.Managing multiple syndicated deals as a good deal sponsor can be big business,and big businesses can very easily turn into time-devouring leeches.

Covid has shown us all we are nowhere near capable of seeing 3 months ahead,let alone 3 or 7 years.An asset is only really worth what the next buyer is willing to pay for it,no matter how much "forced appreciation" we have projected to investors in a rent drop environment.When balloon payments come due,thou shall sell or refinance,and good luck refinancing if the LTV is suddenly inverted.When the pieces suddenly don't fit the puzzle in front of us,the sinking feeling in the bottom of the stomach can be incredibly gut wrenching.

Be careful.

A voice in the wilderness,

Jacksonville FL.

Comments (3)

  1. Great article @Charles A., I fairly new at this game and I have to admit I was drawn to the syndication idea but have decided instead to pursue the boring buy and hold of small multi's. I feel like if I ever went the syndication route, I would have to know and trust the deal sponsor. as far as being the deal sponsor myself, I could see how that could easily turned into another job, and as you mentioned the point was to avoid that in the first place. 

    1. @Steve Vaughan @Bernadeau C.

      As always,nothing is ever all good or all bad.There are certainly several great experiences with syndication as many BP podcasts highlight.

      Hopefully,what I succeed in doing on the post is to remind investors to examine their own peculiar personality and experience level to fully evaluate the risk especially given the specific set of circumstances the industry is navigating at this time.

      Happy investing!

  2. I heard your voice in the wilderness and appreciate your article, Charles.  I may buy into a syndication someday when everybody and their brother isn't a sponsor.  Too many fees. No control or say. Too much financing risk. 

    I like your flipping analogy being like eating your hen.  I like the eggs, too.  Eggs keep my time freedom. Flipping is transactional and keeps you hustling.