Passive Syndication vs. Getting Hands On

[Michael Daharsh]

I recently read the book, “The Perfect Investment” by Paul Moore. Good Read. To sum it up in a sentence, Moore believe that investing in proven syndicators, with proven managers, in a growing market is the perfect investment. He makes a case that investing in multi-family units less than 100 is ultimately a waste of time and fast track to failure.

I understand this publication is effectively a passive advertisement for his own funds, but I want to understand if people in the BP community feel the same. He is pretty strong instating the working your way up by buying 10units and increasing more, does not work out.

I am wanting to transition careers into full-time real estate and I want to invest in large multi-family and build my experience in this area. I am focused on building a portfolio of Class C/B properties, value add, refinance, and expand/grow. This is what i want to do for the next 20 years...

What are your thoughts? Is it a fools errand? What is Moore missing?

[Michael Ealy]

Originally posted by @Michael Daharsh:

I recently read the book, “The Perfect Investment” by Paul Moore. Good Read. To sum it up in a sentence, Moore believe that investing in proven syndicators, with proven managers, in a growing market is the perfect investment. He makes a case that investing in multi-family units less than 100 is ultimately a waste of time and fast track to failure.

I understand this publication is effectively a passive advertisement for his own funds, but I want to understand if people in the BP community feel the same. He is pretty strong instating the working your way up by buying 10units and increasing more, does not work out.

I am wanting to transition careers into full-time real estate and I want to invest in large multi-family and build my experience in this area. I am focused on building a portfolio of Class C/B properties, value add, refinance, and expand/grow. This is what i want to do for the next 20 years...

What are your thoughts? Is it a fools errand? What is Moore missing?

 Michael,

How are you man?

Here's my perspective:

1. 100-unit and larger apartment complexes is more efficient than smaller apartments because 100-units or larger can afford a full time PM and full time maintenance personnel. So I agree that 100 units is a good threshold when one syndicates an apartment deal

2. HOWEVER, since you have more competition for 100-units and above specially from institutional investors, the cap rates and profits from big apartment complexes like those are squeezed - you buy them at higher price per unit and therefore your cap rate and over-all profit tend to be smaller (or the profitability coming from the economies of scale is 'canceled out' in some cases)

In fact, what my partner Nate and I found is that we can buy better deals with apartments less than 100 units (but bigger than 29 units to achieve enough economies of scale - so we're getting great deals with apartments 30-90 units).

3. Do you have to start with 100-units + and just be passive if you can't? Not necessarily. It depends on your market, your goals, your skills and what resources you already have or can have access to.

For example, If you're a super busy brain surgeon making $1M a year in income, buying a 10-unit building is a waste of time. You're making $500/hour and if all you make on a 10-unit building is $2,000/month cashflow...and you have to spend 5 hours a month managing the manager of the building - you're actually losing money and it does not make sense. 

In addition, you a busy brain surgeon might not even have that 5 hours a month. Hence, it makes sense for him to let his money make money for him. He invest $1M in a good deal backed by an experienced syndicator, he could easily make 12-15% IRR or $120K-$150K/yr without spending any of his time.

But, if you can devote 20 hours a week in active real estate investing, you have several hundred thousand in cash, great credit, good leadership and networking skills, sure do it yourself. That's especially true if you can find great deals with 10-unit apartments in your market. 

4. To minimize risk with active investing like investing in apartments, it makes more sense to invest with OTHERS who are more experienced and are better capitalized than you.  You want to minimize your risks by leveraging on other people's experience and network. They already know what mistakes to avoid as well as who are the right contractors, property managers, etc to hire. Moreover, successful apartment investors have more cash than you so if the deal needs more cash than anticipated, they can help infuse liquidity into the deal.

Makes sense?