Do people actually lose money in MF syndications?
Most Popular Reply
Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesA couple years after the great real estate collapse I bought a property for half of what the last guy paid. I bought it for the amount of his loan. His investors lost everything.
Then shortly after I bought it the great financial collapse happened. Jobs were lost, occupancy fell, delinquencies skyrocketed. It didn’t take long for the income to fall so far that there was not enough income left to service the debt. Because of the economy and the income, the property was now worth less than my loan. My investors stood to lose 100% of their investment. The only thing that saved them—I started making the $15K monthly payment out of my own pocket, and did that for a few YEARS until the economy rebounded and eventually we sold. Investors actually ended up with a small profit. I wrote about the experience here: https://www.biggerpockets.com/blog/colossal-fail/
So can investors lose it all? Hell yes. Those of us that have lived through cycles appreciate this and treat real estate like a loaded firearm. Those who haven’t tout “everybody needs a place to live,” and “multifamily is the safest investment because...” Don’t be fooled. If you are considering investing as a passive investor in a syndication, it is a great asset class and can be enormously successful. Stack the deck in your favor and choose sponsors that fear the dangers with the same passion as they appreciate the upside.
25 Replies
- Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes7y
I know of a couple of instances where LPs lost 30-40% of their capital.
One was a bad property in a bad neighborhood bought at a wrong time (right before 2008 crash).
Another one was more recent and happened because one of the GPs turned out to be a crook.
- Specialist · Carolina Beach, NC · Member since 2016 · 390 posts · 496 votes7y
@Asa Hunt I was not directly involved in this deal but I know an investor who was.
Fully stabilized large apartment community across a highway from a University. Property was 95% occupied going into the Spring. During the Summer, the city shutdown the pedestrian bridge that crossed the highway to the university to do emergency retrofit. The occupancy dropped to 60% and did not come back in the Fall. The loan came due during that period and they approached the bank about a refinance. The bank, who they did not have a long term relationship with, saw an opportunity to acquire a solid asset for a huge discount. They foreclosed on the property and the investors lost all their investment. Fortunately, the syndication sponsor was a large enough operator that they were able to pay the investors back their original investment.
The lesson:
1. Make sure the terms of your debt allows you enough runway to execute your business plan.
2. Make long term relationships with lenders.
- Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes7y
Yes - It happens. I know of a few examples off the top of my head. One being the one Neil mentioned. Always make sure to do your homework! That said, I know many successful MF Syndications as well.
- Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes7y
all in all, its a long term play, so if managed properly very unlikely but as with all investments there is an inherent risk
- Lewisville, TX · Member since 2015 · 341 posts · 264 votes7y
Through my network I know of a guy whose father invested $50k in an Austin syndication that got moved to a different Houston property at last minute. The deal underperformed terribly & property & rent rolls declined instead of improving & they were sued as well. 5 years later he still doesn’t have his $50k back or any cash flow or other returns & thinks he never will. This is a worst case scenario for an LP. I believe the syndicator was new & had no track record & is now out of business.
- Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes7y
yea when buying into a security its difficult, but if you can partner and get equity position you can hold a bit stronger interest, and help steer the boat. Thats what we do with our big contributors on certain projects we make them GP so we dont have any LPs but we also are a legitimate and organized group lol, and dont play these dumb games everyone else seems to be playing this isnt a hobby people! but my advice is get to know the people you are going to invest with intimately first
- 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
A couple years after the great real estate collapse I bought a property for half of what the last guy paid. I bought it for the amount of his loan. His investors lost everything.
Then shortly after I bought it the great financial collapse happened. Jobs were lost, occupancy fell, delinquencies skyrocketed. It didn’t take long for the income to fall so far that there was not enough income left to service the debt. Because of the economy and the income, the property was now worth less than my loan. My investors stood to lose 100% of their investment. The only thing that saved them—I started making the $15K monthly payment out of my own pocket, and did that for a few YEARS until the economy rebounded and eventually we sold. Investors actually ended up with a small profit. I wrote about the experience here: https://www.biggerpockets.com/blog/colossal-fail/
So can investors lose it all? Hell yes. Those of us that have lived through cycles appreciate this and treat real estate like a loaded firearm. Those who haven’t tout “everybody needs a place to live,” and “multifamily is the safest investment because...” Don’t be fooled. If you are considering investing as a passive investor in a syndication, it is a great asset class and can be enormously successful. Stack the deck in your favor and choose sponsors that fear the dangers with the same passion as they appreciate the upside.
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes7y
Originally posted by @Brian Burke:
A couple years after the great real estate collapse I bought a property for half of what the last guy paid. I bought it for the amount of his loan. His investors lost everything.
Then shortly after I bought it the great financial collapse happened. Jobs were lost, occupancy fell, delinquencies skyrocketed. It didn’t take long for the income to fall so far that there was not enough income left to service the debt. Because of the economy and the income, the property was now worth less than my loan. My investors stood to lose 100% of their investment. The only thing that saved them—I started making the $15K monthly payment out of my own pocket, and did that for a few YEARS until the economy rebounded and eventually we sold. Investors actually ended up with a small profit. I wrote about the experience here: https://www.biggerpockets.com/blog/colossal-fail/
So can investors lose it all? Hell yes. Those of us that have lived through cycles appreciate this and treat real estate like a loaded firearm. Those who haven’t tout “everybody needs a place to live,” and “multifamily is the safest investment because...” Don’t be fooled. If you are considering investing as a passive investor in a syndication, it is a great asset class and can be enormously successful. Stack the deck in your favor and choose sponsors that fear the dangers with the same passion as they appreciate the upside.
Brian, thanks for writing this, because people need to understand.
In the last crisis, MFRE values fell about 32% from the peak. That would wipe out most if not all equity that purchased at the peak.
However, because other real estate asset classes did even WORSE, MFRE was touted as being the most resilient in recessions.
Over time, “least bad” morphed into “best” which then morphed into “safest” and even “does well in recessions”.
Also, because of the foreclosure crisis, which won’t repeat itself for various reasons, MFRE did really well in the years following the recession - when it still felt terrible, so people think of it as the recession, but economic growth had resumed. People tend to conflate what happened after the recession with what happened during the recession, and the effect is again a misunderstanding that MFRE “does well” during recessions.
- Investor · Tampa, FL · Member since 2010 · 377 posts · 56 votes7y
Originally posted by @Brian Burke:
A couple years after the great real estate collapse I bought a property for half of what the last guy paid. I bought it for the amount of his loan. His investors lost everything.
Then shortly after I bought it the great financial collapse happened. Jobs were lost, occupancy fell, delinquencies skyrocketed. It didn’t take long for the income to fall so far that there was not enough income left to service the debt. Because of the economy and the income, the property was now worth less than my loan. My investors stood to lose 100% of their investment. The only thing that saved them—I started making the $15K monthly payment out of my own pocket, and did that for a few YEARS until the economy rebounded and eventually we sold. Investors actually ended up with a small profit. I wrote about the experience here: https://www.biggerpockets.com/blog/colossal-fail/
So can investors lose it all? Hell yes. Those of us that have lived through cycles appreciate this and treat real estate like a loaded firearm. Those who haven’t tout “everybody needs a place to live,” and “multifamily is the safest investment because...” Don’t be fooled. If you are considering investing as a passive investor in a syndication, it is a great asset class and can be enormously successful. Stack the deck in your favor and choose sponsors that fear the dangers with the same passion as they appreciate the upside.
@Brian, I just read your Colossal Fail article and it's wonderful! In a time like Q2 of 2019, are you still buying MF properties via syndication or non-syndication? If so, what is your strategy buying towards the end of the market cycle?
@Asa, I've seen it happen before and almost every time, it was due to poor structuring of the debt. The bank is your best friend when you're looking to buy at 70 - 75% LTV, but when the market declines and your loan balance is 90-95% LTV, looking for a refinance is much tougher then most think.
- Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes7y
@Asa Hunt
Happens all the time although not as much in this market because of constant appreciation but sometimes its not because of the GP. If the seller cooks the books it can be hard to catch. I have a colleague where that happened and the seller is involved in multiple lawsuits. If you don't like this idea you may want to consider a fund where your investment is further diversified amongst many investments. I know one investor that actually gives their investor a picture book essentially of all these high rises and hotels the fund owns as a gift. Doesn't have anything to do with how it performs but amazing how vain people are about saying they "own" some multimillion dollar property.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Brian Burke just like all real estate in a bad down cycle nothing is immuned even though we see people all the time on BP say in a bad market rentals will get stronger.. but they just dont know what they dont know.
seem many a syndicated deal go turtle up.. generally in bad economic times.. or just plain mis management or even fraud by sponser.
and I predict since do it your self syndication is being taught like flipping houses.. the next 5 years are going to find many a deal with those who just bit off a little more than they can chew.. - 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Originally posted by @Tony Nguyen:
I am, yes. First, we don't know that this is the end of the market cycle, however it is safer to assume that it is and take a defensive approach to an otherwise offensive business. I do this by investing in areas where the demographic cycle is driving the fundamentals more than the economic cycle. Places where there is high income growth, job growth, and population growth. The places where people are moving TO, not from. Then, I underwrite as if conditions will significantly worsen. Cap rate decompression. Increasing vacancy, concessions, bad debt. Let's face it, many markets are performing to absolute perfection right now and it's more likely that they operate less perfect (if that's even a concept) than more perfect (if that's even possible).
Unfortunately, when underwriting like this it's difficult to get deals to pencil. Fine by me, I know what pain feels like and I'd much rather endure the pain of turning over a thousand stones to find a single deal than to have a thousand deals burying me under a mountain of stones.
Even in this strong market and with well underwritten acquisitions, we still have properties we struggle with from time-to-time for various reasons, requiring us to make difficult decisions. If the economic or demographic tide shifts, those challenges will increase in complexity. There could be an interesting shake-out in the syndication sponsor space and a lot of hard lessons learned by passive investors who didn't take sponsor and offering selection seriously.
- Investor · Tampa, FL · Member since 2010 · 377 posts · 56 votes7y
Originally posted by @Brian Burke:
Fine by me, I know what pain feels like and I'd much rather endure the pain of turning over a thousand stones to find a single deal than to have a thousand deals burying me under a mountain of stones.Love it, thank you.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
There are investors who have had under-performing properties during the best bull run in the history of multifamily. Similar properties and operators will go under during the next downturn...lots of them.
- 7yAsa HuntRental Property Investor · Dallas, TX · Member since 2016 · 30 posts · 23 votesOP
Originally posted by @Matt Millard:
Through my network I know of a guy whose father invested $50k in an Austin syndication that got moved to a different Houston property at last minute. The deal underperformed terribly & property & rent rolls declined instead of improving & they were sued as well. 5 years later he still doesn’t have his $50k back or any cash flow or other returns & thinks he never will. This is a worst case scenario for an LP. I believe the syndicator was new & had no track record & is now out of business.
I hope the syndicator was at least in some kind of mentor group or partnered with someone. It seems very strange to tackle syndication as a newbie lone ranger.
- 7yAsa HuntRental Property Investor · Dallas, TX · Member since 2016 · 30 posts · 23 votesOP
@Jay Hinrichs "and I predict since do it your self syndication is being taught like flipping houses.. the next 5 years are going to find many a deal with those who just bit off a little more than they can chew.."
@Brian Burke "There could be an interesting shake-out in the syndication sponsor space and a lot of hard lessons learned by passive investors who didn't take sponsor and offering selection seriously."
@Mike Dymski "There are investors who have had under-performing properties during the best bull run in the history of multifamily. Similar properties and operators will go under during the next downturn...lots of them."
@Jonathan Twombly "Over time, “least bad” morphed into “best” which then morphed into “safest” and even “does well in recessions”."
These are some incredible insights, so thank you for posting. As someone who has been learning about this space for the last 6 months, I really have been lead to believe multifamily is a nearly invincible asset because of this optimism. For all the reasons cited above, there's serious potential for a storm of new syndicators getting in trouble when the cycle turns. Especially those of us without a large warchest to cover a $15K mortgage payment for years.
So many sponsors have gotten in to this space during this cycle and made a killing. It's going to be incredibly interesting to see how things shake out when the cycle changes.
- 7yIvan BarrattBusiness MemberInvestor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
Great points thus far. My first two deals were 35 and 30 units. Made just about every mistake in the book. What ultimately saved the deals was having in house management company working for free for a couple of lean years. Luckily we were able to eventually bounce back.
One we sold 5 years after purchase for a 9% IRR (not bad considering what could have happened). The other we were able to secure redevelopment financing to throw everyone out and start over. A year later we refi'd with Freddie SBL and it cash flows great.
I'm forever ever grateful to have learned a lot on a couple of small deals with one partner involved before stepping up to syndication.
@Mike Dymski is 100% correct. There is a day of reckoning coming for the mediocre sponsor/deal.
@Brian Burke well said as always sir.
- Investor · Phoenix, AZ · Member since 2017 · 261 posts · 143 votes7y
MF syndication is like any investment, there are always the risk of capital loss. It all depends on verifying the sponsor(s) and understanding what steps they have taken to reduce the associated risks.
- Real Estate Broker · Tri-Cities, WA · Member since 2018 · 47 posts · 33 votes7y
This thread is packed full of insight, wow! Thanks @Asa Hunt for getting the conversation started. From what I see written in reply, the biggest risks are:
1) the syndicator themself (crooks, inexperience)
2) being over-leveraged and in a worst-case scenario not being able to pay the debt (or having to pay $15k out of pocket)
Market trends, end of cycles, even serious downturns at a macroeconomic level can cause LPs to lose money, but I think it still comes down to the above. If the syndicator is solid and has the right team (like @Ivan Barratt said, the PM is critical) and is not over-leveraging the property, then even a terrible downturn would not cause LPs to lose money, but would still hurt returns.
Asa, what is your position - syndicator/GP, investor/LP?
- Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes7y
@Neil Henderson
This surprises me because if operator is that large tom absorb loss how would they not have another bank lined up to step in especially with history to show performance prior to extenuating circumstance.
- Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes7y
Have some family members that lost the entirety of a syndication investment on an ambitious assisted living facility development.
One thing that sticks out about the story is complexity:
1) Raise money
2) Build a brand new facility
3) Hire nursing / care staff
4) Run the operation
5) Make the operation profitableIn the case of 3-5, the activities are not particularly related to real estate. These are tasks that would be much more suitable for a healthcare administrator to perform.
I would be cautious about investments that rely on a series of steps unrelated to real-estate or the core competency of the managing partners. Entertainment, healthcare, and many software projects tend to have this problem. The partners are often the right people to solve only a fraction of the puzzle.
For this reason I tend to prefer vanilla housing or commercial deals. The product is real-estate and specific offshoots like parking or storage. Let the other businesses run themselves. If you're lucky, you'll get them to rent from you.
- Rental Property Investor · Los Angeles, CA · Member since 2015 · 24 posts · 5 votes7y
@Neil Henderson haha, that funny. I actually heard and talk with one of the investor about that incident.
- Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes7y
@Asa Hunt it is absolutely possible. Probably the easiest way to lose it all is for a sponsor to go in undercapitalized, do a capital call, continue to drop in occupancy, loan comes due, and lose everything or nearly everything. I would say it's not overly common to lose it all as we are in an up market but I can guarantee you that many sponsors will not be around for the next up market.
- Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes7y
I've heard of a property destroyed by a fire or weather event (can't remember which one) and the insurance company didn't payout.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.