Apartment Syndications: Start small or Go big?

Question

Over the past several weeks I've had multiple conversations regarding how to get started in multifamily syndications. And the common theme, or belief is that it is best to start small. In fact, a close friend of mine even said, "We saw how successful you were, how you started with a smaller 16 unit first before tackling a 220 unit. So we thought we should do the same." To which I responded - 16, 50, 200 - its all the same except the bigger you go the more people on the team and the more specialized you get to be. The more focused you can be means the less you have to learn and do the things you hate.

For example - If you are good at analyzing properties or developing relationships with brokers or raising capital or asset management - well that very well may be the only thing you do for the syndication team.

So my question to you BP -

For an aspiring multifamily investor/syndicator do you think it is easier to start small, to tackle a 10-20 unit first or a 100 unit? Should someone learn everything first? Learn how to find, analyze, add value, and manage a small multifamily before getting into something bigger? Before Syndicating?

Or should they focus more on finding the right people for the job? Should they focus on putting the right people in the right seats on the bus, as Jim Collins refers to it in the book "Good to Great"? Should they focus on networking with experienced professionals, other syndicators, thereby leveraging other peoples experience, knowledge and resources and exponentially expand and accelerate their capabilities as a Commercial Real Estate investor.

I mean, why should I learn to ride a bike if my ultimate goal is to fly? Why think small if my goal is large? After all I don't need to know how my car works to be an excellent driver, I just need to know enough to optimize its performance (that and a great mechanic).

Perhaps it is paradigm issue? As Steven Covey refers to it in 7 Habits of Highly Successful People. A mindset of I need to know everything myself before I am of any value to large team, or project.

I don't know. But I do know this - "If you want to go fast, go alone, but if you want to go far, go together." African Proverb.

What are your thoughts Bigger Pockets?

Brian Burke · Answer

I guess I look at it like this:  you are standing on the ground and you want to get on the roof.  You can climb a ladder or just jump like hell and scramble up there. If you use the ladder you are almost certain to make it on the roof eventually.  If you try jumping, you are almost sure to break your leg.

If you go straight to big in the syndication business, chances are the leg you break won’t be your own, but that of your investors. Smart investors know this, and only invest with proven operators.  For this reason, would-be syndicators seeking a shortcut often find that they struggle to find investors, and either they fail out of the gate or fail after they’ve built a big enough portfolio on the backs of unqualified investors (who didn’t know any better) to where they find themselves in prison.  Yup..seen that!

Bottom line is I know a lot of successful operators who built a business from nothing, over time.  I don’t know many that took a shortcut—but I could tell you numerous failure stories about those that tried.

Jordan Burnett · Answer

I am not a syndicator, but as a passive investor looking to vet syndicators, the thought of someone jumping straight into large multifamily is a pretty big red flag for me as a LP.

A comparison I could give you is in my IT world as a network engineer. We always allow the newer engineers to start with a smaller project like a small office when they're on their own because it limits their downside. If they are participating in a larger project, they pair up with an experienced Senior Network Engineer and perform some of the easier tasks (equipment inventory, physical installation, cabling, upgrade software, etc.) or work under direct supervision.

I honestly think that would be a great approach for you--pair up as a Co-GP with an experienced operator on a larger deal so that if you do get into hot water they can help you out--and your reputation is maintained with your investor base. Meanwhile, you still get exposure to the intricacies of larger deals.

I think another challenge for you on the whole "right people on the bus" approach is that you won't necessarily know that your team will work well together until you tackle some actual deals. As someone who has worked on multiple teams throughout my career, you really need to be in the thick of it with people to know how they're going to perform their duty under pressure. I can only assume it would be better to get that experience on a smaller deal than a huge deal. Partnerships that started with good intentions fall apart all the time.

Also, consider this from a downside protection standpoint. Let's say you start with a smaller multifamily and still run it as a syndication and still raise from LPs. For a smaller multifamily, you may only need to raise equity from 5-10 people to get the deal done. That means your current exposure as a GP is limited to those 5-10 people. If things go horrendously wrong, you limit your downside risk to those investors. On a larger deal, you may have 20,30,50 investors.

This is very much a reputation business. As a GP you may get a LP's investment once to try you out and see how you perform. But, if you mess up the first syndication with that LP, it's highly unlikely that they will invest with you again.

And, it's highly likely they'll likely tell others to avoid investing with you as well, even if they are family and friends. That would be the network effect working against you--bad news.

Ashton Levarek · Answer

Love the Feedback, thank you BP for fueling my dreams! And proving to me that it is merely a mindset issue.

@Brian Burke- so I agree with you then, its a paradigm issue, a mindset. You look at it like climbing to the roof I prefer to address the issue like skydiving. You either jump or you don't, you pull your parachute or you don't. Massive dreams require massive action. Find an experienced syndication team, get in good with them, invest passively even, bring other investors if you have to, learn from them, partner with them. Take action towards your goal. Failure is not an option in this paradigm, because failure provides a learning experience, in other words you can not fail.

If you want to get into multifamily do not waste your time with smaller deals. Network, Join or build a team, find a deal, raise capital for that team, bring a skill, a relationship, be a key principal.

@Erwin Miciano - Lets talk brother. We are always looking for highly focused and motivated partners. In fact our last intern/VA just came onto our team as a partner, set to run a whole division of our business. He helped run the whole asset management side of our business and is now coming on full time. Whether you work with us or someone else - you have the right mindset brother. Keep it up.

@Omar Khan - once again it appears that this is a mindset and paradigm shift - what is small? what is big? Is it really a shortcut? Whats the fastest way from point A to point B - a straight line. Thats not a short cut, thats just obvious. Forget all that shortcut idea, a deal is a deal. The problem is not how big or small the deal is, the problem is how we think about the problem. You're worried about using other peoples money? Working with a bank IS other peoples money. What, they don't matter? Change your mind and the world changes with it. Stop focusing on how, instead focus on why and what. When you start networking with the why and what in the forefront of your mind, telling everyone - The how will emerge.

@Eric Mielke - love it brother. We do much the same. Ohio? There are some great markets out that way! We're closing on a 220 unit in Columbus this August. Love that area. Let's connect and make something happen.

@Jordan Burnett - Love it Jordan. Could not have said it better, this is exactly how we did it - find a successful syndication team and join/partner with them. We brought talent, added value to their team/business, and then helped raise capital. But many people start by coming in as a passive investor a limited partner, then leverage their partner's experience/reputation etc. Like you said, people invest in people first, the deal and the market second. So being attached to an experienced and focused team, who's values and goals are aligned with yours is paramount.  and in other news - You should connect with my brother/partner @Chris Levarek - he's an IT manager as well but also the COO of our business and a monster at what he does.

@AJ Shepard - not hard, just takes clarity of focus, commitment to that goal, and daily action. Clarity, Commitment, and Action. We closed on 43 doors in our first year and will close on over 400 doors this year alone. Hard is relative to the mindset of the individual. Ive spent my entire career, sorry, life embracing hard and impossible tasks. Mindset is everything.

Omar Khan · Answer

@Ashton Levarek I wouldn't take shortcuts especially if you don't have a background in either of commercial property management, in-depth investment analysis (e.g. investment banking) or have a significant financial backing. Otherwise most newbies are playing with other people's money which sounds exciting but is not entirely the most ethical way to be doing business (IMO).

We all have to start somewhere and there is no shame in starting small. You can always scale up quickly if you have a natural talent/flair. But unlike those people, the rest of us, including successful sponsors, have perfected their art over years if not decades. Don't play with other people's money and learn things on your own dime. Then start accepting outside money.

Wendell Fong · Answer

if you are the General Partner, start small.   That's it.   First off you must either have tons of cash sitting around our you can sell ice cubes to the Eskimo.   You believe you can get a group to invest with you without any prior history... well that would be amazing.

My greatest mistake was investing with a fix and flipper who I had a history with.  He decided to form a JV and purchase a +90 unit complex.   Great fix and flipper, poor manager of the +90 units.   The vacancy dropped and he struggled to break even.  It took three years but the JV eventually imploded.

I have made it my mission to be the General Partner on the next JV AND start with 9-20.   I do not need a partner to do this but I do want to get a few cycles under my belt with small risk/small reward before I get to larger projects.

Mary F. · Answer

Notice that the people who suggested you start small are all highly successful...maybe they're on to something?

"I mean, why should I learn to ride a bike if my ultimate goal is to fly?"

Let me give you a better analogy.

Why should I learn to fly a Cessna 152 when my goal is to fly an Airbus A380?

Because you're not going to find 525 passengers (investors) to get in the plane with you if it's your first time in the cockpit, but you may be able to find 1 for the 152.

Your enthusiasm and can-do mindset are wonderful, but as they say in the study of Logic, they are necessary, but not sufficient, conditions.

Todd Dexheimer · Answer

It's not a one size fits all answer. If I told everyone that I coach to start with a 200 unit apartment, most would never get started. I sure know that I would not have gotten started if someone said that to me. I had to start with a $60,000 house, because that is what made sense to me. It allowed me to learn on my own dime, to scale, to systematize, etc. From there I was able to go to larger and larger deals, to eventually buying 200+ unit apartments.

Owning 1-30 unit buildings, flipping, developing, etc allowed me to fully understand the real estate world. It has made me a better investor and better steward of my investors money. That said, I know others that have jumped right into large assets with the right partners. They have found success doing that, built teams and created a great company.

The most important factor is that you take action. Massive action is great, but taking small action consistently, with patience, will beat out the big push here and there every time.

Omar Khan · Answer

A positive mindset is very important. It's also very important to run these types of experiments with your own money. I'm all for being optimistic and tackling bigger problems. But you don't have to take my word for it. You can ask folks with an even longer tenure in investment management (@Brian Burke) to chime in. They will echo something similar. Don't take risks with other people's money, refine your pitch and take your time. A lot of the advertising you hear online from gurus is designed to sell you a dream. Sadly, that dream turns into a nightmare for a lot of well-meaning people.

But I am with you on positive thinking, having a generally optimistic outlook on life - personally and professionally.

Erwin Miciano · Answer

Awesome post @Ashton Levarek. I'm currently in between these two ideas, but as of right now leaning towards networking and finding the 100-200 unit team that I can help and support. Rather than building the team myself.

I'm excited what the others have to say. I do think there's more grey area to starting in syndications than just creating a team to do deals. With that said, I would personally be down with being a free virtual assistant in doing some grunt work that comes along with the deals if it meant I could also learn the process.

Mike Dymski · Answer

There are lots of investors who leverage clubs and programs to jump start their syndication careers. One way or another, it requires hard work, knowledge, and assistance from experienced individuals (just like advancing in any career).

Apartment Syndications: Start small or Go big?

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