Lessons Learned in Syndicated Investments

I have been investing in syndicated real estate investments for about five years. I have invested in industrial, commercial, residential, mobile home communities, alternative funds, and I have done some hard money lending.

With some experience under my belt, I wanted to provide the lessons learned over the past five years to help others looking to secure passive income for themselves and their families.

Due Diligence: Never Lose Money

I think this piece of wisdom is attributed to Warren Buffett.

Fortunately, I have yet to lose any money. This is because I have been fortunate to follow a couple of key items. I only invest with sponsors that have a solid track record. If someone approaches me with a great investment, but it is their first time I have no interest in participating in that investment as a passive investor.

I also dive deep into due diligence. Anyone asking for money is selling a storyline, so I check out their story. I will check county records online to confirm that any properties they are claiming to have bought and sold in the past are reflected in the county record. I also like to use Zillow. Zillow keeps a record of who lists a property for rent. If it is the operator shown, great. If a property management company is used, I will follow up with the property manager to confirm that they have worked with or are working with the sponsor. It is amazing what a mid-level manager will share.

I also go out to real estate forums to check what people have said about a sponsor. Local real estate communities typically have a Facebook page, and organizations like BiggerPockets are great sources to see if anyone has done business with a sponsor in the past. I like this approach because I am not asking the sponsor directly for references (which are almost always positive).

The last step I take is to analyze the numbers. We have provided deep dives in this article, but I recognize that doing a deep dive is not something that everyone enjoys doing.

The last method that we use is to invest a smaller amount that we can afford to lose with the sponsor. If the investment goes well, we know that moving forward we can invest significantly more.

Know What You Want

This is a big area where I messed up. I invested in everything that came across my Inbox that met my due diligence criteria.

As of right now, I have lost zero dollars. However, I have jumped into investments that I just do not like. I prefer strong cash flow that starts paying on day one of the investment. Unfortunately, some of my investments are geared more towards adding value and equity over time. The cash flow stinks. I expect a great payoff in another 2-3 years, but I would prefer the steady cash flow.

I have also increased my standard for investing even as the hotter market has driven returns down. Patience is a valuable skill when it comes to investing, and it is something that I have been working hard on for two or three years. Do not be scared to turn an okay investment down because you are waiting for a great investment to come along.

It is not hard to find good sponsors, but it does take work. Research guests on real estate podcast shows and follow people who are active or semi-active in forums. Get to know up and coming teams that are operating in areas that you are interested in. The time might not be right now to invest with them but building relationships early can yield benefits over the longer term.

Invest in Meaningful Amounts

Another mistake that I made was investing in small increments. Some sponsors and some investment websites will allow you to invest in increments of less than $10,000. I would advise anyone looking to invest to avoid investing anything less than $10,000 (I prefer at least $25,000) in any single investment. Each syndicated investment requires a K1. If you use an accountant to prep your taxes each K1 often adds to the cost to prepare your taxes. If the syndication is in a different state that has income taxes, you are also going to need to file a return in that state which also adds to your overhead.

You want to make sure that your investment is meaningful enough to pay for those additional costs without destroying your personal rate of return.

Track Progress

I like to track two components of any deal.

I have a tracker that measures my IRR, my cash flows, and my annual performance on each investment. This Excel spreadsheet is designed to give me an idea of how much cash flow I am bringing in and how my investments are performing as a collective.

I then build a tracker with each new deal that tracks how the investment performs against the pro forma. I keep this fairly high level, but I do work to track actual income and expense verse budget so that I know how a deal is going. This helps me understand how my investment is doing, but it also helps me plan future investments.