All Forum Posts by: Brian Burke

Quote from @Amit M.:

I’d like someone to show me syndicators that said, “nope we’re not buying more deals because we don’t think we can make a decent return for our investors.”   

I sold most of my portfolio between early 2021 and May 2022 and haven’t bought anything for over two years for this exact reason.  There are a few of us out there that run lean enough, and are capitalized enough, to sit out when conditions warrant. My opinion is this is one of those moments.

Maybe that makes me persona non grata for podcasts and conferences that want to project an upbeat image on Multifamily, syndications, or real estate in general, but I can only call it as I see it.

If you are purchasing at a true foreclosure auction such as a trustee’s sale in a deed of trust state or a sheriff/court auction in a mortgage state, you will receive a receipt for your funds, and soon thereafter, a deed. Nothing more, nothing less. After you get title, you are on your own to figure out everything else.

@Scott Trench you know I love you man, and we often agree, but in this instance I think you are being unrealistic and idealistic.

I'm not sure why you want sponsors to meet this metric--is it vengeance, i.e. "I want them to lose if I lose", or is it an attempt to achieve an alignment of interest?

If it's vengeance, I get it.  No one wants to lose on the watch of someone who wins.  But this concept of potential loss hovering in the background doesn't make the sponsor any more competent, honest, experienced, and so on.  

If it's alignment of interest you seek, I have bad news.  The dirty little secret is that alignment of interest in a sponsor/investor relationship is impossible.  The simple fact is these interests are not aligned, even when the sponsor has money on the table alongside the investors on the same terms.  I wrote a whole chapter in "The Hands-Off Investor" about this--not only how alignment is impossible, but how a significant portion of the sponsor's net worth invested in the deal not only fails to create alignment, but can actually further enhance the misalignment.

Don't get me wrong--there is nothing wrong with sponsors investing in their own deals.  But there is something wrong with investors thinking that it matters--or at least that it matters in the way they are thinking it will.

What is important is finding a sponsor that has experience, a track record, a strong management team, a strong balance sheet, and perhaps most importantly, a brand and reputation to protect.  On top of that, you want someone who understands that their interests are not aligned with yours and can and will prioritize and balance your interests over their own.  That trait can't be measured in dollars.

If your hard-stop is 10% or 25% of net worth invested into each deal, you'll be limited to sponsors who are topped out at three to eight deals (lenders require sponsors to meet certain net worth and liquidity thresholds, so that means that at least 10% to 25% of their net worth has to remain liquid).  

That doesn't bring you a sponsor with a breadth of experience.  Now you'll be invested with only small-time syndicators who have so much money tied up in deals they'll have few resources when things go wrong, will not be able to ride out adverse markets, will be forced to "do deals" just to keep their lights on, and might make decisions far adverse to your interests just because they are painted into a corner.  This is all the opposite of what you want as an investor.

@Dominique Canlas, start here:  www.BiggerPockets.com/syndicationbook 

I appreciate the vote of confidence, @Steve Vaughan.

@Doug Henderson, there aren’t a lot of syndicators with multiple cycle experience on BP—as you’ve astutely already pointed out, many of them started in the last several years as a rising tide has lifted all boats.  There are a few, however.

I can’t confidently say I speak for everyone, but I’d like to think that any syndicator who has been through adverse cycles and underwrites conservatively isn’t buying anything right now. I haven’t bought anything in two years and using my underwriting I couldn’t get anywhere close to a price even motivated sellers would accept. 

Someday that’ll change...

What you are seeing is likely depreciation recapture.  Look at the starting capital account balance on the K-1.  If you invested $100K and the starting capital account balance is $25K, that means your depreciation losses likely exceeded income by $75K (there are nuances to this but this is the general idea). 

So if you got $200K back at the sale, $100K is profit, $75K is recapture (taxable), and $25K is return of principal (non-taxable).  There is also $75K or capital return but it’s in the recapture so it’s taxable.

I doubt that the LPs are getting taxed for the GP’s share.  If that’s even legal it would be highly unusual.

@Ana Vhan you can go the retail route and invest in REITs on the public markets, or invest in homebuilder stock.  Or you can go the private placement route, investing in passive real estate syndications.  This is a whole other world, so if this concept is new to you I recommend reading up on the topic before you invest a single dollar.  There are a lot of alligators in the pond.  

BiggerPockets happens to have a book on the topic written by yours truly--it's available here:  https://store.biggerpockets.com/products/the-hands-off-inves...

Cap rate is calculated by taking the TRAILING NOI, typically the trailing 3 months annualized effective gross income minus trailing 12 month expenses, divided by the purchase price. You don't calculate it using income that you EXPECT to achieve, nor do you include ancillary acquisition costs.

Your example 1 is called Yield on Cost, which is a different than cap rate--but is ultimately a better tool to use to evaluate investment performance than cap rate anyway.  Example 2 would be called a proforma cap rate, which is useless unless you are a broker.  Brokers use it to entice buyers who don't understand that cap rate isn't a measurement of investment performance.  

Here are some articles that might help shed some additional light:

https://www.biggerpockets.com/blog/capitalization-rate-defin...

https://www.biggerpockets.com/blog/real-estate-cap-rate-prop...

Quote from @David Lilley:

 

cap rates are a sensitive subject for equity right now, so it must be taken into account.

Agreed, however I’d counter that’s only because of a) the equity decision maker has some of the same misconceptions of cap rate as described in the article or b) the sponsor hasn’t done a good job conveying why the going-in cap is either reasonable under the circumstances or doesn’t matter.

Nevertheless, if the equity still says “no” none of this matters anyway.  So you are right that it does play some role in an acquisition decision, like it or not.

@TJ Woolum, cap rate is, in my opinion, one of the most overrated and misunderstood concepts in commercial real estate.  Rather than rehash my theory and arguments here, I'll just point you to two articles I wrote for the BP blog 3 years ago--every word of it is just as relevant today.  I think these will clear up a lot of your questions, and misconceptions, about cap rate.  Here are the links:

https://www.biggerpockets.com/blog/capitalization-rate-defin...

https://www.biggerpockets.com/blog/real-estate-cap-rate-prop...