Why I love being a Passive Investor in Syndications (30% IRR!!)

[Andrey Y.]

I haven't bought a standalone rental since 2015. Since 2017, I started investing exclusively passively in real estate syndications - in over 15 opportunities at the moment.

So far, the two than have fully exited have returned a 32% and 25% IRRs NET, respectively! I couldn't be more pleased.

This type of investing would highly recommend for those folks who don't want to be on the phone with lenders, property managers, insurance companies, trying to upload 100 documents to the lender, etc.

Recently, I sold a rental property and did a 1031 exchange. I have already spent a good 6-8 hours on the phone trying to coordinate with the seller, lender, appraisals, 1031 company, PM, inspection, etc. and I don't EVEN OWN THE PROPERTIES YET.

Single family rentals are not scalable. Even if you hire a PM you have to constantly coordinate all of this, and next thing you know, every month you are hearing about doing this repair or not, tree branches, sewer system, and evicting tenants. A PM will eat 60% of your cash flow to save 50% of your time, at best.

I had a great conversation with the CEO of a Property Management company in the NE, who himself has invested in dozens of rentals, and wanted him to sell me on the idea of owning rental properties instead of investing in syndications. Wasn't sold, and it wasn't even close.

You have to baby that investment for 30 years. I don't see the value proposition there from a ROTI (Return on Time Invested).

By that time, a passive investor in syndications who achieved a 15% CAGR on his money is a multi-millionaire many times over, without the lender calling him every year for an update on the insurance or HOA companies ;) I enjoy the freedom of living anywhere in the world, not having to track pieces of mail related to my rental properties.

Private Equity is where its at.

[Account Closed]

Sorry! I find that being a passive investor is has the highest risk and is the most dangerous type of real estate investing a person can do.  While this OP may have run into one or a few syndicators who did well for him you will find that a very high percent of syndicators are ruthless and unscrupulous sharks who don't have the mental capacity to perform as promised.

It comes down to this. Never ever allow someone to control your money and that is what you do when you become a passive investor. Syndicators have too much control of your money and you get to watch them do very bad things as your investment money whittles away to nothing.

I was a passive partner in two separate deals for two K-Mart shopping centers. I had an attorney review the 600+ page placement memorandum before I invested. I had a financial expert review the deal. Everything looked great until the day after I put exactly $1 million into the deal. It is funny how life is. Obviously, I was excited before I invested my $1 million. I was promised that in 7 years I was going to get a check in the mail for $2.3 million and my earnings was going to be tax-free. That part was absolutely true since you will see that I did not pay one penny for income tax.

K-Mart had four 25-year lease options with no rent increases. That meant the value of the property would remain stagnant for 100 years. Was someone sleeping with someone to get this deal? The general partner purchased each property for $18 million and sold it to the limited partners for $25 million. Simple math! He made $7 million. The general partner paid himself $1 million per year for 5 years to manage each property. He made another $10 million.

Then, the general manager drove the profits into the ground with maintenance issues, upgrades and so many other expenses the limited partners got nothing. We (the limited partners) filed a class action suit for $50 million since there was 50 of us. We won the $50 million, but the general partner was insured for only $50 million and the attorney took almost every penny. 

This following statement is not a joke nor an exaggeration. The payment I received from the lawsuit was $39.00. I literally threw the check in the trash.

I was a passive investor in two other syndicated real estate deals that went bust. I can write all day. So, I will ship the other two stories.

A few weeks ago, I wrote about a 25-unit apartment building that is next to the commercial building I live in. The syndicator has about 20 similar projects in the Los Angeles, Arizona area and Texas. I did a little work for this company as a neighbor and the company has failed to pay me $10,000 that was due last November. So, I know a lot of the the details.

Every passive investor doing business with this company is getting ripped off on every project, but I will explain only the one project next to my property. They purchased a 25-unit building worth about $4 million through a short sale for $1.7 million. Terrific start.

Now!!! Make believe you are a passive investor. This company has projects in Texas, Arizona, California, a really impressive-looking office and beautiful brochures. You sit through their sales pitch and you are positive these people have more business knowledge than you and they promise to triple your investment capital in 5 years. You give them your $500,000 cashier check that took you a lifetime to earn and as soon as it is laid on their office desk you get a lump in your throat because now you can't do one damn thing about how they spend spend your money. 

Before you gave them your cash they answered their phones on the first ring every time you had a question. Now, that they have your cash every time you call the person you want to talk to is in a company meeting. 

Now, I am going to tell you about what control you do not have and what control your syndicator has. The rental income for this 25-unit property was about $48,000 per month and the condition of the property was a little less than fair. So, this bigshot syndicator evicts every tenant at the same time. This was two years ago and the property is still vacant today. The project looks like it is going to run into a little over 3 years. That is a $1.8 million loss of rental income from a building that did not need remodeling, in the first place, or it could have been entirely remodeled a few units at a time during the same 3-year period. Is this how you wanted your $500,000 investment managed...so this company could absorb a $1.8 million loss.

The syndicator brings in illegal and unlicensed immigrants and guts the inside of every apartment. There are no foremen, no building permits and the illegals do everything wrong that can be done wrong.

So, after wasting about $700,000 on bad work a building inspector catches them and shuts the project down for about 9 months and makes them pull out every new window in every unit and replace them with the correct windows. 

Meanwhile, the syndicator gets a $3.4 million loan against the property, but he uses all the money for his other projects that are going bust. So, he still does not have the money to finish the property you invested your money in. And...there is not one thing you can do about it. You can't even sue him for Failure To Perform because your contract stipulates that he has 3 more years to prove that he can perform.

After you wait 5 years and lose all your hair you finally get to pay an attorney $50,000 to sue the syndicator, but the project is an LLC corporation and you can sue only that corporation. In the case of my deals, we also sued the syndicators, but as stated, out of $1 million investede the return on my money was $39 after paying attorney fees.

I've made $millions and lost $millions. I don't feel nowhere near as bad about losing money when it is my fault, but it is a miserable and long-lasting feeling when you find that someone you trusted lied to you and stole or misappropriated your money and lived high-on-the-hog (whatever that means) with your money.

Very few people in this world ever perform as promised! Investing in real estate syndicates is similar to investing in the stock market since there are good and bad managers and market conditions for both stock and real estate is constantly changing.  Always have 100% control of your money and 100% control of decisions pertaining to controlling the actual investment. You need to have the ability to make changes on-the-fly,  the ability to cut your losses in an instant, and the power to make all critical decisions that will make the deal perform they way you want and not the way some unscrupulous syndicator wants.