Why Not Syndications?

Question

Hey everyone! I'm curious on your thoughts as investors. As someone working in different syndications I'm curious what, if any, your reasons are if you have NOT done a syndication?

As I'm learning every day, I want to understand why some people aren't interested. Is it because you don't know or trust the individuals? You like more control? What about that control do you like? Do you not know of good opportunities? What other reasons do you have?

Thanks for your feedback in advance.

-Matt

Dave Rav · Answer

Matt thanks for your post.  You should check out my post entitled "Ownership Survey - 5% or 100%.

12+ year REI veteran here.  I've done over 2 dozen transactions and have experience in SFRs, duplexes, MHs, MHPs, and small multifamily.  I've done both flips and rentals, using traditional as well as creative financing (owner fi, no-money-down techniques etc).

I've vetted a couple syndication deals and, though always open to looking at future synd deals, I keep arriving at the same conclusion:  too complex/convoluted, watered down returns, and very little control.

Here, I will try to address some of the questions you posed.  First off, I care NOT about control.  It does nothing for me as far as ego, etc.  However, a higher degree of control over a real estate asset is usually a positive thing when it comes to profits.  Further, it allows you flexibility and opens up more exit strategies and options.  Too many decision makers = harder to arrive at decisions (case in point is the inherited property with 5 heirs --> there's a reason these are almost always harder to close quickly!).  To spare further detail, in summary, with respect to asset control and exit strategy flexibility syndication deals are likely best when the head decision makers number 3 or less.

You ask "do you not know of good opportunities?"  = I have no idea what you're saying here.  Clarify.

Lastly: profitability.  In syndication deals, as the number of involved parties goes up, this is inversely related to the profits of each individual.  Sharing the pie is very real.  Again, best conducted if the number of participants is kept small.  Tackling a 200-unit MF with 8 GPs and 8 other (basically) private lenders, sounds like a headache to me and undoubtedly waters down profits.  Though it may sound cool to say "I own 200 doors", in reality any one participant here actually does not.  Its like owning 0.5% stock of a company and walking around saying you own the company.  Not entirely truthful.

Me personally, I'd rather own 30% or better yet 100% of the thing.  Else, what's the point?

Evan Polaski · Answer

@Matt Pursley, similar to Dave, I own(ed) rentals, single family and a duplex, had a STR, still do flips, and invest in syndications.  I would say the only real estate investment I haven't done is private lending.

In my experiences, control is the one piece that I sometimes miss on my passive deals, but it always a trade off.  Lack of control also means lack of answering tenant calls, which is very nice.  There are times where the syndication I am in is beating projections, and the syndicator decides to sell.  Yes, this was outlined to me, but if it were up to me, I would rather refi and hold.

One reason I went into syndications is because in the current market, I believe I can make MORE money, even with the syndicator taking their fees and carried interest, than I could buying a small rental directly. And as for the complexity (and admittedly, I have worked for "syndicators" since before people called them syndicators), I find it easier than buying a house.  I can esign docs (can't do that on a deed) and wire my funds from my banking app.  Yes, there are more parties involved, but for an individual LP the number of LPs is sort of irrelevant, since I am not dealing with that, and even being on the syndicators side, technology handles 90+% of the complexity, again with tracking docs, funding, ownership, etc.  Also, at the end of the year I get a K-1.  I don't have to spend an hour per month tracking income and expenses, making sure taxes and insurance bills are paid, or that my PM is operating the property how I want.

Another reason I don't put more into syndications is for diversity.  I am down to 2 rentals (had 9 at one point).  I will keep these two.  I will put money into syndications.  I will continue to buy a flip per year, assuming a great deal comes around.  These all have their own pros and cons, but it means if a syndication falls apart, I still have my rentals.  If my rentals crash, I likely have a flip going.  If the flip losses money, I still have distributions and rents coming on from rentals and syndications.

Lien Vuong · Answer

For myself its lack of control of the asset and inability to capture the depreciation and expenses to make the deal much sweeter than it is.

Dan H. · Answer

Why I have not done syndications is I can achieve far greater return on my own RE investments.  Typically I have achieved infinite return as I end up with no money trapped in the RE.

Why I am considering doing a syndication is that the time commitment is significantly less than when I do my own RE investments; syndications are more passive than doing your own RE transaction and extremely more passive than BRRRR or flips.  As money becomes more plentiful than time, syndications look more appealing.  This is more true is you are an accredited investor and can choose from countless syndications (instead of being required to have an existing relationship with the syndicator).

Todd Rasmussen · Answer

@Matt Pursley

I have enough time to manage my own deals, why pay someone else a portion of returns to do it for me? Some day if I have more money than I can effectively manage, then a syndication might make more sense.

Matt Pursley · Answer

@Dave Rav Thanks for your feedback. I'll check out your post. Interesting that you've constantly found watered down returns. I've seen strong performing syndications on a regular basis. While I understand the lack of control, I haven't experienced that as a negative yet. When I said "Not know of good opportunities" I was simply asking if people aren't aware of the variety of syndication opportunities.

You have your niche and focus and that's great. I'm glad you found something that works for you and appreciate your feedback

@Scott Johnson Thanks for the comments. Trust is totally key. I'm glad you have a mentor that you trust. Good mentors can be hard to find.

@Evan Polaski I love your diversification around the different real estate asset classes. Sounds like you've thought through your plan and it seems to be working for you.  I agree that the "complexity" is not as complex as people think it is before they do a deal. I've found syndications to be quite simple.

@Lien Vuong I understand your sentiment, but I do have to share we have participated in a fund that allowed for 90% depreciation in year 1. A significant tax advantage then with strong returns the following year.

@Paul Moore Love your thoughts and your perspective on "lack of control". I think many people were pitched real estate as a way to control your assets against the stock market. However, I think some take that too far. As a participant in syndications myself, I agree with your comments of partnering with someone who's obsessed about the investment.

Also to your point of diversification we have several asset classes around the country. The opportunities that exist to allow someone to get into any asset class at any part of the country is a huge advantage.

Of course, bad syndicators can ruin any opportunity.

Thanks to all of your for your feedback.

Tony Kim · Answer

Depreciation and expenses are fully taken at the asset level and will be reflected in your K-1's. In fact, depreciation in an equity syndication is much more powerful than it is at the direct ownership level due to the cost-effectiveness of performing an accelerated depreciation analysis with a much larger property.

With that said, I've really slowed down on investing in syndications as I've really started to realize just how much trust you're putting into the sponsor.  This can be good and bad because while you're really capitalizing on the expertise and experience of the syndicator, you're also basically putting 100% of your trust into them by sending them your hard earned cash. Once the RE cycle resets, a lot of previously honest syndicators might find the temptation to fudge the numbers to be too great to resist. Even now, during our epic run up, there are several ponzi schemes and dishonest managers that get caught every month.

Been investing more with larger asset managers, private equity, VC, and various businesses.

Lane Kawaoka · Answer

Most people I talk to are enthralled with their own BRRRs because they like the control.

But for most accredited investors its more about time than returns. And when you look at it from a tax standpoint, being an LP is the long term play.

Roschelle McCoy · Answer

Great questions @Matt Pursley.  I'm currently a passive investor and sponsor in syndications plus own my own personal portfolio of small multifamily and single family. The more mature I become in my real estate journey the more I appreciate the hands-off approach of passive investing.  My personal portfolio keeps me very busy on a week to week basis as does my GP syndication.  But the passive syndications require non of my time after the initial investment is made, meaning I can focus on the things I truly love to do while earning solid returns on my invested capital.

It does take an incredible amount of trust in the sponsors to hand over large sums of money.  But the more I'm in this space the more I realize what a 'small world' syndications are.  There are a limited number of syndicators out there and word gets around if someone isn't operating with integrity. A tainted reputation will become detrimental to one's ability to continue operating and attracting capital for their deals.

Paul Moore · Answer

Great questions, @Matt Pursley. In full disclosure I not only invest in syndications but I am a syndication fund manager.

One of the reasons I do invest this way is because of the lack of control. Let me explain. Unless I am deeply knowledgeable and obsessively committed to an individual deal or at least an individual asset type in a specific location, I don’t want to personally have control. I would rather partner with someone who is obsessed about that asset in that location.  I’m thinking about Warren Buffett now. He doesn’t control the flavors at dairy queen, but he profits from the experts who do. He doesn’t choose the insurance coverages for Geico, but trusts those who do.  Another reason I like syndications is diversification. I can invest one amount, say $50,000, and have it spread over multiple asset types, geographies, operators, and properties. I believe I can make much more profit, and more importantly protect the downside, by investing with experts whose combined deal pipelines are much larger than I could ever dream of on my own, even if I were working at it full-time. And most syndication investors are already busy with jobs, families, or retirement. The catch and the potential downside of course is linking up with the wrong syndicators. It is critical to do a lot of due diligence upfront. But making a good choice might be the last hard decision investors ever make along a long journey of hands-off profitability.

Why Not Syndications?

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