Is an apartment syndication investment strategy scalable?
Investor · Windsor, CO · Member since 2019 · 21 posts · 18 votes
My investment is just beginning and I'm evaluating against two strategies: SFR vs syndication investing. While cashflow early on from SFR seems minimal the goal is ultimately to build long term wealth. One of the key components I like from SFR is debt/mortgage paydown which allows for leverage later on down the road, or if i chose, to just fully cashflow a paid off home. Whereas I don't see that component in syndication. Syndication seems to be more an input = output/cashflow. While returns can be reinvested there is no asset paydown with syndication so it seems to miss on that key component that would create a scalable strategy. Can someone correct me or convince me that apartment syndication investing can be scalable and ultimately lead to wealth and/or eventually replace my W-2? Thank you in advance for any responses!
Scott
It depends on experience and lifestyle goals. SFHs are more management intensive. You have to manage the manager. You also will have to fire managers and find new ones. You need to make sure you are saving up reserves for big ticket items throughout.
For syndication, you are at the mercy of the GPs. You need to make sure they are good and experienced. There are many out there who are newer. If I had to guess, I would say there are many that were saved by the market. This is most likely not a sustainable model at this point. Make sure you do your own due diligence. Ask for current numbers on the property; don't trust their "Year 1" numbers.
Additionally, with SFH, you are competing with REITs in a lot of good markets. They are paying smaller interest rates than you will be. They are okay with 5-6 CAP purchases in markets like PHX, Charlotte, ATL, ect... Their management cost is also lower than yours in most instances. At the smaller multi-fam syndication, you aren't competing with them (in some markets, you won't be competing with REITs on SFHs as well - or different types of SFH as REITs have a pretty strict buy box).
Another additionally, you are limited to a certain number of mortgages generally. After that, you need to use an alternative source which will be in the 5% range depending on the company. CoreVest is the most competitive I have seen. With multi-fam, you don't have this issue. Syndication allows you to take advantage of leverage as well.
Your answer Steven makes a lot of sense. I wonder why no one voted for this - must have been overlooked by the posts that came after. So I did vote for your post and probably will vote several times if I can :)
I totally agree with you Steven about the need to vet the GP in a syndication. A lot of syndicators nowadays have not gone through the Great Recession of 2008-09 and they are pitching a lot of MARGINAL deals. You are right in saying Steven that most of these syndicators are "being saved" by the market but when the market turns south and cap rates start to increase, a lot of investors in syndications will get BURNED big time!
There are very few syndicators who actually THRIVED during the Great Recession of 2008-09. I am one of them.
Sure it's scaleable by reinvesting all of your principal plus profits into each new deal.
The more you ultimately invest in a syndication the more you make as you already mentioned.
By rolling over your capital each time you're essentially "scaling up" and generating more income.
It seems you're talking about passive investing in a syndication vs an active approach in SF's. The active approach could allow you to create value through renovation and refinance. SF investing is very active, even if you hire out property management and contractors.
As for the passive role, you have a different model. You take a back seat and don't have to spend time on the investment. You still get the tax benefits, depreciation, principal loan reduction, etc. Scaling is done through investing into more deals and rolling your money when the property is refinanced or sold. The main difference is that you don't get to call the shots.
I would argue that syndication is the way to scale a multifamily business/portfolio. There is still the pay down of the debt in a syndication deals. Syndicators raise money for the equity portion of the deal and then obtain debt for the rest. Depending on the deal, then the syndicators make money in the following ways:
Acquisition Fee, Asset Management Fee, Some type of promote for the GP, Disposition Fee, etc.
It all depends on the structure of the deal. Then during the hold period, you are using cash flow to pay down debt just like any other property and returning the left over cash to the equity investors. Depending on the deal, down the road you can just hold the property for cash flow, or do a cash out refi and return money to your investors. Due to the large purchase price and high upfront costs with MF, purchasing many MF properties with your own money would be difficult. Can be done though.
Disregard the above, seems like you are talking about investing in syndications as a LP, not as a GP
I would go with SFR investments. In a syndication you have -0- control and are at the mercy of the GP. If you buy SFR you control rents, reno costs, refinancing if needed, etc. I have been considering syndications lately but the returns just don't appear that high. I would rather wait until I can find a great deal and purchase under market value.
I would go with SFR investments. In a syndication you have -0- control and are at the mercy of the GP. If you buy SFR you control rents, reno costs, refinancing if needed, etc. I have been considering syndications lately but the returns just don't appear that high. I would rather wait until I can find a great deal and purchase under market value.
Thank you for the responses. Yes my investment would be as an LP. Ultimately I want to be active as a GP or look at multi-family in general but I feel that the passive investment through syndication as an LP gives me some time to analyze deals, learn about the ins and outs and figure out how I can become active - as opposed to diving into the deep end out without any experience or network. Thank you Brian, Todd & Scott. I think you answered my question on scalability very clearly so thank you for that. And thank you John - I do not disagree with anything you're saying there either. I think one of my biggest challenges is living in a very hot market right now (northern colorado) so the "deals" on SFR are few and far between. That's partly why I'm trying to figure out if Syndication may be the best use of my money. Thank you all again! This network is great!
It depends on experience and lifestyle goals. SFHs are more management intensive. You have to manage the manager. You also will have to fire managers and find new ones. You need to make sure you are saving up reserves for big ticket items throughout.
For syndication, you are at the mercy of the GPs. You need to make sure they are good and experienced. There are many out there who are newer. If I had to guess, I would say there are many that were saved by the market. This is most likely not a sustainable model at this point. Make sure you do your own due diligence. Ask for current numbers on the property; don't trust their "Year 1" numbers.
Additionally, with SFH, you are competing with REITs in a lot of good markets. They are paying smaller interest rates than you will be. They are okay with 5-6 CAP purchases in markets like PHX, Charlotte, ATL, ect... Their management cost is also lower than yours in most instances. At the smaller multi-fam syndication, you aren't competing with them (in some markets, you won't be competing with REITs on SFHs as well - or different types of SFH as REITs have a pretty strict buy box).
Another additionally, you are limited to a certain number of mortgages generally. After that, you need to use an alternative source which will be in the 5% range depending on the company. CoreVest is the most competitive I have seen. With multi-fam, you don't have this issue. Syndication allows you to take advantage of leverage as well.
Thanks Steven. I really liked you in Above the Law BTW. Or is that Steven Seagal? Sure you never heard that before. I digress.
Lifestyle is something that's weighing heavy for sure. I have 5 kids - 3 teenagers and a set of twins so time is precious for sure. And something I consider in evaluating when it comes to time commitment needed to really scale SFR quickly. At least for the time being. Thank you for the advice on the syndications. I'll definitely take it all in for consideration!
Follow up question: If we are in fact near the top of the housing market cycle, do you believe syndications fair better or worse than SFR in a market correction?
Scott
@Scott Blackwill
I started in SFRs, and after about 4 years of building a SFR portfolio, then went into multifamily syndications as a LP. Now I am in the process of being the GC on multifamily investments.
My goals were very similar to yours. I wanted to build long term asset value while collecting cash flow. I wanted to own the assets, so that it added net worth and provided the option for leverage and scale. So I did this early on with SFRs and I can say that it has worked well.
Then, when I decided to get into large multifamily, I started by investing as an LP in syndications so I could learn and make money at the same time. As others have said, you can scale, even as an LP, if you invest in Value-Add deals where equity growth is forced and you reinvest. And you do actually own part of the equity in the deal, which is an asset.
One thing to note, most multifamily syndications require that you be an accredited investor to be an LP. As such, it may not even be an option unless or until you meet those requirements.
As @Todd Dexheimer mentioned - these are two different business models. One requires you to be somewhat active and the other requires you to be entirely passive. Investing in SF will have you spending time sourcing deals, dealing with tenant phone calls, completing your accounting, etc. Even if you hired a property manager you will have to spend time away from your day gig going to closings, setting up accounts at the bank, etc. Many of us who are obsessed with RE know that the clock doesn't stop to end the day, investing is a job as you to find properties to purchase and spend time walking them.
I don't know how you make money outside of RE but many people who invest in syndications do so as they know their time is best spent in other areas. It is easier to continue their path being a great engineer, lawyer, etc. and doesn't make sense to spend a lot of time trying to analyze and source deals. You can't be great at everything, at some point it will start to balance out. Knowing this they hire an expert - a person with a proven track record to find deals and provide the financial analysis.
Another thing you have going with a syndication vs SF rental strategy is you are more in control of your investment. The commercial property will be valued based on it's performance. You can directly increase the value of a property by increasing rent and/or decreasing expenses. SFRs are valued based on comparable sales, not performance. You could have a very good performing rental but it will be valued by comparable properties which is out of your control.
The one push for SFRs is that you can re-leverage when you want. If your syndication investment has a lot of equity you can't take your membership units to the bank and pull out more money against it. However a responsible syndicator will be looking out for your best interest and if it makes sense they may refi with a cash distribution to investors.
@Scott Blackwill
One thing to note, most multifamily syndications require that you be an accredited investor to be an LP. As such, it may not even be an option unless or until you meet those requirements.I know you said "most" but I wanted to help clarify - You don't have to be accredited to invest in a syndication, 506(b) will allow some non-accredited investors and there are some state specific crowd funding options for people looking to raise money from non-accredited investors. But you are correct - many people who invest in these are accredited investors.
Thanks Chris, Thanks John. Yes I am an accredited investor by definition. I don't "feel" like an accredited investor as really my only investments have in a company match 401k and I already know how everyone feels about those so no need to blow that one up! I work in international trade in the protein industry and have been for 15 years. I have a great career and earn a respectable income. I just know I need to be doing more.
Chris, your story is great. It's right in line with my thought processes. It's not that I don't want to do SFR but I hear a lot of people "graduating" to syndications or multi-family. No disrespect to other SFR investors out there that are killing it. As mentioned I have zero experience so just based on my own observations. With some decent annual capital to invest I want to place it wisely that's suits where i'm at in my life.
Thanks again everyone!
scott
@Scott Blackwill my comments come from my background of working with a lot of RE investor clients in my tax practice. I currently have SF and smaller MF investments so completely understand your thinking on this. I just want to point out that they are different business models and both have their positives and negatives. The older I get (turn 35 next month lol) the more I value time. Someone scaling a smaller investment portfolio is not going to create time, they are going to create a full time job. I have several clients who have done this to themselves, they are happy and excited about the growth but they are creating more work to manage. You can try to process up but it isn't as easy as it seems. For this reason I don't want 75 properties to manage and I don't have goals based on number of doors. My goals are on cash flow and creating time for family and other more enjoyable areas than property management.
It depends on experience and lifestyle goals. SFHs are more management intensive. You have to manage the manager. You also will have to fire managers and find new ones. You need to make sure you are saving up reserves for big ticket items throughout.
For syndication, you are at the mercy of the GPs. You need to make sure they are good and experienced. There are many out there who are newer. If I had to guess, I would say there are many that were saved by the market. This is most likely not a sustainable model at this point. Make sure you do your own due diligence. Ask for current numbers on the property; don't trust their "Year 1" numbers.
Additionally, with SFH, you are competing with REITs in a lot of good markets. They are paying smaller interest rates than you will be. They are okay with 5-6 CAP purchases in markets like PHX, Charlotte, ATL, ect... Their management cost is also lower than yours in most instances. At the smaller multi-fam syndication, you aren't competing with them (in some markets, you won't be competing with REITs on SFHs as well - or different types of SFH as REITs have a pretty strict buy box).
Another additionally, you are limited to a certain number of mortgages generally. After that, you need to use an alternative source which will be in the 5% range depending on the company. CoreVest is the most competitive I have seen. With multi-fam, you don't have this issue. Syndication allows you to take advantage of leverage as well.
Your answer Steven makes a lot of sense. I wonder why no one voted for this - must have been overlooked by the posts that came after. So I did vote for your post and probably will vote several times if I can :)
I totally agree with you Steven about the need to vet the GP in a syndication. A lot of syndicators nowadays have not gone through the Great Recession of 2008-09 and they are pitching a lot of MARGINAL deals. You are right in saying Steven that most of these syndicators are "being saved" by the market but when the market turns south and cap rates start to increase, a lot of investors in syndications will get BURNED big time!
There are very few syndicators who actually THRIVED during the Great Recession of 2008-09. I am one of them.
In response to your question, it's hard to say whether SFH or syndication will do better in a market turn.
For SFH, the 30 year mortgage and low rate is a tool. Even in the last recession, rents in many markets continued to increase. Who knows where this is going in the future. Is there a chance that the majority of $100K - $250K homes are eventually owned by REITs? I actually think the answer is yes which, to me, is insane for how it would change the landscape of the marketplace.
For commercial, shorter term notes can be dangerous. If you make your money on the buy on not the pro forma'd 3% annual increase in revenue, I think there are a lot of good opportunities.
For both, I think being in strong markets are important right now. Look at the population increase estimates on Charlotte, PHX, Huntsville, ect... We live in a world of supply and demand. Really, neither I nor anyone else can predict this. We can just make decisions based on risk tolerance, looking at trends, and understanding the asset class. People a lot smarter than I have lost everything and people a lot dumber than I have made millions.
My investment is just beginning and I'm evaluating against two strategies: SFR vs syndication investing. While cashflow early on from SFR seems minimal the goal is ultimately to build long term wealth. One of the key components I like from SFR is debt/mortgage paydown which allows for leverage later on down the road, or if i chose, to just fully cashflow a paid off home. Whereas I don't see that component in syndication. Syndication seems to be more an input = output/cashflow. While returns can be reinvested there is no asset paydown with syndication so it seems to miss on that key component that would create a scalable strategy. Can someone correct me or convince me that apartment syndication investing can be scalable and ultimately lead to wealth and/or eventually replace my W-2? Thank you in advance for any responses!
Scott
I struggle with this question frequently myself as I see the merits of both sides. As a passive investor, I would rely on my directly owned properties to appreciate in value over time without any significant action. But for my syndicated investments, the cycle is typically 3-7 years and the appreciation would be based more on the skill and experience of the syndicator.
But to directly answer your question, without a doubt, syndication is much more scalable than direct ownership. However, I believe I have thoughts that are similar to yours in the sense that although a decent value-add or core+ syndicated investment will double your investment in 5-7 years, long-term ownership of properties, especially in areas that are known to appreciate, is a more tried and true path toward true wealth.
So this is why I do both. The core of my portfolio consists of carefully selected properties which cash flow very well and, based on history, will appreciate in the long-term. And then on top of that, about 30% of my portfolio consists of carefully selected syndications with managers that have demonstrated experience with multiple full cycles....most of whom were actually in operation during the 2008 crisis.
My investment is just beginning and I'm evaluating against two strategies: SFR vs syndication investing. While cashflow early on from SFR seems minimal the goal is ultimately to build long term wealth. One of the key components I like from SFR is debt/mortgage paydown which allows for leverage later on down the road, or if i chose, to just fully cashflow a paid off home. Whereas I don't see that component in syndication. Syndication seems to be more an input = output/cashflow. While returns can be reinvested there is no asset paydown with syndication so it seems to miss on that key component that would create a scalable strategy. Can someone correct me or convince me that apartment syndication investing can be scalable and ultimately lead to wealth and/or eventually replace my W-2? Thank you in advance for any responses!
Scott
There's absolutely scalable and exactly what I am pursuing. There is definitely principal paydown with syndications, just on a shorter timeframe.
The only advantage with SFH is that you can have a paid off asset in 30 years, which I realized isn't as good as it seems and may not be for everyone. The tenant and PM headaches are IMO not worth any advantages of SFH (not convinced if there even are any) vs. passive investment in syndications.
I would go with SFR investments. In a syndication you have -0- control and are at the mercy of the GP. If you buy SFR you control rents, reno costs, refinancing if needed, etc. I have been considering syndications lately but the returns just don't appear that high. I would rather wait until I can find a great deal and purchase under market value.
Highly disagree. I would rather leave it to the professionals. Even a 10% IRR with a mostly passive syndication is infinitely more valuable than a 20% IRR you get from actively managing a SFH. Dealing with PMs and tenants will make you lose faith in humanity sometimes and we underestimate how much time this takes.
One is a job and one is an investment. I already have a job (that pays more per hour than SFHs), I don't need another time consuming one for the rest of my life.
You'll never hear about and be burdened with a tenant not paying their rent when passively invested in syndications, and that's a beautiful thing :)
@Scott Blackwill my comments come from my background of working with a lot of RE investor clients in my tax practice. I currently have SF and smaller MF investments so completely understand your thinking on this. I just want to point out that they are different business models and both have their positives and negatives. The older I get (turn 35 next month lol) the more I value time. Someone scaling a smaller investment portfolio is not going to create time, they are going to create a full time job. I have several clients who have done this to themselves, they are happy and excited about the growth but they are creating more work to manage. You can try to process up but it isn't as easy as it seems. For this reason I don't want 75 properties to manage and I don't have goals based on number of doors. My goals are on cash flow and creating time for family and other more enjoyable areas than property management.
Exactly. Even when I reached only 4 units, the managing of tenants became highly annoying and not worth the effort IMO. There are so many little (and no so little) things you have to keep doing as a landlord that it becomes a time sink. I'd rather spend that time at the gym or learning a language.
My plan is to rotate entirely out of SFHs (whether I or a PM manages them) in the next few years.
@Scott Blackwill
Some syndications require that you be an accredited investor. I do not know if all of them require that. We Are considering of the same. But more so as a way of diversification of our money into real estate.
Thank you everyone for the responses. There is a lot to chew on here and I very much appreciate it. It's maddening that there are no "right" answers but it just shows the flexibility and diversity of real estate investing and there's a place for all strategies to be successful. Looks like a lot of research is still required but this was invaluable. Thank you very much all!
Hey @Scott Blackwill - I believe investing in syndications can be scalable. Especially if the deals you are investing in go through a refinance around year 2 or 3 and a chunk of your capital is returned.
Having personally started off buying single-family homes and a duplex the past few years, I thought for the longest time I'd just keep building that portfolio and eventually retire. However, I pivoted to the syndication strategy as a limited partner a little over a year ago.
I wanted to experiment with handing over control and responsibility to someone with more experience and knowledge than myself and collect the quarterly distributions. 8%-10% cash on cash and a 15%-18% IRR after a 5-year exit sound great to me without having to lift a finger. Obviously, that's not guaranteed and the most important factor here is to partner with/work with proven operators.
Hit me up if you want to chat. I've been involved in 3 syndication deals now.
-Tyler
Ive never invested in a syndicate but from the typical returns Ive seen thrown around I dont see how that could be considered a viable vehicle to rapidly scale up wealth compared to your own property investments
To go with syndicate route, you would have to build a good nest first, say put in 100-500K into the deal every year, the compound IRR will really get you the desired financial freedom one wants. I started with SF and whence it getting to 30 doors, the amount of work involved will make you wondering how much it worth. I am in the process of moving towards the syndication route and looking forward to know some good syndicators pros recommend.
I've personally always felt that it's easier to be a LP in syndication once YOU know what you're doing. Until then, all you have to evaluate deals is what a GP is telling you. If you don't know anything about real estate, it's incredibly difficult to have any clue about whether their numbers are correct or not. I would start out in SFR, learn the business, go through the pain and struggle and then move to syndication. SFR short term and then move to syndication long term.