Don't become passive investors

[Carlos Ptriawan]

If there's one thing I learnt from the massive crash of CRE in 2023(and 2024) is that "Do not become passive investors". WHen you are passive investor, you become the dumb money , your money is being misused or mismanaged by more experienced sponsor/operator. Why ? because when you are passive and you do have money, you tend not to understand the risk. When market changes, even the most sophisticated sponsor could collapse.

At the end of the day, it's better to become "active investors" where you know every single bit of your investment, your market, your realtor, your contractor, what's the actual repair cost, actual rent, appreciation and so on and so on. Real estate is very tricky, if one can be successful it's because investor can see the hidden pitfalls and trap, and have ability to dance with the unexpected. So understand every bit of risk is important. Don't just blindly follow "oh this is so passive and return is guaranteed", it's never work like that.

[Carlos Ptriawan]

Quote from @Henry Lazerow:

Active investing you directly get appreciation + mortgage paydown + cashflow ALL ON A FIXED 30 YEAR MORTGAGE. The fixed mortgage is what makes these deals not very risky as long as you know basic analysis and buy cashflow positive. I also invest spare cash in SPY its not going to 0 and gives a decent long term return.

 Also I want to add few things.

Structuracally there's fundamental very wrong in PRIVATE EQUITY/PRIVATE INVESTMENTS in CRE ( well almost in anything):

- From realized investment, track record even the sophisticated operator is questinable, you can't just keep selling 5.2 cap to 4.8 cap and expect this to be continued, it is just impossible

- Multifamily syndication CANT survive if financing aspect is only 5 year baloon, it has to be 10-12 years at least. Most operator keep selling and buying between themselves to create value from nothing. I checked their track record and I'm worried, not worry about their specific investment, but it's just questionable from basic logic math. 

To avoid most of the issue, financing should be at least 8 to 10 years for them to survive, if everyone is chaing 15% IRR with 5 year baloon, it's highly risky because then the operator would be forced to sell their investment too quick without adding value to investor.

- Valuation, the valuation is all over the place man, an apple that's worthed $1K in 2021 now is only valued $200, there's something really wrong in the valuation of these industry, specially when they're leveraged.

I've seen the last part when banks is doing LBO as well, they are like valuing company 10x from their own cash flow and use investor money to create "non sense" value, or just for the sake of heavy commision.

[Carlos Ptriawan]

Quote from @Scott Trench:

Quote from @Carlos Ptriawan:

I want even more Scott. And this needs to come from regulation.
Every  *private* syndication needs to have periodic 6 months a reported financial statement to investor in *public* and their future trajactory analysis of their investment.

Currently, It has better reward/risk when we invest at public REIT, because the result is available for public and everyone can gives their analysis. It's ok for their NAV/price to go up or down because all risks and future implication has been documented properly. When we as investor being told about the risk publicly, then we know the risk.

Make it the structure more like an Interval fund, so it's still not tradable, but there's periodic financial reporting to public. Not just to investor.

Disagree with you on this one. Last thing I want is any additional government friction in any processes, much less investing. That just sucks returns out of both syndicator and LP pockets going towards reporting. 

I don't have a problem with reporting. A syndicator who isn't providing real-time reporting is a non-starter, and easy to vet who provides reporting packages and who doesn't. 

And, the illiquidity of the investment is a feature, not a bug. REITs are publicly traded. Private investments are not. The expectation should be for higher returns to compensate for the illiquidity, but it's part of the deal. 

So in practice , accredited-investor-only investment has bigger risk/reward than public investment.
First because public investment has its own transparency. And second because it's liquid.

If you invest to MF with 500K and they ask you for capital call without the explanation why they have to do it ? Do you want to participate ?

Because there's no transparency in private transaction, the GP level could always hide the information under the veil.
For LP the question still remains: you want to lose 200k now or lose 500k later, all for to just generate 200 bucks cash flow.

[Scott Trench]

Quote from @Carlos Ptriawan:

Quote from @Scott Trench:

Quote from @Carlos Ptriawan:

I want even more Scott. And this needs to come from regulation.
Every  *private* syndication needs to have periodic 6 months a reported financial statement to investor in *public* and their future trajactory analysis of their investment.

Currently, It has better reward/risk when we invest at public REIT, because the result is available for public and everyone can gives their analysis. It's ok for their NAV/price to go up or down because all risks and future implication has been documented properly. When we as investor being told about the risk publicly, then we know the risk.

Make it the structure more like an Interval fund, so it's still not tradable, but there's periodic financial reporting to public. Not just to investor.

Disagree with you on this one. Last thing I want is any additional government friction in any processes, much less investing. That just sucks returns out of both syndicator and LP pockets going towards reporting. 

I don't have a problem with reporting. A syndicator who isn't providing real-time reporting is a non-starter, and easy to vet who provides reporting packages and who doesn't. 

And, the illiquidity of the investment is a feature, not a bug. REITs are publicly traded. Private investments are not. The expectation should be for higher returns to compensate for the illiquidity, but it's part of the deal. 

So in practice , accredited-investor-only investment has bigger risk/reward than public investment.
First because public investment has its own transparency. And second because it's liquid.

If you invest to MF with 500K and they ask you for capital call without the explanation why they have to do it ? Do you want to participate ?

Because there's no transparency in private transaction, the GP level could always hide the information under the veil.
For LP the question still remains: you want to lose 200k now or lose 500k later, all for to just generate 200 bucks cash flow.

I'm an adult, and am responsible for my decisions, including the contract I sign as an LP with the GP. I go into the deal assuming I have a chance to make money, but also aware that like any investment, I can lose up to 100% of my investment, and in some cases, more than 100% of my investment. 

I don't want you, my parents, and DEFINITELY not the government telling me what I can and cannot do.

If I don't understand the contract, that's on me. 

I think this 30% crash in multifamily is going to be a very healthy wakeup call. I believe I will lose a lot of money, but LPs, all on their own, without government interference, will wake up and realize that they have the power and their capital is the actual asset. And they will exert that power to realign incentives and weed out Free Spinners.

[Carlos Ptriawan]

Quote from @Scott Trench:

Quote from @Carlos Ptriawan:

Quote from @Scott Trench:

Quote from @Carlos Ptriawan:

I don't want you, my parents, and DEFINITELY not the government telling me what I can and cannot do.

Government already telling you what you can NOT do. 

If you do not have 300k income you are not even allowed to participate at Accredited-Investor only Investment.

It's just matter of time until the authority comes and investigate more private investment that involves public/investors money.

I am also involved in certain clawback litigation against previous quite-famous-syndication that was under SEC receivership now.
It's fun to watch how the GP has to sold all their Rolex watches to bring back the money back to investor.

[Evan Polaski]

@Carlos Ptriawan, you are talking about syndicators and passive investing with very broad brush strokes, but then comparing to your unique direct investing experiences.  This is apples and oranges.

I know of people that have had houses foreclosed upon.  They lost their full investment.  So direct investing is bad.

I bought a house in 2010 for $22,500.  The prior owner bought it for $140,000.  That is way more than a 150bp cap rate swing in values.  So direct investing in bad.

Per Ian's point, just because you seem to be a savvy investor doesn't make direct investing a good choice for everyone.  

Educated investing is the right choice.  Investing what you are willing and able to lose is the right choice.  

I agree that a lot of syndicators are proving to only be better marketers, but not operators, than their investor base.  I agree that a lot of investors got into syndications with almost no real knowledge about the true risks.  We are coming off a "syndication bubble", I believe.  There are very prominent syndicators who I have heard refuse to share financials with their investors.  

But, investing directly without knowledge is commonly a route to losing money, too.  It has nothing to do with active vs passive, in my book.  It has all to do with knowing what you are doing and how to vet an investment.  

I am simply trying to state that your experiences are not everyone else's.  And making blanket statements is never accurate.  Passive investing is all Warren Buffet has done his whole career.  Similar to Ian, he is very ACTIVE in his passive investments, but he is letting other companies run themselves, and his investors are passive investors with him...

[Carlos Ptriawan]

Quote from @Evan Polaski:

@Carlos Ptriawan, you are talking about syndicators and passive investing with very broad brush strokes, but then comparing to your unique direct investing experiences.  This is apples and oranges.

Evan, you are very wrong again.

I am investigating syndication track records OUTSIDE my investment and most of them are busted.

I could talk more but I just don't want to give name in public , so these are general statement.

Dont just say everything is fine when public money lost money left and right, they are the one that makes you able to pay your kid's school.

[John McKee]

Carlos,

My safest investments are my syndications (mortgage notes).  My riskiest investments are my active ones and they are starting to crack.  Some of that is my fault and some of that is the market.  

[Carlos Ptriawan]

Quote from @John McKee:

Carlos,

My safest investments are my syndications (mortgage notes).  My riskiest investments are my active ones and they are starting to crack.  Some of that is my fault and some of that is the market.  

 Hi John, Notes are usually performing well during high interest rate environment because the reward/risk favor the lender (you), however when I am referring to syndication here, I refer to equity investment (not debt investment) like you mentioned above.

During low rate environment, equity investment usually performs well. But not during high rate environment. So syndicator that doesn't prepare for future volatility (ie: interest rate and/or bond market risk) is usually losing money in their investment. Financing is just one aspect.

However, for notes, even at worst case scenario, you get foreclosed real estate at discounted price. 

[Carlos Ptriawan]

However, the notes would work well *IF*

1. underlying asset class is Single Family
2. They are at least in good location ( C+ or above).

But if underlying is something like office class C made in 1970s, I dont know what to say man, the risk is with you.... I keep understanding more and more this HML notes also work well only if underlying is SFR, but if they started loaning to other asset class than it may start going beserk.

So check your notes appropriately. WHat I like about SF is at very least,the valuation is transparent and not too volatile. 

[Carlos Ptriawan]

[Carlos Ptriawan]

You could exchange one Cupertino 4BR house to one 44 floor skyscraper now LOL Maybe we should just bid this property. 

[Kevin Kohler]

Quote from @Carlos Ptriawan:

You could exchange one Cupertino 4BR house to one 44 floor skyscraper now LOL Maybe we should just bid this property. 

 except thats the starting bid of an auction so this is a complete misrepresentation.  

[John McKee]

I'm not anti equity syndication necessarily, but I agree that you have to be very cautious. Most of these guys have never seen a high interest rate environment. When you're doing your due diligence in MF just make sure they are not over leveraged and have some skin in the game. Some of the IRR's that are being advertised are still from 2022!!

[Carlos Ptriawan]

I found this information and this data is extremely accurate. I think this is the most important point inside this thread.



Who is NCREIF?
NCREIF (National Council of Real Estate Investment Fiduciaries) is a member-driven, not-for-profit association that improves
private real estate investment industry knowledge by providing transparent and consistent data, performance measurement,
analytics, standards and education. Established over 40 years ago, NCREIF serves the institutional real estate investment
community as its Data Central, representing the largest, most robust and diverse database of country-specific real estate assets
in the world. NCREIF produced the first property level return index, the NCREIF Property Index (NPI), dating back to 1978 to
capture investment performance records that meet the rigorous scrutiny and review of major investors and academia.
What is the NFI-ODCE?
The NFI-ODCE is a capitalization-weighted, gross of fee, time-weighted return index. NCREIF began calculating the NFI-ODCE in
2006 with data back to 1977. Supplemental data is also provided, such as equal-weight and net of fee returns, for informational
purposes and additional analysis. Open-end Funds are generally defined as infinite-life vehicles consisting of multiple investors
who have the ability to enter or exit the fund on a periodic basis, subject to contribution and/or redemption requests, thereby
providing a degree of potential investment liquidity. The term Diversified Core Equity style typically reflects lower risk investment
strategies utilizing low leverage and generally represented by equity ownership positions in stable U.S. operating properties.
There are currently 25 private funds that are included in the index.


So in short, only this froum is tracking private data from an institutional private core-only real estate syndication.
They're tracking core-add only and un-levered position.

Here is the return of Commerial Private Real Estate core-only unlevered position for 4 quarter :


        Q1__Q2___Q3____Q4____Annual 
2007 3.71% 4.82% 3.68% 1.90% 14.84%
2008 1.15% 0.09% -0.85% -11.04% -10.70%
2009 -13.89% -9.24% -7.52% -3.70% -30.40%
2010 0.51% 4.09% 5.22% 4.70% 15.26%

..
2022 7.14% 4.54% 0.31% -5.17% 6.55%
2023 -3.38% -2.88% -2.10%  n/a

Annualized net return from Q4 last year : -15% !!!

this is bloodbath.
 

[Carlos Ptriawan]

Learning from this data, negative MoM real estate private investment occurred for FOUR QUARTERS dating from Q3 2008 , it's all negative until Q4 2009.

In this 2022/2023 downturn cycle, we started the negative performance on CRE on the 4th quarter, so if cycle repeats the same, at very least we have to wait for another two quarter data to see the improvement if any.

Learning from 2008 experience, the CRE is stabilizing only *after* Fed reduced the FFR, I dont think it's a coincidence that bond market started expecting Fed to decrease rate by April 2024 next year. We're all hopeful. 

[Carlos Ptriawan]

[Carlos Ptriawan]

this guy is so funny, he is big GP but so direct and honest in his own style LOL he could be a good friend of mine.  I also wondered why for every investment, if I am the only money manager , the result is always good ; the moment I throw my money to someone else,they screw me over. I don't know why LOL Hence comes the tweet LOL

[David Song]

Syndication certainly favors the syndicator, with all the risk on the passive investor. Even worse, the investor has no control. It’s probably better just to invest in SP5000 or QQQ.

With the current interest rate, commercial RE is in big trouble. I was on the phone with a BMO commercial mortgage guy this afternoon. The commercial mortgage market is DEAD, quote.

Rates are 8s up to 10s. Whereas the cap rate on active listings are 5, 6 range. No transactions. No qualified commercial loans based on current interest rate and cap rate offered.

To solve the problem, either the rate has to come down significantly (probably not going to happen in a few years), or the cap rate has to go up to 10s, which means the price has to be cut by almost half.

For those folks that has a maturing commercial mortgage, they can not refinance based on today’s rate. They can not sell at 6% cap. What are they going to do?

[John McKee]

Carlos,

Sounds like you got burned on a syndication deal.  Give us the high level overview!

[Carlos Ptriawan]

Quote from @John McKee:

Carlos,

Sounds like you got burned on a syndication deal.  Give us the high level overview!

 basically all LP in general.

[Carlos Ptriawan]

Quote from @David Song:

Syndication certainly favors the syndicator, with all the risk on the passive investor. Even worse, the investor has no control. It’s probably better just to invest in SP5000 or QQQ.

With the current interest rate, commercial RE is in big trouble. I was on the phone with a BMO commercial mortgage guy this afternoon. The commercial mortgage market is DEAD, quote.

Rates are 8s up to 10s. Whereas the cap rate on active listings are 5, 6 range. No transactions. No qualified commercial loans based on current interest rate and cap rate offered.

To solve the problem, either the rate has to come down significantly (probably not going to happen in a few years), or the cap rate has to go up to 10s, which means the price has to be cut by almost half.

For those folks that has a maturing commercial mortgage, they can not refinance based on today’s rate. They can not sell at 6% cap. What are they going to do?

thanks for being so direct.

 the LP bought at 4 cap.
GP wanna get out at 5.5
buyer wanna buy at 6.5 only.

I keep hearing in-refinance , i don't know what that is, maybe refinancing / debt restructutization for another 5 years ? 

[Carlos Ptriawan]

Quote from @John McKee:

Carlos,

Sounds like you got burned on a syndication deal.  Give us the high level overview!

 I also already shown you the data at national level, it is not about me LOL it is nationwide GFC-like impacting commercial side only at this time. 

[David Song]

Quote from @Carlos Ptriawan:

Quote from @David Song:

Syndication certainly favors the syndicator, with all the risk on the passive investor. Even worse, the investor has no control. It’s probably better just to invest in SP5000 or QQQ.

With the current interest rate, commercial RE is in big trouble. I was on the phone with a BMO commercial mortgage guy this afternoon. The commercial mortgage market is DEAD, quote.

Rates are 8s up to 10s. Whereas the cap rate on active listings are 5, 6 range. No transactions. No qualified commercial loans based on current interest rate and cap rate offered.

To solve the problem, either the rate has to come down significantly (probably not going to happen in a few years), or the cap rate has to go up to 10s, which means the price has to be cut by almost half.

For those folks that has a maturing commercial mortgage, they can not refinance based on today’s rate. They can not sell at 6% cap. What are they going to do?

thanks for being so direct.

 the LP bought at 4 cap.
GP wanna get out at 5.5
buyer wanna buy at 6.5 only.

I keep hearing in-refinance , i don't know what that is, maybe refinancing / debt restructutization for another 5 years ? 

 Most commercial loans are only for 3 to 7 years. At the end of that period, the owner must pay off the existing loan and get another loan to pay off that old loan. If the loan is maturing in the next few months, the owner has no way to refinance at the current high rate, since the cash flow will not qualify for the double high interest rate. Oops! Bankrupt.

[Amit M.]

carlos 

basically 

right

————

3words

[Ram Darisa]

@Carlos 

@Carlos Ptriawan I couldn’t agree more with you on this. I came across a property management company last year through a friend of mine. When I started looking at the properties listed and their pro forma, I realized that in the name of “hands off” investments, they’re ripping off people. When I did some research on a few properties, they’re buying the houses at 20% of the same price (that’s presented to the prospective investors) and do some renovations and offer them at 4-5 times the original purchase price. As an investment owner, you’ll never recoup the amount you lost in the premium. It probably would take 7-10 years. Thanks for sharing this information.