Syndications: How do you deal with the trust issue?

Question

Hi.  I am new to BP (former FatWallet member though!).  I have been investing in RE for ~10 years and hold 5 properties.  They have not been time-intensive, but I'm always interested in smart financial options.  The Google led me to this site from a different question (are there no companies that do all the work that mortgage servicers do without the mortgage part?), but the first forum post I saw was on real estate syndications.

Reading through the various threads on BP gave me a good overview of the concept, but very little information about the process and the risk.  In my other (professional) life, I work for a federal agency and have seen a lot of fraud.  Like, a lot.  And it usually comes in the form of people seeking investments and trusting individuals based on their pitch and purported credentials, which may or may not be honest/legitimate.  So the apparent word of mouth approach to syndications, frankly, raises a lot of questions in my mind.

I know a ton of folks on BP are big fans of passive investing via syndications.  Can some of you provide some comfort -- or ways to get comfort -- about the approach and, as importantly, the people who are doing the managing?  In other words, how do people get past the trust issue?

Taylor L. · Answer

References, Referrals, Research, and Long Term Relationship building. Background checks are recommended and good old fashioned Google searches can go a very long way. Also, frankly, not putting too many eggs in one basket.

It also helps if you have a good understanding of the business and what a typical deal looks like in today's environment. If someone I'd never heard of were to approach me with a deal projecting well higher than the typical market return today, I would very quickly suspect either naivete or something worse.

Christine Bellish · Answer

Taylor and Evan gave great advice: references, referrals, research, and relationship building. As someone who is a control-freak myself, and who has owned and managed smaller rental properties locally, when I heard about syndication I was bit a skeptical too, which is why it took me nine months of doing research about syndication and getting to know different sponsors before I decided to invest passively for the first time. You have to ask a lot of questions, and the syndicator you are potentially investing with should have no problem answering them in a timely manner. There are a lot of syndicators and a lot of deals out there, so if anything feels or looks off to you, you can find someone else and another deal to invest in. Getting to know the GP is so important, and if you are feeling uncomfortable, say that, and see how they respond. I think their response can be very telling.

Also, most people don't actually read the paperwork - the PPM is long and full of legalese, but it outlines all aspects of the deal - including what happens if something goes wrong, on what occasions passive investors have voting rights, and how to remove a general partnership team that is not performing. I suggest you take a look at it and ask questions before making this type of investment for the first time. Part of the reason why I decided to invest with the GP team I did for the first time is because they were voted in two times to save other deals from foreclosure when another sponsor wasn't performing. It's not just about what people can do when things are going as planned, but it's how they handle and overcome challenging times.

Additionally, I think this goes without saying, but make sure whoever you are investing with has a great track record. You can speak to their other investors as a reference.

Evan Polaski · Answer

@Howard R., trust is hard to earn and easy to lose.  Like Taylor mentioned, references and research can go a long way.

You are in a slightly better position than others, in that you have owned rentals for a decade.  While a SFR and a 200 unit apartment are not the same, there are components that are similar.

Personally, I recommend anyone starting out talk to a lot of sponsors.  After a dozen, or more calls, you will start to get a sense of what a sales pitch is and which sponsors are legitimately outlining facts to let you make the best decision for yourself.

Another way I get comfortable with new groups is trying to get a sense if the sponsor is building a company or not.  While I don't want a group that is growing for growth's sake, real estate is not a passive investment.  It is not a hedge fund taking positions in other groups (although there are some groups that do this successfully).  I want to be investing in a company.  There should be employees: acquisition analysts, investor relations, accounting and finance.  The more layers, the better, as the more employees there are, the harder it is to hide fraudulent activities.

Paul Moore · Answer

Hi @Howard R..  Tech entrepreneur Ian Ippolito faced a similar question when he started investing in syndications about eight years ago. To help set up a clearinghouse for people to review Syndication, syndicators, and phones, he set up The Real Estate Crowdfunding Review. Since then, reportedly thousands of investors have joined to share their reviews and read reviews of others’ experiences.  Ian has also set up a Private Investor Club. (I say “reportedly” because syndicators and fund managers aren’t able to join the site, so I don’t have all the facts.)

I would also recommend getting the 2020 BP book, The Hands-Off Investor by @Brian Burke.  This is a 300+ page deep dive on how to review syndicators, fund managers, and deals. Happy investing!

Duncan Hayes · Answer

Investing is taking a chance. Either you want to take that chance or you don't. You can only calculate risk, you cannot eliminate it.

Mike Dymski · Answer

Vet sponsors (and their offerings) over years, rather than weeks or months.  Invest with clubs who perform extensive diligence, including background and TLO checks, or perform them yourself.  Invest with sponsors with long track records.  Diversify into 20+ opportunities.  After 1-2 years of learning how to best passively invest, sponsor trust will be still be paramount but a non-event to get comfortable with.  The harder part is finding good opportunities.

Howard R. · Answer

This is a great discussion.  I appreciate the collegial nature of the responses; I was a little worried there would be some hard feelings on one end of the spectrum or the other.  I will heed the advice above and take it slow, with plenty of research.  Not sure that I will ever get over the trust hump, but we'll see.

Lane Kawaoka · Answer

I had 11 rentals from 2009-2015. Then I went into syndications. Feel free to reach out.

Ronald Rohde · Answer

For sure thats true. but direct CRE investing eliminates a lot of subjective risk. I'd much rather put my own dollars to work when I have total control. Why not just control the dirt yourself? @Howard R.

Syndications: How do you deal with the trust issue?

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