To syndicate or not to syndicate ???

Question

I am at 61 units with a market value of 6 million.... I keep hearing “ your next step is a syndication “.... I have heard mixed reviews about syndications. Who here as experience with them?? And would you recommend it or not ??

Sam Grooms · Answer

First, decide what you want, then figure out if what you're doing will get you there. Don't feel like you have to move into syndication just because others are doing it.

The people telling you to syndicate remind me of the investment banker in the fisherman parable. I'll post it below for those who haven't read it.

Disclaimer: I've syndicated deals. $40 million in acquisitions in the last year. I'm now at a crossroads, where I have to decide if I want to grow into a business, or keep it small and have plenty of free time. It's not an easy decision.

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An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fish in it.

The investment banker was impressed by the quality of the fish and asked the Mexican how long it took to catch them. The Mexican replied, “Only a little while.” The banker then asked why he didn’t stay out longer and catch more fish?

The Mexican fisherman replied he had enough to support his family’s immediate needs.

The American then asked “But what do you do with the rest of your time?”

The Mexican fisherman replied, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos: I have a full and busy life, señor.”

The investment banker scoffed, “I am an Ivy League MBA, and I could help you. You could spend more time fishing and with the proceeds buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats until eventually you would have a whole fleet of fishing boats. Instead of selling your catch to the middleman you could sell directly to the processor, eventually opening your own cannery. You could control the product, processing and distribution.”

Then he added, “Of course, you would need to leave this small coastal fishing village and move to Mexico City where you would run your growing enterprise.”

The Mexican fisherman asked, “But señor, how long will this all take?”

To which the American replied, “15–20 years.”

“But what then?” asked the Mexican.

The American laughed and said, “That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich. You could make millions.”

“Millions, señor? Then what?”

To which the investment banker replied, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

John Casmon · Answer

Lots of good questions asked. Goals are very important here as it can be just as lucrative to do smaller deals than to syndicate. But syndication is not about real estate investing. It's more akin to a financial services firm that invests in real estate so make sure you understand what you're signing up for.

Tj Hines · Answer

@Carlos Medina depends on your resources whether you should be syndicating or not syndicating. Something to think about ... if you decide not to syndicate how quickly can you scale with what monetary resources you have?  Do you buy one or two properties - then play the waiting game till those two props throw off enough yield to go after another asset. In real estate my friend the person who has the most capital wins. Learn as much as you can about syndication soon as possible.

Mauricio Rauld · Answer

@Sam Grooms I love that parable.  First found it in the 4-Hour Work week.  Yes, you just need to make sure you are working with a great SEC lawyer to make sure you raise the money legally.  Happy to answer any questions re legal process @Carlos Medina

Luke Miller · Answer

@Carlos Medina what's your end goal? Are you trying to build a business and truly scale or are you looking to wind things down soon? If you want to continue doing small deals, keep refinancing your portfolio and buying smaller stuff. If you really want to scale, get some investors together, find a really great deal and take it down. Syndication is what you make of it. It can be good or bad.

Travis Watts · Answer

@Carlos Medina Good question. I started in SF homes and eventually transitioned into being a limited partner investor in multifamily apartment syndications. For my wife and I, the decision was about being 100% passive in our investing approach. I had had my fair share of managing tenants and property managers and doing hands-on flips. We couldn't be happier with the decision we made to go passive. As far as active syndicating, it can be very lucrative, but can also be very time-consuming. If it's what you love doing, it's worth considering. Best of luck!

Alina Trigub · Answer

@Carlos Medina

A lot of great advise here. I like what @Lucas Miller and @John Casmon suggested. It all depends on what your end goal is and where you want to take it next and what responsibilities you want to have on your shoulders.

Using OPM (other people money) is a great responsibility and should not be taken lightly. Syndications is a business that requires full understanding and complete legal alignment with SEC rules. I suggest you learn about the process first if you haven't and speak with a few securities attorneys about it. Good introductions to syndications are these two books: "best ever syndication book" by Joe Fearless and @Theo Hicks and "it's whole new business" by Gene Trowbridge.

I can give you a few securities attorneys names if you need. PM if needed.

Your options are:

1) Continue buying properties yourself or with partners via JV's.

2) Take a syndication route if you're interested in a significant scaling and ready to take on responsibility  of having investors to report to.

Greg Dickerson · Answer

@Carlos Medina  The positives of syndication are you can raise an unlimited amount of capital to do deals if you know what you’re doing. There is plenty  of money out there looking for good opportunities if you know where to look and how to get it.

The negatives are you have to handle multiple investors, the deal could go south and if you miss your projections you will have to answer for that to the investors.

If you want to scale and you are an experienced operator and know what you’re doing syndications are the way to go.

Greg Dickerson · Answer

Not offended at all. Just trying to make sure my message was clear. Many people miss the point on that metaphor entirely. It is a great story nonetheless but not relevant in every case.

Sam Grooms · Answer

Clearly, sounding like the investment banker offended you. I'm sorry for that. I did not say you were "like" the investment banker. Just that your statement was very similar to his in the parable. I'm sure you have a great life, and kudos to you, Greg. Mines not too shabby, either.

To syndicate or not to syndicate ???

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