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Updated over 4 years ago on . Most recent reply
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Investing in syndications through a wealth management company
I'm currently talking to a financial advisor with RBC Wealth Management that I met through the Bigger Pockets forums (Hi Dan, if you're reading this) about investing an inheritance from my grandfather in real estate syndications as a form of passive income. There is a 1% annual fee on the total investment, but he's telling me that the syndications they have access to have a proven record of bringing in mid teens. This significantly outperforms my original plan of investing a chunk of the money in Fundrise, but I wanted to get some second opinions. I know syndications carry an element of risk and it brings comfort knowing that the ones I'm using are being vetted by a professional, but are there benefits to doing this myself and not using a middle man? What are some things I should watch out for here?
I really appreciate you guys being willing to share your collective wisdom with a novice like myself.
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Fee: An annual fee of 1% of total investment is enormous. There have been many articles written about the impact of fees on your return. Think about it this way: there is no performance incentive. They win either way. Plus it really eats away at your overall return. Google can teach you about the impact of a 1% annual fee on your returns in the long run.
Alignment of incentives: When you invest in a syndication, the sponsor will typically only earn a return after investors have been paid. There are fees in syndications, such as acquisition or asset management. However, they are very distinct from recurring annual fees based on total invested capital.
An acquisition fee, for example, is a one-time fee and largely repays the syndicator for costs they incur along the way: syndication legal costs, closing costs, etc. Lenders will want to see that the syndicator still has money in the deal after acquisition fees are paid. Again, it's one-time and directly repays & compensates the sponsor for putting the deal together.
There are funds that invest in syndications, but they'll typically have some kind of waterfall structure. I would never invest in a fund where the fund manager wins even if I lose money.
Track record & deal flow: Maybe they do have access to fantastic deals. But they need to prove it, not just say it. You can find syndicators and fund managers yourself who don't get paid unless you do. For example...
@Paul Moore runs two funds that invest in Self Storage and MHPs. You invest the money, he goes and finds the operators and deals. Then the return comes based on the plan for the fund. If I was looking to outsource the task of finding deals to someone else, I would much rather go with someone like Paul. He has a real estate track record in his own right, and has set up (in my opinion) a solid value proposition for his investors.
Doing it yourself: If you want to take it one step further and evaluate sponsors and deals yourself - great!! It's not easy, but many guides have been written on how to evaluate sponsors and deals. Brian Burke just put out a book with BiggerPockets on Hands-off investing. Jeremy Roll with Roll Investment Group and FIBI talks at length about how to evaluate sponsors and deals.
In short: I would very much pass. 1) The fee is very high 2)There is no alignment of incentives 3) I doubt very highly they have better deal flow than fund managers who offer investors preferable waterfall structures and 4) You can do this yourself if you want to. Sponsors are out there waiting for you to find them.