Is syndicated co-investing (passive) right for me?

[Andy Port]

I'm currently looking to take some money out of traditional investments and begin investing directly into real estate as a passive investor on syndicated deals.

The internet is pretty much copy-paste with advice on how to access real estate and defaults to saying "Just invest in a REIT - its the same" except you pay for the entire pool of existing properties (even if they have low yields in less opportunistic areas), the entire management team's multi-million dollar salary and their private jet, etc... No thanks.

So I really have been interested in passively investing in good deals with experienced sponsors, but want to set my expectations to be realistic and right for this. Any advice would be great as well.


My rationale is below:

- I have a career and don't want to focus on real estate full time right now. I want to be "hands off" for the development/management phase.
- I would like to get a minimum of 12-15% irr on average, with potential for higher returns.
- I have some past experience working with sponsors from PE funds on non-real estate deals.
- I get an experienced sponsor/developer that can run the show so I don't run the risk of making any (very expensive) mistakes from my lack of experience.
- I can get exposure to large multi-family with many tenants. If the occupancy is high, then I have less risk/hassle with one or a few tenants.
- I can invest across different types of deals unusual or difficult for a smaller investor (multi-family, opportunistic/distressed offices, hotels, etc.).
- I don't need to put up as much upfront equity as I would need to for doing it myself and I can use that capital across multiple deals.
- Pricing 'should' be better from the perspective of fees, contractors, rates, etc. that the sponsor gets vs. me as a solo investor.
- I don't care if the investment is less liquid vs. an ETF or REIT and I would aim to hold it for 5+ years at the bare minimum.


Some other questions I had and would appreciate any advice:

- Is an average minimum of 12-15% irr reasonable for syndicated deals ($10mm - $100mm) with an experienced sponsor? Assuming the deals are value-add or new developments with moderate leverage/risk targets. It seems to be a more than reasonable average with potential for 20%+ on some deals from what I read, but I would love to hear from experience. So far I've read that it may be difficult to get some of the irrs that are marketed since there has been a bull run across real estate with a low-rate environment the last decade and I would love to hear thoughts.

- What are the "usual" investment minimums for a deal? I've seen anywhere from $25k - 50k, but can even be $250k with the bigger companies, but want to get thoughts. It seems to always be flexible and at discretion of their investors they are looking to take on.

- Do sponsors/developers generally just look for GPs or preferred investors? Or do they charge massive fees that private equity sponsors charge for their LP investors for buying businesses (2% management / 20% profit)? It seems like GP/preferred is the answer so I would avoid these massive fees on the profits since developers seem to market a deal-by-deal in real estate and I would actually be a direct GP investor.

- How would you exit an investment say after 10 years after a commercial property is developed for whatever reason? I assume you can be taken out by an existing investor or using a broker to find a buyer for your stake if the asset is a good cash-flowing one?


Really appreciate any advice, feedback, or respectful criticisms! Thanks in advance.

[Ian Ippolito]

 @Andy Port , 

This is the book I wish I'd read when I started...and I think it should be required reading for every beginner and pro.

It's called "Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures & Crowdfunding". And it's written under the pseudonym of Sean Cook by Paul Kaseburg.

Paul’s sat on both sides of the table on over $2 billion of real estate deals. And in my opinion, his book covers everything a newbie needs to understand: from asset selection, to evaluating sponsors, to capital structures. For pros, he challenges conventional wisdom and explodes sacred cows by exposing hidden conflicts of interests and mis-alignments that many in the industry won’t admit to.

And I feel this book took my personal due diligence (and how I look at deals) to the next level.

-----------
On your other question:

When vetting a syndication, every investor will do it differently because every investor has a different risk tolerance, comes from a different financial situation and has different financial goals. So a deal that look great to one investor will look horrible to another and vice versa.

I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. Here's how I do my due diligence:

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)

b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.