Long term syndication performance

[Jacob Rosenkranz]

For those who have been in the syndication game for awhile, how would you say sponsors typically perform in terms of expectations? 

XX% lose money 

XX% underperform expectations 

XX% match expectations

XX% outperform expectations

I understand that this is very general and will vary by the person and how many deals they have done. I am just trying to understand how this passive component of investing compares to passively investing in the stock market via index funds. Obviously right now the stock market, and by default index funds, are down. But if real estate syndications rarely lose money then it seems they would provide much more consistent or predictable returns over time. 

[Brian Burke]

Unfortunately I doubt anyone is going to be able to answer this question, and even if they tried, their answer wouldn't be all that helpful.

The difficulty in answering arises from a lack of data.  Unlike publicly-traded mutual funds where you can look up past performance easily from a number of sources, there is no central repository for syndication performance data.  Nor are there research firms that have taken on this task--and even if there were, they would have to rely on data supplied from sponsors or investors, which could be over or understated or misunderstood.

Even if there were such data, it wouldn't be all that helpful because this is the classic case of past performance isn't indicative of future results.  We've been in a "rising tide lifts all boats" scenario for the last 12+ years, so even the most inept sponsor could come out looking like a genius in the right circumstances.  That may soon change.

Over the long haul, well-located real estate in the hands of a capable operator will perform quite well if it's conservatively financed.  Bad locations, bad operators, and over-leveraging can be a death sentence when the market isn't there to bail these deals out.  That day is coming.  When, is the million dollar question.

It's also difficult to put all syndications in the same bucket.  Even good sponsors have a bad deal once in a while--if they haven't, they just haven't been active enough or for long enough.  Different strategies have widely mixed results, too--for example, ground-up development can be hit-or-miss.  Older properties can either soar or tank.  Some geographical markets are boom and bust...

Your best defense is to diversify--eliminate single points of failure by investing with multiple experienced sponsors, in multiple markets.  And make syndication investments only a part of your investment strategy.