Syndication risks and potential of losing funds invested????

Question

I am looking to invest in my first syndication opportunity and wondering if anyone has been part of one where they have lost money or other risks involved.  I see so many of these opportunities, but always curious about the risks involved and if anyone has actually lost their funds, and what the recourse is in this scenario?

Ian Ippolito · Answer

Yes, if you read the risks section of the Private Placement Memorandum for that syndication or any other, you will see a disclaimer saying that it is possible to lose some or all of your money and that you are willing to take on that risk as part of subscribing.

If you do lose money, there is generally not much recourse. You could sue the sponsor, but generally you also indemnify them, so that means that they will be defending themselves with your money and every other investor who was in the fund.

This is why it's very important to do extensive due diligence on both the sponsor and the deal before pulling the trigger.

Alina Trigub · Answer

@Danny Randolph

Regardless of the legal structure, money can be made or lost in any real estate deal. Hence, it is important to fully understand the market and the asset class you're investing in. Now when it comes to syndications, another critical component that needs to be evaluated (ideally as a first step), is the deal sponsor(s). You want to ensure this is someone you'd want to be investing for a long time!

Here're a few articles that should give you additional guidance:

https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndication

https://www.biggerpockets.com/member-blogs/10850/76728-questions-to-ask-a-syndicator

Michael Plaks · Answer

@Danny Randolph

Yes, people do lose money in syndications. Some of my clients have.

However, the risk is much smaller than trying to acquire and operate your own properties. For a very simple reason: most of the sponsors/syndicators are experienced investors and business managers.

Like others said, the key is to vet the sponsor first and the investment second. An experienced sponsor can make money from a so-so investment, however an incompetent one can ruin a great opportunity.

Andrew Hogan · Answer

There are inherently so many risks when investing in real estate in general and specifically syndications. Because it's a team effort, it's vital that you underwrite the sponsor's team and their ability to execute, their investment thesis (as it pertains to the current market conditions) and their track record.Govt financing, conservative underwriting, and management execution properly combined; make multifamily (in my opinion exclusively workforce housing vs luxury, student, low income, etc) the BEST risk-adjusted return of all real estate asset classes.

Roni E. · Answer

Yes, you can lose all your money. I would look at the whole picture, do your own underwriting and speak with the syndicator. You should look at the length of the loan, are funds being kept in reserve and so forth. One thing I would look at is how capital calls are being handled. We do not force any capital and if there is a shortage we will cover the capital call ourselves and it will be an interest-free loan to the partnership.  We look at things a bit different 1) Just like the mortgage payment has to be paid timely monthly so does the investors' distribution be paid timely monthly. 2) If someone has to take a haircut for some reason we as the Manager/Syndicator take the haircut. 3) This is a long term relationship the investors need to be taken care off first and via our performance, you will come back again. 4) We believe a market correction/change is coming and that is why we have focused on an asset class that performs well during a market correction or even better.

Mike Dymski · Answer

Common causes of failure:

• Bad locations (self explanatory)
• Under-capitalized properties (insufficient funds to maintain property)
• Untimely balloon payments (and aggressive debt)
• Poor execution of business plan (inexperience or inattention)
• Fraud (people do bad things when backed into a corner)

We are in the golden age of capital...it's everywhere and it's chasing yield in every asset class and on most every block in the country.  That is not going to end well for some.  There are great operators and opportunities out there...just need prudent diligence.

Travis Watts · Answer

Hi Danny, I have invested in about 14 syndications with many different groups. I have seen the good, bad and the ugly. Happy to discuss anytime. DM if needed

Christina Morgan · Answer

Awe Travis.  You're supposed to answer here so we can all learn from your experience.  I'm also very curious about syndication investing.  Frankly, it scares me to not be in control of my investment, but hey, I've got money in a 401(k) so...

Also, for everyone else following this post, I listened to a podcast yesterday related to this topic.  The podcast: How to Lose Money.  The host: Paul Moore (frequently writes articles here on BP).  Episode 97: How to Lose Money Investing with the Wrong People.  I am still searching for the podcast that answers my questions about how to vet syndicators.  If anyone can point me to one, I'd really appreciate it.

Travis Watts · Answer

Hi Christina and all other curious investors ;) I'm happy to discuss my syndication experience one-on-one with anyone. I do not prefer to publically post negative reviews about sponsors or GPs. I'm always happy to share my experience and opinions in order to help others, but it is simply my experience and not the experience or opinions of everyone who has invested with the particular groups. DM away!

Steve K. · Answer

so you're saying you are only interested in the upside, and if the project loses, you think the GP should be held responsible?

the risks are clearly spelled out in the PPM, including the fact that they are illiquid, and may become worthless

Syndication risks and potential of losing funds invested????

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