Do syndicators outperform the average investor?

[Jason Powell]

I'm wanting to enter a more restful season of life after sprinting hard that last few years. Syndications, in theory, sound like a very attractive option to me. I get how they work, but I wanted to ask you:

1) Do average syndications with seasoned syndicators tend to outperform the average person trying to be a landlord on their own? My biggest mental hurdle is whether the fees a syndicator (rightfully) charges makes it so that passive investors only net marginal returns. Also I'm wondering if syndicators take a bunch of mediocre deals in hit markets like this just to keep their own deal flow and revenue going. 

2) any specific recommendations? I'd love to hear from those who have used syndication model long term. I realize that most of the deals in the last 8 years have all probably been great due to huge market tailwinds. 

The passiveness and quality of life aspects of syndications sound great. I guess I'm trying to quantify how delayed one's "financial freedom" target might be if they use this model as opposed to being very active by themself. 

[Don Konipol]

@Jason Powell

Full disclosure. I am a syndicator of both investments in performing notes and investments in commercial properties.

I have been investing in real estate and real estate related assets since 1979, so I’ve experienced both booms and busts.

The typical syndications I see use about 50% leverage to obtain 7% current cash on cash return, about 1.5 to 2% loan amortization, and rent increases at current cap rates add another 6-9% to projected returns.

In other words the future returns are based on the real estate market performing as it has since 2008.

Maybe yes, maybe not so much.

The change in tax code in 1987 literally wiped out real estate syndications at the time. So much so that syndicators umbrella association, a par of the National Association of Realtors folded, as membership decreased 90%.

The vast majority of private real estate investment funds, the grandfather of today’s syndications, either went bust or closed their doors in 2008-2009.

Real estate prices in Phoenix, Miami, and Las Vegas fell 60%. Nobody built THAT into their forecasted returns.

So if I were on the other side of the table, I would regard the assumptions made by syndicators (including myself) about sale prices of the subject property 5 years down the road very suspiciously.

I agree with almost all that was said in posts above. However some of the risks of investing in a syndicated investment vs. a property you control have not been sufficiently detailed.

What if we do hit a major real estate recession, and prices drop 20%? The syndicator won’t be able to sell new syndications, so won’t have income from acquisition fees, ongoing management fees for those syndications, and current syndications being underwater won’t have income, realized or unrealized from over ride. Will the syndicator be able, or even be willing to stay in business? If the syndicator folds, what happens to the subject property? I just had a loan request for a large apartment complex where the syndicator went out of business in 2010. Since then the investors had 4 capital calls, received no distributions, and a larger loan was taken out on the property. They are now suing the asset manager they hired in 2010 to replace the syndicator that went out of business.

Being a syndicator, I believe in the advantages of syndications as passive investments. I just don’t think investors realize all the associated risks.