Investor · San Jose, CA · Member since 2015 · 89 posts · 46 votes
I was wondering why an investor would continue buying houses and small apartments, building up their portfolio to dozens of doors or more. They keep brrrr-ing and brrr-ing and then get to 10 loans, then I guess they get private money or portfolio loans to continue acquiring more doors. At that point, they are probably an accredited investor and can buy into syndications which give very favorable returns. The General Partners do all the work and the Limited Partner goes for the ride and gets good cash flow and shares in the profits while being totally passive. The syndicators have the track record (easy to check with a little research) and do all the work, vetting properties, etc.
So, why buy SFRs and small multis when you can just buy into syndications and kick back and let the pros do all the heavy lifting? After acquiring 10+ doors, instead of adding more doors, why not instead of buying 10 more doors, buy into 10 different syndications? I've done some research and partnering with the pros just seems like a better choice. I've just started investing into them and am looking to scale. What would you do?
Unfortunately, it's not that simple. These opportunities carry a lot more execution and market risk than advertised; hence, the high returns.
I invest both actively and passively and they both have their pros and cons. This question is more nuanced than just an investor's goals and control preferences. It's about the properties...and the operators...there are good, average, and bad ones for both. And about the commercial real estate market.
Too bad nobody would like to come up with the real number. The question is great but no one dig deeper to the number. To answer the question even more, we need to characterize good MF Syndication which for me at least: - their actual number in the past is better than their projected proforma - their skin of the game is high - good waterfall - high IRR and twice of the return of investment can be achieved within 4 years when the average is 6 years.
What's lacking actually we don't have MF Syndication Portfolio Ranking/Analyzer compare to its peers (I've seen one but only from one sponsor). If we have that data as a comparison, we cay say perhaps, YES the TOP 20% Syndicators beat the Single Family/MF Investments, but the rest of the syndicators are just following the market dynamics/mediocre.
What I'm saying is that it's easy to buy a rising stock when the whole market is up, but finding a syndicator that performs like Tesla/Amazon is very hard.
@Johnny Lau I think this question comes up very frequently at a more base level, whether to be an active investor or passive investor. I'm actually finishing up an ebook exactly on this topic so I can say that in my opinion it entirely depends on the person and their situation.
The following variables and how a person fits into those variables will likely determine either actively investing (running/majority of the entire deal) or passively investing in a deal (investing in other's deals) :
Time
Capital
Knowledge
Risk/Responsibility
Control
Location
Career / Passion / Purpose
With regards to SFR and small multifamily vs syndication, very often the above variables will dictate or correlate in some way why an investor would or would not choose one or the other.
I was wondering why an investor would continue buying houses and small apartments, building up their portfolio to dozens of doors or more. They keep brrrr-ing and brrr-ing and then get to 10 loans, then I guess they get private money or portfolio loans to continue acquiring more doors. At that point, they are probably an accredited investor and can buy into syndications which give very favorable returns. The General Partners do all the work and the Limited Partner goes for the ride and gets good cash flow and shares in the profits while being totally passive. The syndicators have the track record (easy to check with a little research) and do all the work, vetting properties, etc.
So, why buy SFRs and small multis when you can just buy into syndications and kick back and let the pros do all the heavy lifting? After acquiring 10+ doors, instead of adding more doors, why not instead of buying 10 more doors, buy into 10 different syndications? I've done some research and partnering with the pros just seems like a better choice. I've just started investing into them and am looking to scale. What would you do?
At some point you will always run out of your own capital. If you don't learn how to generate money out of thin air or raise it then you're screwed.
Lots of great ideas and feedback here, thanks for all the valuable information given. I feel that I'm at a turning point in my investing future and will most likely focus on finding more syndications to partner into. I am working with 2 syndication companies that look very good and I plan to jump in again soon. I like the passive part of investing at this point, but I will still consider something local if it's a great deal. My portfolio consists of local properties (most are located about an hour south of the Bay Area), OOS (turnkey and mls), and now syndications. I am leaning towards being more of a passive investor than actively looking for a great deal. To be honest, I'll probably continue to do a little of both!
I think that's the way to go. You should be able to make a much greater return on equity out of state than in California, both via syndications and turnkeys.
I don't think people should start in syndication despite all the pros for it. Syndication deals is all about marketing and nothing in a pitch deck tells you if its a good deal.
New investors don't have a shot telling if its legit or not without a network around them. To get said network you need to come in with some battle scars (SFH turnkey etc) and offer some value to other passive investors.
I have done both. Im now unwinding the SFR portfolio and mostly moving to syndication and other more traditional investments. Yes in SFR you have more control but correspondingly more risk. All major and minor expenses come from your pocket. Its not hands off. The accounting and taxes are complicated. You are dependent on a PM (for out of state anyway). But you control the asset. You can sell when you want to to free up cash. Syndacates are the exact opposite. No hassle, hands off but you tie up the cash. And you depend on the expertise and the knowledge of the syndicator. Also you can keep a SFR for 20 years and more and leave to your kids if you like. A syndicated deal has a 5 year or less hold unless something very bad goes wrong.
I have done both. Im now unwinding the SFR portfolio and mostly moving to syndication and other more traditional investments. Yes in SFR you have more control but correspondingly more risk. All major and minor expenses come from your pocket. Its not hands off. The accounting and taxes are complicated. You are dependent on a PM (for out of state anyway). But you control the asset. You can sell when you want to to free up cash. Syndacates are the exact opposite. No hassle, hands off but you tie up the cash. And you depend on the expertise and the knowledge of the syndicator. Also you can keep a SFR for 20 years and more and leave to your kids if you like. A syndicated deal has a 5 year or less hold unless something very bad goes wrong.
I am also slowly moving toward syndications, but I have to disagree with your post. Are you saying that expenses associated with a syndicated deal do not come out of your pocket? You are definitely paying for ALL of the expenses associated with whatever the syndication is buying...and then some.
I work as a fund accountant for a private equity firm... to say that one of the downsides of direct ownership is that all major and minor expenses come out of your pocket is not correct. Not only are you paying for every single possible thing associated with the LP or LLC in which you are a partner in a syndication, you are also paying a nice promote should the fund perform well.
Also, the accounting and taxes are FAR MORE complicated in a syndicated deal... you just don't see it because the K-1's are being prepared by an expensive tax firm (also being paid by you and your fellow LP's)....and the financial statements are being prepared by expensive fund accountants like me.
Also, regarding risk, that is subjective...but I feel much more confident with my ability to not lose principal when making direct investments. With proper due diligence, one can also minimize the risk of principal loss in a syndicated investment (i.e., ensure the loan period term is much longer than anticipated hold period, DSCR must be at a certain minimum level), but it's still a much bigger consideration than with small multis which have 30 year amort periods.
Lane Kawaoka, congrats on your latest syndication which utilizes 30+ year HUD loan.
When buying into passive investments, you receive a return on your capital. When actively investing on your own, you receive a return on your capital plus “entrepreneurial profit”. ( hopefully). The latter can be quite substantial.
Another thought process that I went thru: - If you've accredited Investors or even QP, why do you need to stick with MF Syndication anyway since what matters most is a return of Investment. You could do non-MF Syndication or non-RE investment (Alternative Investments) that typically bring better IRR and few are having with better risk-reward value because they could be more resilient to the economy. - if you want better deals with MF Syndication, join SPV to invest at the most sophisticated MF Syndication or NNN. Or Invest through crowdfunding (although some of the sponsors are not that great). - But even for the top syndication's investment return, the return can be matched with non-MF Syndication such as note or HML. - Even then, syndication return can be matched if you find good deals by buying direct MF/SFR.
Syndication hold periods can be longer than 5 years. In fact, if the Sponsor is focused on preserving, protecting and returning capital, they should be presenting some opportunities that are providing a steady risk-adjusted cash distribution that are 7 - 10 year holds (or reorganization at that point) depending on debt terms that are placed. If investors' interest is paramount, they will find a 1031 replacement to roll the proceeds into to keep your investment working toward your legacy/generational wealth.
I am doing both currently but plan to do more passive investing in the future. I did put an offer in last week on a local muli-unit that needed some work, but the market is still too hot and the price shot up way over asking with multiple all cash offers with 2 week or less close. My offer just wasn't high enough over ask. I thought the market cooled down a little but not my particular market at least. My agent told me the open house was crowded with international investors.
So, I will most likely add more to my syndication portfolio while I look into more providers. I am leaning more towards more passive investing anyways, but still keeping my eyes open to good deals.
Great point! Everyone on this site should invest in syndications, specifically mine😀
All kidding aside, It’s true you can get great returns investing in a syndication, but it really depends on what you’re trying the achieve and where you are in your career/life.
I was able to give myself a 300x return in 8 years using the brrrrr method. I have now switched to large Multifamily and started Syndicating my deals, which has allowed for greater growth.
Why wouldn’t everyone do my strategy? Here’s the rub. It was full time, working 60 hrs+/week. Timing also fell into play. The market created a perfect storm for that strategy.
A good strategy is pick one strategy and stick with it. I have investors that own businesses or have great jobs that they like. Why quit their business/job when they can invest in a syndication.
I have done both. Im now unwinding the SFR portfolio and mostly moving to syndication and other more traditional investments. Yes in SFR you have more control but correspondingly more risk. All major and minor expenses come from your pocket. Its not hands off. The accounting and taxes are complicated. You are dependent on a PM (for out of state anyway). But you control the asset. You can sell when you want to to free up cash. Syndacates are the exact opposite. No hassle, hands off but you tie up the cash. And you depend on the expertise and the knowledge of the syndicator. Also you can keep a SFR for 20 years and more and leave to your kids if you like. A syndicated deal has a 5 year or less hold unless something very bad goes wrong.
I am also slowly moving toward syndications, but I have to disagree with your post. Are you saying that expenses associated with a syndicated deal do not come out of your pocket? You are definitely paying for ALL of the expenses associated with whatever the syndication is buying...and then some.
I work as a fund accountant for a private equity firm... to say that one of the downsides of direct ownership is that all major and minor expenses come out of your pocket is not correct. Not only are you paying for every single possible thing associated with the LP or LLC in which you are a partner in a syndication, you are also paying a nice promote should the fund perform well.
Also, the accounting and taxes are FAR MORE complicated in a syndicated deal... you just don't see it because the K-1's are being prepared by an expensive tax firm (also being paid by you and your fellow LP's)....and the financial statements are being prepared by expensive fund accountants like me.
Also, regarding risk, that is subjective...but I feel much more confident with my ability to not lose principal when making direct investments. With proper due diligence, one can also minimize the risk of principal loss in a syndicated investment (i.e., ensure the loan period term is much longer than anticipated hold period, DSCR must be at a certain minimum level), but it's still a much bigger consideration than with small multis which have 30 year amort periods.
Lane Kawaoka, congrats on your latest syndication which utilizes 30+ year HUD loan.
Of course I understand that fund expenses come out of my returns, just as in my owned rentals. But my investment is limited to the capital I put in and I don't have to worry about reserves etc for sudden large capital improvements. I am aware that the fund maintains its own reserves etc as any prudent manager would. Its just not my hassle.
Here are the 5 top reasons to consider commercial multifamily:
Economy of Scale
Single family properties or small multifamily properties do not have sufficient revenue to hire full time staff. Because of this, owners are typically required to handle all day to day operations of the property. With a multifamily, revenue is sufficient to hire full time staff to operate the property.
Cost of property management, repair materials, service contracts benefit the economy of scale.
Risk Reduction
Thanks to the multiple units in a multifamily property, laws of average for vacancy and maintenance costs apply. An Investor in single family homes will need many units to apply laws of average on his portfolio: a bad tenant can result in burning up all profits made in a year.
Tax benefit
Contrary to a single family rental property, the depreciation on a multifamily asset can be accelerated thanks to a cost segregation analysis.
Appreciation
Unlike a single family value tied to comps, themselves linked to market conditions, the value of a multifamily asset is based on the Net Operating Income (NOI) - income minus expenses - and the Capitalization Rate of the market. There are three ways to force appreciation by increasing the NOI: increase income, decrease expenses, or a combination of both.
Workload
Finding the deal, underwriting, negotiating, closing and managing. Those are the tasks that must be repeated for each acquisition of a real estate asset. While less complex, single family properties must have to be repeated for each door. A single multifamily acquisition allows one to run a more intense process once to acquire 5, 10, 100... 1000 doors!
Here are the top 5 reasons to consider passive investing in syndications:
Passive
Possibly the most beneficial reason to consider investing in real estate syndications is that you have the ability to be a passive investor. The sponsor will find the deal, negotiate, underwrite (create a business plan), find financing, close the transaction. Then the investor is letting the sponsor manage the asset or take care of the operational perspective of the investment.
Experience
A syndication allows you to take advantage of the experience and financial strength of the sponsor. The sponsor brings a track record and a network of 3rd parties to inspect, finance, provide legal support and manage properties.
Access to Large Investment
A syndication allows the aggregate of capital among other investors to invest in otherwise unobtainable, high-value apartments with high returns. Over 90% of multifamily purchases are made through syndication.
Diversify
Investment in a syndication typically start at $50,000 and could be as little as $25,000. The relatively modest investment in a particular syndication allows you to access several markets when investing in multiple deals.
Protection
Each syndication purchases the multifamily asset through a Limited Liability Company. An LLC provides its members with personal legal protections against lawsuits and personal financial liability. Consult with your attorney for specific advice on the benefits of investing through a syndication.
@Johnny Lau it really comes down to your overall plan. Syndications have a time stamp. They will be sold and that money will have to be redeployed. They provide much greater economies of scale but you have to make sure you are qualifying the operator or if you are the operator you now have a whole other subset of responsibilities.
We syndicate so this is just to show both sides.
While small multis and sfr don’t have scalability they can also meet a lot of goals for a lot of people.
