Experienced Syndication Investors

[Sean McKay]

I am considering selling one of my least desirable SF rentals and moving that equity to an apartment deal. To this point, I have personally only invested in 1-3 unit properties. I have done a number of 1031's, so I am pretty comfortable with that, but I would love to get some feedback from those that have invested in Apartment Syndications. My primary concern is that the financing for the offerings that I have looked at shows that there are balloons on the loan. I realize that is typical in the multi-family arena but that is the reason why I have stayed in the shallow end with smaller deals to this point. Thanks in advance for anything that you can share!

[Ian Ippolito]

Originally posted by @Sean McKay:

I am considering selling one of my least desirable SF rentals and moving that equity to an apartment deal. To this point, I have personally only invested in 1-3 unit properties. I have done a number of 1031's, so I am pretty comfortable with that, but I would love to get some feedback from those that have invested in Apartment Syndications. My primary concern is that the financing for the offerings that I have looked at shows that there are balloons on the loan. I realize that is typical in the multi-family arena but that is the reason why I have stayed in the shallow end with smaller deals to this point. Thanks in advance for anything that you can share!

Sean, I have invested in syndications since before the current cycle (2006). Pretty much all commercial real estate involves balloon payments like that. And yes you are correct in thinking that there is extra risk here, and it's something that many investors don't really think about.

There's a reason that there are so few syndicators today that can say that they have gone at least a full real estate cycle. Many of them were wiped out in the great recession, when bank lending froze (and/or they were yanking lines of credit). Sponsors could not refinance their balloon payments. The banks foreclosed, investors lost everything and many sponsors went under.

The next recession could be severe like that and run a risk of another bank freeze. Or it may be very light and not have one. It's impossible to know for sure.

So a more aggressive investor tends to overlook the downside and focuses optimistically on a positive outcome. A more conservative investor plans defensively for the worst case, and then is happy if it doesn't happen.

I am a conservative investor, and feel we are late in the cycle. Due to the refinance risk you mentioned, I personally don't go into any deals with short-term or medium-term debt (anything less than 7 years is a red flag for me and I move on). Yes this does mean I pass up on a lot of deals that more aggressive investors think are perfectly fine. And yes it may mean that if I'm in a deal and it needs to exit sooner, there may be additional prepayment penalties to pay that will reduce my return more than if I had invested in a shorter-term deal. For me I'm happy to pay a little bit extra for the protection of removing the refinance risk. That's because protection of principal is much more important to me than projected return.

But there's no one right answer for everyone and it all depends on a person's risk tolerance.