When and how did you move into syndications over SFH's?

Question

Hey folks, curious what you'd recommend in my shoes... I have two rentals at the moment, both SFH's. These were bought with savings rather than financed. I have the option of lending against my primary which would free up $400-500k, but I'm wondering if it doesn't make sense to get involved with syndicates here and now, rather than do years of single family homes first, only to gravitate toward multi-family eventually anyway? I have a background in finance and have held a number of licenses, so I do believe I'd be deemed an accredited investor by default, which helps. Certainly have an interest in syndication, but I see how competitive that space is, and I have systems in place for more single family homes.

What factors would you consider? With what I just said, what would you do? What is the best route into syndicates (other than the obvious networking). Thanks

What factors would you consider? With what I just said, what would you do? What is the best route into syndicates (other than the obvious networking). Thanks

Christine Bellish · Answer

Hey Dave! A lot of people have had success gradually building up their portfolio of SFH or smaller multifamily rental properties and then they level up into larger assets - it's a great path and has worked for many, but it's definitely not the only path. You are smart to consider getting involved in syndication if you are looking to scale quicker. Investing as an LP (passive investor) is a good way to get started, whether you want to become a GP yourself in larger deals eventually, or if you are just looking for more TRULY passive income.

Love that you are considering leveraging your equity to continuing investing. As long as you are making more than the interest you're paying, it's a win. With rates still at historic lows, we have had a number of investors who took out HELOCs recently to invest in our recent syndication deals.

If your goal is to earn more TRULY passive income and have more time freedom, then investing in syndications is could be a great option for you because regardless of the systems that you have in place for your single family homes, you still have some work to do - initially it's finding the deals and everything that goes along with that, and then once you close, even if you have a property manager in place who fills it with tenants and deals with maintenance requests, you still have to manage the property manager and handle any major issues that arise - as a passive investor in syndications all of your work is done up front evaluating the syndicator and the deal - once you wire your money your job is done.

To Zach's point - finding a sponsor you trust is the most important.

You asked for a way into syndications other than networking, and I honestly believe networking is THE way. I met the syndicator I invested with passively for the first time (and who I currently partner with on the GP side of things) at a real estate meetup event in NYC!

Even if you do research on your own by Googling, and reading the threads here on BP, the next step should be to connect with people directly and have more in-depth conversations. You can set keyword notifications here on BP for syndication (and similar words) so you can get notifications when it's being talked about, and then you can message the people who are talking about it directly - maybe they are syndicators, or maybe they've invested passively and recommend some good sponsors. Getting references (especially from people you already know and trust) is always a good idea!

You can also connect with syndicators on social media (Instagram, Facebook, LinkedIn, etc) - for those that are active on these platforms it can be a great way to get to know them better, and then when you find ones you like, you should message them to set up time to chat one-on-one because ultimately that's how you'll get to know them and build trust (or not), and figure out whether they are the right fit for you to invest with.

Evan Polaski · Answer

@David Smit, story time: I started buying SFRs (and one duplex) in 2011.  At one point had up to 9 doors, so was not a huge portfolio, but more than a couple.  I self managed until first child was born.  Hired manager.  Went through 4 managers over about 18 months, then took back management.  They were all horrible, and I was making less money to do more work.  I hired the managers because first child, plus owning a business, plus owning rentals was too much.

I sold a couple rentals several years ago.  Then I sold several more a couple years ago.  Why did I sell: When looking at true reserve requirements and the appreciation of the asset, with limited forecast future appreciation, my ROE was next to nothing. I sold and started rolling that money into syndications, because it meant less work, less worry, and, when taking real Capex and repair reserves into account, I could make more money.

So what is a real reserve for rentals: $20/mo for the roof, 500-1000/yr for turn over costs, $33/mo for HVAC, $83/mo for full kitchen remodel every 20 years, $33/mo for full bath remodel every 20 years, exterior paint, decking, fences, tree trimming, garage doors and openers, flooring, baseboards, blinds, etc.

Moral: owning real estate is expensive, and especially if you see prices stagnating for a while, you really cannot make up money. No matter what everyone tries to say, appreciate will drive your whole return.  You may be able to cash flow well for a year or two, or 8, but the longer you are cash flowing, the more likely you are about to come into a major maintenance and Capex costs.

Now for syndications, networking is always good.  BiggerPockets has a lot of active syndicators, but the world of syndicators is HUGE.  Independent financial advisors tend to get solicited frequently with syndicators raising money.  Google's algorithm will start funneling you more operators.  Podcast guests. If you would prefer to invest locally, driving your market and tracking down the ownership group of properties that seem interesting can uncover groups.  Looking at transactions on Real Deal and various press releases.

Then it is having a lot of conversations.  Who do you feel is speaking honestly and frankly to you, who is selling you? You start assessing business plans, various markets, asset types, level of integration within the company, track record, access, etc.

Finally, you just need to take a leap and put some money to work.

I cannot advise on what you should do, but I will say that if I had 400-500k of equity available in my home, I would be looking for ways to tap into and reinvest that money, syndications or more direct rentals.  You are "earning" 4.25% on that money by not borrowing against it.  Would you be happy with an investment earning 4.25%? (4.25% being the national average 30 yr fixed rate interest rate).

Zachary Inman · Answer

Hi David,

Full disclosure, I work with a top Midwest Multifamily Syndicator, so keep that in mind when reading :)

It truly depends on your investing and life goals. With active SFH investments, you will continue to spend a significant amount of time, effort, and money on your deals. When you scale up, the amount of time, money, and effort will only increase proportionally to the number of deals you have. Of course, there is the potential for higher returns investing actively.

With passive investing through syndications, the biggest advantage is being able to leverage an operator's track record, experience, and connections and invest passively - which buys you back your time while often receiving similar or higher risk-adjusted returns. The primary risk with syndications is operator risk. Being a limited partner is the biggest advantage and the biggest disadvantage. It's an advantage because you can invest in high-quality, low-risk deals passively, and a disadvantage because if you invest with a poor operator then the LP has limited recourse.

When finding reputable sponsors, google is a good place to start. Established, lower-risk sponsors will have an online presence. Also, there are several threads on BP and other forums with LPs discussing reputable sponsors. When evaluating, be sure to ask for an audited track record of full cycle deals.

Lane Kawaoka · Answer

I started with turnkey remote rentals in 2009-2015 while working my engineering W2 job. Then went into syndications once my net worth went over 500k more for the passive losses and tax benefits that are stronger than owning little rentals.

Its more about scaling over 5-20 units. When you net worth is over 1-2m time is more valuable.

Daniel Han · Answer

I think many SFH investors will face the same question given the huge appreciation last few years. It seems like the core question is what to do with the equity built in the rental properties.

The options are

1. don't do anything. There is big equity trapped in the property. Maybe that's ok for some folks who are more conservative

2. cash-out refinance. the rent probably didn't grow in proportion to home price appreciation. If you cash-out refinance, cash flow becomes tight.

3. sell - lots of questions on what to do with the proceeds and tax implications. 1031? lazy 1031 into syndication?

If you had a property that appreciated substantially (LTV is below 50% now), what would you do with the property?

Brock Mogensen · Answer

First it really depends on what your long-term goal in REI is.  Do you want to be 100% passive?  Or is your goal to run your own syndication deals?  If you want to be 100% passive, investing as an LP in a syndication is a great route to take.  If your goal is to make real estate investing your full-time career, running syndication deals as a GP is a great way to do it.

When and how did you move into syndications over SFH's?

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