San Jose, CA · Member since 2017 · 75 posts · 42 votes
Has anyone experienced losses or failures (i.e. significantly less than expected return) through participating (GP or LP) in professional MF syndications? If so, can you share? What went wrong? And what was the outcome?
I strongly believe that carefully vetted commercial MF syndication is a good investment vehicle due to many many reasons (professionally managed, more passive, economy of scale due to large units, spread of risk due to multiple partners, and all the goods of Commercial MF like forced appreciation through value add, not only to mention all the tax benefits)... But I wonder if anyone has been in 'bad' syndication deals before.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
8y
My very first RE investment (way before BP) was a syndication (although I didnt know that word). It was a development project of townhomes. The principals were inexperienced and I had no experience to even ask the right questions. Eventually the LPs sued the GPs (mostly because of me) and we recovered the principle amounts plus legal fees but it took almost 10 years to get the money back. I learned the lesson that WHO you invest in is far more important than WHAT you invest in.
Has anyone experienced losses or failures (i.e. significantly less than expected return) through participating (GP or LP) in professional MF syndications? If so, can you share? What went wrong? And what was the outcome?
I strongly believe that carefully vetted commercial MF syndication is a good investment vehicle due to many many reasons (professionally managed, more passive, economy of scale due to large units, spread of risk due to multiple partners, and all the goods of Commercial MF like forced appreciation through value add, not only to mention all the tax benefits)... But I wonder if anyone has been in 'bad' syndication deals before.
People lose money in syndications all the time. No one syndication is perfect. Markets change, unexpected events occur, over the course of 5 years the FED can change the dynamics, and on and on. The more common mistakes are buying incorrectly, not planning for capital expenses and the cost of money and underestimating operating expenses or having the seller lie on his T-12. Or, being too optimistic. Me, I'm a pessimist. I run my spreadsheet on a "worst case scenario". If it still looks good I get suspicious and I run it again a couple of different ways. Eventually I give up and figure if "that is as bad as it can get" and I still like the deal, I'm going forward.
United States · Member since 2015 · 401 posts · 394 votes
8y
@Keong Kam I haven't experienced any "bad syndications" myself. However, one thing I would add is that, when vetting a Sponsor/deal, their acknowledgement and analysis of a "bad" situation is certainly welcome.
For example, a sensitivity analysis that supports say a 2-3% return even if occupancy and rents don't come anywhere near projections, is still relatively attractive given potential returns on other investment vehicles.
If a Sponsor you're considering is all rainbows and sunshine, I would take that as a red flag and move on.
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y
Yes, I have. You can chalk it up to the usual suspects. Bad property management. Unexpected expenses. Unrealistic expectations for rent increases for that sub-market. Then I have deals that go much better than expected. Overall the have averaged out for me.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
8y
My very first RE investment (way before BP) was a syndication (although I didnt know that word). It was a development project of townhomes. The principals were inexperienced and I had no experience to even ask the right questions. Eventually the LPs sued the GPs (mostly because of me) and we recovered the principle amounts plus legal fees but it took almost 10 years to get the money back. I learned the lesson that WHO you invest in is far more important than WHAT you invest in.
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
8y
@Keong Kam Just did a recent podcast with @joe fairless. We spent a lot of time one of my early big mistakes. Hopefully you can learn from it. The education was quite expensive! ;)
Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
8y
@Keong Kam Depends on how you define a "bad" syndication. In one of the deals I participated, the tenants used a small paddle behind the building as the trash bin. Well it ended up clogging the sewer and resulted in large fees to the city and cleanup and etc. Is it a "bad" syndication? Do you expect a property management to be responsible for it? Or is the expectation that the tenants have some common sense and know better?!
I'd say, if you vet a syndicator and ask them about the pro's and con's of the deals, and get a realistic list of both, that's a good sign. Also, always review the underwritting presented to ensure that it is conservative. What I mean is, for example, if a market vacancy rate is 5% but a syndicator is putting 10% - that's a good sign.
Also remember one cannot control mother nature, and so things like hurricanes or flooding happen sometimes.
Hope this helps. Feel free to PM me if you'd like to hear more about my experiences.