Friend netted $3m , looking to deploy newfound wealth into RE

[Louie Pullen]

Hi, 

A very close friend of mine has just sold his business and will net $3,000,000

He is very eager to put his new found wealth into real estate.  Having read books and listened to podcasts he feels multi-family is where he wants to invest. 

I suggested that because he has no RE investing experience and the current market conditions, it may be wiser to find proven private equity real estate investment companies like Praxis Capital, etc and let them do what they do best. 

What is the downside of investing with RE Investment companies rather than doing it on your own?

Any thoughts/ideas would be greatly appreciated. 

[Brian Burke]

@Louie Pullen I really appreciate your confidence in Praxis Capital, and it might come as a surprise that I would chime in with the downside of investing in syndicated offerings such as the ones we do at Praxis, or anybody else does, for that matter.  But, you asked...  :)

There are plenty of downsides.  The company he invests with could be of low quality (present company excluded, LOL), could lack a track record, not have experience with having survived a market cycle, could produce inadequate reports that don't tell him what he needs to know...whatever it is, when investing in a syndicated offering there is an additional risk component that isn't present when buying real estate directly--the sponsor of the investment.

As an investor in a syndicated offering you can't typically 1031 exchange in or out, which you can do when buying real estate yourself.  You also don't have full control over when the asset should sell, when you can refinance for cash out, or how you can make changes to the business plan. 

When you buy real estate directly, you are in the pilot's seat.  When investing in a syndication, you are a passenger and there is a professional pilot flying the plane (if you picked the right company).

But there are upsides too.  I call it leverage.  Not the type of leverage you usually think of in the context of real estate (debt), but leveraging the sponsor's track record, experience, skill, judgment, relationships, deal flow, financial strength, team, research and time to produce an outcome as good as or even better than one can achieve on their own. 

So the question is, do the upsides out-weigh the downsides?  And, what about the downsides in direct ownership (there are plenty)?  And which one is a better fit?  It's definitely an individual decision as each option isn't for everybody.