Syndication Return Projections as a LP

[Zachary Bellinghausen]

In the early stages of looking into apartment syndication.  It really has sparked my interest with possibilities as I am a slave to my W-2 job at the moment and this would be a more passive way to invest at this time. In your experience, BiggerPockets Community, how accurate have your experiences been with the GP's projections on returns. Do they usually inflate claims to entice investment, or are they usually straight shooters when it comes to their analysis?

[Brian Burke]

@Zachary Bellinghausen my best guess is there is no "usually" in this case.  Newer sponsors that don't have an established base of investors might be incentivized to inflate their projections to attract investors.  Inexperienced sponsors might inflate projections simply because they don't know any better.  They think they are doing it right, and even talk about how conservative they are, but they just missed the mark.

I've even seen some experienced groups putting out projections that are impossible to hit.  They should know better, but either they fly with blinders and ignore reality, or they inflate the projections because they are aggressively growing their investor base at any cost.

The problem with this is normally it leads to short careers because the inflated performance isn't met, the investors realize that the sponsor is missing the mark, and they don't re-invest.  This would normally leave the sponsor to either go find some other business to get into, or stay in this business and always seek new investors that aren't aware of how badly they underwrite.

I say "normally" because the market lately has been very forgiving.  Outsized rent growth and cap rate compression have bailed these sponsors out, so even though their underwriting was insane, the market bailed them out.  The day will come, however, where this safety net evaporates and you'll see the good operators from the snake-oil salespeople.

Having said that, there are also great operators that truly underwrite properly and make realistic projections.  The key task for the passive investor is figuring out which is which.