New member, invest through syndicator or directly?

Question

Hello all,

I'm totally new to this. I've been reading voraciously, listening to the podcasts, and trying to understand the best route for me. I've got a full time job, with a little cash to spare that I'd like to invest in real estate. I'm currently thinking around a six month ramp time between now, and actually investing in a property.

I'm trying to decide if I start looking for deals on my own, or go with a syndicator? My inclination is to use the syndicator, but parallel to that look for deals and evaluate them against each other, I'd assume for the first few months, or even years, the syndicator would likely have more attractive deals. What do people see as the pros and cons of investing directly verse with a syndicator? I think I could invest around $25k per year with my current financial situation, more if I did a home equity loan.

About me and my situation:

• Married, father of a 2 year old and 4 year old, both me and my wife have full time jobs, so I've got limited time to bird dog deals.
• MBA, and work in commercial building energy efficiency, so I know enough to dangerous, but not enough to be effective (yet, hopefully) when it comes to real estate investing.
• I live in Minneapolis, so I'd likely need to invest in other towns to get cash flowing deals.
• At this point I'm looking for investments, not another full time job like flipping.
• Have been maxing out my 401k and IRAs since graduating from college, so this is additional savings to diversify, and maybe allow an early retirement.

Any thoughts and suggestions would be appreciated.

Thanks,

Chris

Ivan Barratt · Answer

@Chris Baker keep your cash in the bank and get more education. Wait till you have more liquidity and are able to invest 50k into a deal without breaking a sweat.

I agree with @Heidi Pliam that you should get more familiar with both debt and equity deals and the pros and cons of both.

Take a deep dive and read/listen to actual books on apartments, syndication, and creative finance.

NOTE: The next economic winter is approaching. Good deals are out there but not so easy to find.

Happy Hunting

Marc Jolicoeur · Answer

@Chris Baker I am also busy with my job and invest semi-passively in local rentals.   I am in Minneapolis if you would like to know how my investments are returning for me I can give you a pretty good picture of what it would look like to own rentals here, and hiring out the rehabs, repairs, and property management.  I am happy to open to the books and share my experience to shorten your learning curve.

I just got two more properties this spring.   Have 3 townhomes and a duplex now.

I am more hands-on and DIY right now than you would be.   It is my personality.  However I chose and plan investments with the intent to make them passive at a future date.

Marc

Ivan Barratt · Answer

@Chris Baker I highly recommend NOT using home equity loan in syndication or any other long term investment. That's called going long with short money. If the spread between your cost of capital and return inverts (goes negative) because of interest rate environment, deal flatlines or fails, etc you'll be in bad shape.  That's how companies and investors can go bust!

@Ross Ayesh makes some good points about being wary of sponsors that will take unaccredited investors for a low minimum investment.  That should be a red flag.

David Thompson · Answer

Chris,

REITS buy what we have once we are done doing value add.  So, yes, REITs will move along at a lower yield and return profile typically than what a value add syndication can achieve.  Think of flipping a house but doing this w/200 - 300 unit apartments.  You have families living there right.  If you are 95% occupied on a 200 unit apartment, you have 10 units down to renovate when you purchase, that's all you can do until the next month when 8-10 more leases come do, then you move those folks into the just renovated units, and renovate their old unit for the next lease expiration resident.

Value add syndication profile returns for experienced operators would be in the 8-10% CoC range and 18-20% IRR on a 3-5 year hold.  It often gets better than that because at the pace above, it takes about 2 years to renovate the apartment. At the end of that period, you've created a much higher NOI w/increasing rents and you do a refinance pulling more equity out for your investors so we often see another 5% on top of these returns in solid markets.  We may hold a bit longer but if the market is healthy we may look to exit and go find another property that needs updating.  I'm not sure your returns would approach this unless you are turning these properties like this.  Buy in hold won't achieve these returns.  REITs are conservative by nature and will buy a pool of these stabilized and fully renovated properties for yield.  They are not in the game of renovating and turning properties around in general, hence, the return profile should be lower and is.

David Thompson · Answer

Hi Chris,

I think you are thinking the right thoughts.  Do you want to be active or passive?  You can also be a hybrid.  Own some direct investments when your lifestyle, time, education and passion align.  Till then, I think syndicators can outperform most folks starting out in just about any niche that they are focused in.  The advantage is several including relationships, scale and forced appreciation which are concepts that can add value and separate syndicators from those investing in SFR or small MF.

For a lot of syndicators, you need to be accredited investor to qualify but not all deals of course.  Also, w/a minimum of $25K, that might exclude you from some deals as well as $50K is what I see most often.  I did an article on 10 tips for vetting deal sponsors you may find of interest and an article on diversification w/alternative REI classes you may find helpful (see below).  Wish you the best.

https://www.biggerpockets.com/blogs/9145/53959-vet...

https://www.biggerpockets.com/blogs/9145/59865-div...

Fahadbin Alam · Answer

What are some books you would recommend?

Leslie Pappas · Answer

Hi @Chris Baker, like @David Thompson said, it's important to determine how active or passive you want to be. If you’re looking to take a more passive role in your real estate and want the benefits of diversification there are funds available to accredited investors that are designed to allow investors the opportunity for ownership of institutional investment grade property that is occupied by regional, national, and Fortune 500 credited companies.

Andrew Johnson · Answer

@Chris Baker For what it's worth, you don't seem like you know enough about what you want to do.  What you've done so far is limit what you don't want to do (which, by the way, is a great first step).  Do you want control or to give up control?  If you own it yourself you get to (or HAVE to) make the repair vs. replace decisions, decide what to buy, when to buy, when to sell, if you want to pay more for tile floors or put in the cheapest carpet, etc.  And you get to pick exactly where you want to buy and (through a PM, since you're passive) how you want the unit or property managed.

With a syndication you don't get that control.  But you do get diversification and it's passive.  I also see some syndicators that like to brag about how many units they own a part of.  To me that means nothing but to them it means a lot.  Maybe you have really strong positive feelings about the Minneapolis market and syndication is the only way for you to get into it.  But then you do have to start thinking "syndication for what?"  Apartments?  Mobile home parks?  It's not as though there's a single option there.

The bottom line is that my goals are the same as yours and neither of our goals are the same as just about anyone else on here.  Heck, you can find people that want to invest in a vacation rental so they can go there a couple of times a year for "free".  Just because it isn't my goal doesn't mean that it's bad or wrong.

But I will ask you this, if you want something trust passive why not just invest in a publicly traded REIT (equity not mortgage)?  You get diversification, liquidity, dividend payouts as a return, etc.  I'm not saying there aren't good reasons to choose one over the other but, for you, why not a REIT?

Heidi Pliam · Answer

Welcome @Chris Baker!  There's plenty of attractive middle ground between syndication and DIY flipping. For example, you might lend to experienced investors and have your investment secured by a mortgage and personal guarantee.  Or, perhaps you could joint venture with a rehabber and get involved with the high-level decisions and budgets, etc., while they do all the heavy lifting.

Know the pros/cons, including the risks associated with each. It may even be worth hiring someone like myself or doing the reading here on BP (ideally, both). For instance, I'm often surprised people don't think through the ramifications of owning a good mortgage versus owning a share of a syndication (ie debt versus equity interests).  Both are hands off, but owning debt with personal guarantees and rights to foreclose provides a significant advantage to owning a share of a syndication in which the company itself could go bankrupt and your investment becomes greatly diminished if not destroyed altogether.

Syndications have the advantage of scale and returns are crazy good if you're in the right deal with the right team.  Funds can add diversification of portfolio to the advantages column.  But great track records from the recent past definitely do not mean great future returns; markets are all different now, and many syndicators haven't been tested.  You also pay more in fees to the deal sponsors & fund managers than you might realize.  Minimally, you'll want  to learn how to evaluate a syndicator's deal structure and legal "get out of jail free" cards.

IMHO, you will learn more (and faster), have more fun (or fear depending on how you're wired) and have less risk, by pumping a small amount into several different flippers than a bigger chunk into a syndicator.

Happy Investing!Heidi

Paul B. · Answer

Ivan, can you elaborate on the home equity loan? If you have substantial equity in your home, and can get a fixed rate loan for $50,000 at 4%, and you are confident that a deal will return at least 10%, AND your income is such that if the deal fails, you would still be able to make those loan payments out of pocket without jeopardizing your home, do you still that is too risky?

New member, invest through syndicator or directly?

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