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 @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @Carlos Ptriawan:

Ok, tinfoil hat off. Things start to get really dark of ya wear that thing too long, lol. 

At the end, goverment is coming to rescue.

Like what they did to AIG back in 2008. 

Too big to fail. The mine trap in commercial real estate is huge..... i don't know how many cycle of this I've seen in my life, but 2023 ain't the biggest, it took minimum 5 years before the dust settles. And then the investors going to repeat the same euphoria again lol

Its wolf eating wolf and eating wolf-way of business.

Now every GP outthere, look at the same excel sheet, find me all complex that would have debt maturity in 2024, I would buy it all with 20% discount LOL LOL

Kind of. More like Big Business, carried on the shoulders of Big Gov., who big biz long bought and paid for, for these exact times. 

Hence the scariest word's in the English language; "I'm from the Government, and I'm here to help".... 

Halliburton "helping" in Iraq. That's cemented in my mind for how our Government translates "Help", Halliburton and electrocution showers. 

 haha , the gov said i am going to screw you with my left hand so you're all TKO-ed , but when you can't breath then i will give you help with my right hand so you can at least breath for few more secs.... lol

beautiful game.

[Gino Barbaro]

I disagree. If you want to become a passive investor, learn the business. How to buy, manage and finance a deal as if you were going to do it on your own.

Understand it's not like a mutual fund where you hand your money off. Real estate is a business and needs to have systems.

As a passive investor, the key is to select qualified sponsors who have multiple full cycle deals who align with your goals and values. There is risk is any investment, and before a went through a market cycle, I managed my own deals and did a terrible job.

Once I learned the business, my risk went down.

[Carlos Ptriawan]

Quote from @Gino Barbaro:

I disagree. If you want to become a passive investor, learn the business. How to buy, manage and finance a deal as if you were going to do it on your own.

Understand it's not like a mutual fund where you hand your money off. Real estate is a business and needs to have systems.

As a passive investor, the key is to select qualified sponsors who have multiple full cycle deals who align with your goals and values. There is risk is any investment, and before a went through a market cycle, I managed my own deals and did a terrible job.

Once I learned the business, my risk went down.

After comparing passive business risk - reward and active business risk - reward ; sorry to say we are opt into direct rental business.

Maybe after this whole busted cycle for passive (LP) is going to end, we are going to buy your 5 cap asset with 7 cap, and 20% discount. LOL

[Gino Barbaro]

First of all, I only have one syndication. Gone full cycle on 2, and we own 1,800 units ourselves without investor capital.

We aren't selling. In fact, we're closing on our third deal this year, average blended price of 80k a door, and blowing past the 1% rule. No LPS in the deal.

But not everyone can start buying their own deals. Being an LP in a deal with a good sponsor is a great way to start.

[James Hamling]

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

So there is a lot of incentive from some big long established entities in both syndication and banking/finance to just sit back, let others over-leverage and drive thing's bust, because picking up the ashes is more like picking up the gold. Be it sizable syndicators or J.P., they win. 

totally hahaha , so the shark (read: goverment and their allies like jp morgan) is screwing the small dog and small wolf like the GP level, while the small wolf is screwing the humble chicken ( LP).

When everyone destroyed due to their own shark-inducing-volatility policy and then everyone dies, they come to rescue the market hahahaha lol 

i am lucky this is not my first busted cycle so i can comprehend whacca going on behind the screen. 

Yeah, honestly not much creativity right. I mean, it's always done differently, but it's the same script just different players. 

[Carlos Ptriawan]

Quote from @Gino Barbaro:

First of all, I only have one syndication. Gone full cycle on 2, and we own 1,800 units ourselves without investor capital.

We aren't selling. In fact, we're closing on our third deal this year, average blended price of 80k a door, and blowing past the 1% rule. No LPS in the deal.

But not everyone can start buying their own deals. Being an LP in a deal with a good sponsor is a great way to start.

Personally, I made my own 30%-70 IRR with few doors that's why I'm not interested.

But if avg cap going to 6 or 7 I may invest, I am waiting until all these madness to be over.

[Gino Barbaro]

You won't have to wait long. We all have different goals. I'm just looking to buy 300-500 good units per year.

It's been challenging in 2022 to do that. We bought around 100 units, smaller scattered sites. This year has brought more opportunity, and 2024 will bring even more to those who know and understand the business, even LPs who can underwrite and pick the right deals

Gino

[Carlos Ptriawan]

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

So there is a lot of incentive from some big long established entities in both syndication and banking/finance to just sit back, let others over-leverage and drive thing's bust, because picking up the ashes is more like picking up the gold. Be it sizable syndicators or J.P., they win. 

totally hahaha , so the shark (read: goverment and their allies like jp morgan) is screwing the small dog and small wolf like the GP level, while the small wolf is screwing the humble chicken ( LP).

When everyone destroyed due to their own shark-inducing-volatility policy and then everyone dies, they come to rescue the market hahahaha lol 

i am lucky this is not my first busted cycle so i can comprehend whacca going on behind the screen. 

Yeah, honestly not much creativity right. I mean, it's always done differently, but it's the same script just different players. 

 this is why it's very tiring and boring, everyone of those offering they would paint everything with white colour, change the countertop, add stainless stell appliance, what else are there ?

people in the street are dying becuase their company make less profit too, most small business in america can only survive by continous debt cycle. Only tech and big business with cash can survive.

i am actually still bullish to syndication but only for niche selective asset class like warehouse or self storage, as common industrial trends are going towards more consolidation of business.... and their IRR is still 20-30% conservatively.

But yea in MF there's no creativity, they are selling the same Kentucky Fried Chicken,Alabama fried chicken, with almost no creativity and no innovation.

[James Hamling]

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

So there is a lot of incentive from some big long established entities in both syndication and banking/finance to just sit back, let others over-leverage and drive thing's bust, because picking up the ashes is more like picking up the gold. Be it sizable syndicators or J.P., they win. 

totally hahaha , so the shark (read: goverment and their allies like jp morgan) is screwing the small dog and small wolf like the GP level, while the small wolf is screwing the humble chicken ( LP).

When everyone destroyed due to their own shark-inducing-volatility policy and then everyone dies, they come to rescue the market hahahaha lol 

i am lucky this is not my first busted cycle so i can comprehend whacca going on behind the screen. 

Yeah, honestly not much creativity right. I mean, it's always done differently, but it's the same script just different players. 

 this is why it's very tiring and boring, everyone of those offering they would paint everything with white colour, change the countertop, add stainless stell appliance, what else are there ?

people in the street are dying becuase their company make less profit too, most small business in america can only survive by continous debt cycle. Only tech and big business with cash can survive.

i am actually still bullish to syndication but only for niche selective asset class like warehouse or self storage, as common industrial trends are going towards more consolidation of business.... and their IRR is still 20-30% conservatively.

But yea in MF there's no creativity, they are selling the same Kentucky Fried Chicken,Alabama fried chicken, with almost no creativity and no innovation.

In general I think we could hold that true of the lack of innovation business wide the last many years. 

ai is a great example. Countless masses are implementing ai calling it their business "innovation" but no, did they make the ai? No, there simply utilizing it, adoption, as is all there competitors, so it's not any business innovation except the ai creators, it's industry adoption to a evolved S.O.P.. 

There just generally a thought loss in the U.S. for real actual innovation for far too many years. Look back to world's fair in the 60's, countless hair-brained crazy head-in-the-cloud's ideas of true creativity that foster into real innovations. Last many years has been age of adoption, not innovation. Tech for most part is just a deployment item not innovation, utilizing tech to automate and do, more efficiently, what was done in antiquated manners. 

Musk seems to be all too alone in arena of innovation, chasing the impossible into "done". 

Too much adopting, not enough disrupting. 

And that is a "perfect storm" for the giant sloth of corporate consolidation who is too slow a rambling titan too innovate, they regurgitate. 

So yeah, lack of innovation pave's way for consolidation. Innovators today brag of being agent's of corporate goliath's with action plans to break new ground to "sell-out" to ___ giant. What happened to the spirit of "F-them"? 

[Carlos Ptriawan]

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

In general I think we could hold that true of the lack of innovation business wide the last many years. 

ai is a great example. Countless masses are implementing ai calling it their business "innovation" but no, did they make the ai? No, there simply utilizing it, adoption, as is all there competitors, so it's not any business innovation except the ai creators, it's industry adoption to a evolved S.O.P.. 

There just generally a thought loss in the U.S. for real actual innovation for far too many years. Look back to world's fair in the 60's, countless hair-brained crazy head-in-the-cloud's ideas of true creativity that foster into real innovations. Last many years has been age of adoption, not innovation. Tech for most part is just a deployment item not innovation, utilizing tech to automate and do, more efficiently, what was done in antiquated manners. 

Musk seems to be all too alone in arena of innovation, chasing the impossible into "done". 

Too much adopting, not enough disrupting. 

And that is a "perfect storm" for the giant sloth of corporate consolidation who is too slow a rambling titan too innovate, they regurgitate. 

So yeah, lack of innovation pave's way for consolidation. Innovators today brag of being agent's of corporate goliath's with action plans to break new ground to "sell-out" to ___ giant. What happened to the spirit of "F-them"? 

 i agree with you too, in tech also there's not much innovation actually. 

These Ai thing the way I see it, is just temporary way to uphold the stock market, gov. cant screw 401k and retiress because if stock market collapsing, nobody would elect them so they have to create a story.

gov regardless left or right, they have no choice but to pump stock market via tech sector as if they are going with oil, they would satisfy the Russian, their new enemy lol.....

this is why also the risk/reward for avg Joe, public investing either with SPY or simple REIT for real estate is still way better , it just provide the cashflow to investor while it's also liquid.

Also my data center REIT is doing midly okay, not as terrible as O though LOL

i am thinking rather than buying outright syndication, way better is to just buy MBS as when the rate normalized, we get money from better rate and normalized volatility of yield (currently 300 bps), including cashflows.

[Carlos Ptriawan]

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

So yeah, lack of innovation pave's way for consolidation. Innovators today brag of being agent's of corporate goliath's with action plans to break new ground to "sell-out" to ___ giant. What happened to the spirit of "F-them"? 

 Just read, large pension fund would not invest into Multifamily.
Reason just like what we discussed, the spread betwen treasury and apartment cap rate is now zero : 4.6-4.8 vs 4.8-5.20
so the spread is so thin, it is almost there's no room to make money.

Please do note that during GFC 2008, the spread between 10 and MF cap is healthy 140-180 cap.

I guess everyone at institution is doing similar like me, waiting either the cap rate of rental move to 6-ish and/or waiting the 10 year yield move to 3 ; when this spread widen then it does making sense to invest at syndication.....

otherwise, the name of the game, just change the LVP floor in OH or MN or DFW :)

[David Song]

Quote from @Carlos Ptriawan:

Quote from @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.

 THATS IT !

So there is inherent danger in commercial that never been talk about, becoz every GP is rushing to buy at discount->to rehab in hurry->to rent it out->to sell it quickly and do the same/repeat, this cycle can't be repeated in basic math because at one point, the cycle would go againts them. And that cycle is now.  
Everyone is promising the same thing. Multifamily syndication by average expecting 15% IRR with high single digit cash flow.

I am not blaming those GP, but from financial perspective, the lending aspect of it doesn't make sense. What has to change is, the lending structure, they should be able to keep the property for ten years, so if there's unexpected happening in the future , they could recoup the losses. 

There should be lender or banks that could finance them for at least ten years. 

From macro economic perspective, These cycle can only be executed when Fed is increasing money supply.

Syndication is like the wolf eating a wolf game, it's just at what one position during cycle that would determine you make it big money or you may commit suicide ( there's GP that's already committed suicide) just saying how serious it is ...

My fist commercial mortgage was a 10 year. However, you pay more with higher rates, etc. 

I never invested in syndication myself, so I can not speak to the GP’s experience, net worth, etc. if I ever invested in a syndication in the future, I would like to know that the GP has personal net worth of a minimum of 50M, with verification from successful REI. This does not include other people’s money. There are too many inexperienced people pretending to be experts and want to be a GP. That is simply not acceptable. GP needs to actually have a lot of net worth from REI to prove that they are actually good investors. 

[Carlos Ptriawan]

Quote from @David Song:

Quote from @Carlos Ptriawan:

Quote from @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.

 THATS IT !

So there is inherent danger in commercial that never been talk about, becoz every GP is rushing to buy at discount->to rehab in hurry->to rent it out->to sell it quickly and do the same/repeat, this cycle can't be repeated in basic math because at one point, the cycle would go againts them. And that cycle is now.  
Everyone is promising the same thing. Multifamily syndication by average expecting 15% IRR with high single digit cash flow.

I am not blaming those GP, but from financial perspective, the lending aspect of it doesn't make sense. What has to change is, the lending structure, they should be able to keep the property for ten years, so if there's unexpected happening in the future , they could recoup the losses. 

There should be lender or banks that could finance them for at least ten years. 

From macro economic perspective, These cycle can only be executed when Fed is increasing money supply.

Syndication is like the wolf eating a wolf game, it's just at what one position during cycle that would determine you make it big money or you may commit suicide ( there's GP that's already committed suicide) just saying how serious it is ...

My fist commercial mortgage was a 10 year. However, you pay more with higher rates, etc. 

I never invested in syndication myself, so I can not speak to the GP’s experience, net worth, etc. if I ever invested in a syndication in the future, I would like to know that the GP has personal net worth of a minimum of 50M, with verification from successful REI. This does not include other people’s money. There are too many inexperienced people pretending to be experts and want to be a GP. That is simply not acceptable. GP needs to actually have a lot of net worth from REI to prove that they are actually good investors. 

 100 percent correct.... i am also tired responding to people that act smart but actually has not much experience. I would not even think to throw money at them.

Like what James said and what I just read,  big large fund would not touch multifamily until the spread between treasury and yield cap settles.

Also, come on smarter folks, who in the right mind would buy MF property with 4% cap rate, I will buy one for SF Airbnb, but not for MF, because that's dumb and extremely risky even without interest rate hike.

[Joe S.]

Quote from @Gino Barbaro:

First of all, I only have one syndication. Gone full cycle on 2, and we own 1,800 units ourselves without investor capital.

We aren't selling. In fact, we're closing on our third deal this year, average blended price of 80k a door, and blowing past the 1% rule. No LPS in the deal.

But not everyone can start buying their own deals. Being an LP in a deal with a good sponsor is a great way to start.

Who’s we?

[Carlos Ptriawan]

Quote from @Joe S.:

Quote from @Gino Barbaro:

First of all, I only have one syndication. Gone full cycle on 2, and we own 1,800 units ourselves without investor capital.

We aren't selling. In fact, we're closing on our third deal this year, average blended price of 80k a door, and blowing past the 1% rule. No LPS in the deal.

But not everyone can start buying their own deals. Being an LP in a deal with a good sponsor is a great way to start.

Who’s we?

 What Gino said is correct though, he has very smart GP and do NOT need LP and he seems he do his financing right.
Basically he doesn't syndicated his deals becoz.......he knows he has good deal.

But again he is not our typical Biggerpocket pop and mom investor level. 

The fact he is not selling and not offering to LP, means he is doing okay

When LP throws money to GP and especially when the cap rate trend is declining AND spread between 10y yield and cap rate is declining, LP is already losing money.

I would say LP that invest in 2021 is similar to those car buyer that purchase new Jeep , asset value tanked immediately the moment they are participating in. GP is always smarter than LP. 

LOL timing is everything.

[Delia Santa]

Quote from @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.

 Great Topic and discussions on this thread. By chance, any updates since last one was a year ago?