All Forum Posts by: Chihiro Kurokawa

@Alan M. I don't think deeper value adds are a greater risk-adjusted return than lighter value adds. I think they are riskier period. Hence should provide greater returns. The larger renovation project means more construction/execution risk due to uncovering previously unknown issues, project scope creep, a lot of subcontractors to manage etc. Also, residents don't like living in a construction zone either so occupancy may dip more than one might expect. 

This is always true but more so if you're considering a heavy value-add: make sure the sponsorship group has demonstrated success delivering on this type of project. 

Hey Taylor,

There are innumerable reasons why I feel experience is valuable and that is one of them. 

I highly value experience, and so for my first deal I insisted on having very experienced partners; they have 8,000 doors and over 500mm in multi family acquisitions between them. 

I’m new in the game and I will be successful, but my requirement is to have experienced partners for my first few or several deals.

I don’t feel comfortable investing passively in a deal whose partners collectively have little experience; so I don’t feel comfortable syndicating a deal without experienced partners either. 

@Ben Leybovich I don't think he was being presumptuous. 

If Deal A and Deal B are identical except for Deal A being sponsored by a less experienced sponsor, which would you prefer as a passive investor? I'd take Deal B all day. Note that like you, I'm a new-in-the-game syndicator myself! 

The weak deals that I've seen have definitely been sponsored by inexperienced sponsor groups. The stronger deals mostly have at least one very experienced sponsor. You want facts? Here's what I've seen:

• Stabilized deals with bridge debt - strongly suggestive that the syndicator overpaid and couldn't get the proceeds they wanted from Fannie. If it's not good enough for Fannie it's not good enough for me. Obviously, it's a different story for an unstabilized deal.
• Big sponsorship groups with 6 or 8 sponsors. When I get deals from experienced sponsors I don't see this. Why is that?
• D-class deals being presented as if they're C-class deals. I only see these deals from inexperienced sponsors.
• Pro formas showing that syndicators intend to distribute more than the pref. Yes, I've seen this.
• A lot of the deals I see are 80/20 straight splits. Or they used to be, at least. Now deals are being bought at prices too high for that to be feasible, so sponsors are taking 10% splits in order to meet their passive investors' cash-on-cash expectations. Some will disagree but as a passive investor if Deal A and B are identical (including projections to the passives) except for A being 90/10 and B being 80/20, I'd take Deal B. 

I don't think anybody disagrees with you that newbies can do good deals and experienced people can do bad ones. But I highly value experience and I think most people agree with me. For my first syndication I made sure to have highly experienced GP's on board with me for a variety of reasons that I have found to be extremely valuable. 

Fair enough Ben, we can disagree on this point and it's still 100% possible for both of us to be successful. 

Regardless, if somebody is deceptive about their past I certainly would want to avoid investing with them. 

@Charles Kao I'm not sure how you interpret this discussion that I've started as an ad for anything. Have I advocated for anyone or anything? 

My purpose is to protect others - to inform potential LP's that not all GP's have the operational experience they claim. Having raised capital for deals does not give one the right to claim asset management experience. They're completely different activities and skill sets. 

I've invested passively in two deals. In one, there are three people in the GP of which two have limited experience, but the third has thousands of units currently owned. In the other, one has syndicated 3 or 4 multifamily deals and the other has over 1,000 units as well as a broad range of single family, development and raw land experience. 

So no, I have not and do not intend to invest with anybody who has faked their operational experience. 

But if I'm a syndicator myself and even I have been fooled, others can be as well. My message is "be careful out there" - feel free to be skeptical about that as there are plenty of people willing to accept your funds. 

@Ben Leybovich Yes, "caveat emptor" always applies. You and I also know that the most important factor in deal success is the sponsorship group, not the property. This is why it's constantly harped on that people should place their money only with people who have track records, right? 

So if somebody touts himself all over podcasts and the internet as an experienced operator across several large MF properties despite only having raised capital for those deals, doesn't he seem like an experienced operator to anybody spending 30+ seconds to research that person? And if we suppose there are a bunch of people taking down deals touting experience that they don't have, it goes to reason that many of those deals will not end well because these people don't actually have great (or any) experience.

As to why you and I should be concerned, it's because if this behavior infests this industry, LP's will go elsewhere. Also, when there are a lot of bad deals there will be a lot of lawsuits. If there's a lot of lawsuits government regulators will be concerned. Taken to the logical extreme, what if the 506(b) exemption is eliminated due to rampant abuse? If that would concern you, then anything that threatens that should also be a concern. 

I think all of us should always be wary of unscrupulous behavior in our industry. If there's enough bad behavior out there it will eventually affect all of us, and that would be concerning indeed. 

@Nate Marshall yes that's the point - there are many people who operate strictly as capital raisers and that's absolutely fine. They can and do operate legitimately. Yes there are rules to follow but it's not difficult. 

I take exception to people implying they are operators when their only experience is in raising capital. 

@Spencer Scott I'd like to learn more. 

Hey @Dan Shelhamer,

I've been investing in the Fundrise Growth eREIT since July of 2016 which returned 17.3%, 14%, 2.9% and 11.9% for 2017, 2018, 2019 YTD and all-time, respectively. I'm also an LP in two syndicated real estate projects in addition to putting together my own syndication on a 128 unit about a month ago.

Fundrise pros are that's it's really easy and you can invest small amounts. Cons are that I have no idea who's running those deals which is something that's been mentioned already in this thread. 

Passive investing pros are that I know exactly who I'm investing with and I've insisted on investing with people who are experienced, which to me means thousands of units under management and tens or hundreds of millions in acquisitions. I know them personally, trust them and can call or email them at any time. 

And perhaps somebody can jump in to verify but I believe everything I've earned from Fundrise is taxed at the ordinary income tax rate whereas I'm showing massive paper losses on my passive investment due to accelerated depreciation. So a 11.9% nominal return from Fundrise is inferior to an 11.9% nominal CoC return in a syndication. Not to mention that the overall return after the project is sold is projected to be about 20% annually for the deal in which I am a passive investor. So there's simply no comparison.

One might argue that the Fundrise investment has a better risk profile which is true from a number of assets standpoint, but not necessarily true from a quality of manager standpoint because as many have mentioned I have no idea who's running those deals. 

As an operator I think that knowing/liking/trusting the people I've invested with is paramount, so the jury is out on whether Fundrise is truly less risky. 

Moving forward I intend to invest in my own deals (obviously) and passively invest my money in 506B and 506C syndications with operators I trust - it's a no-brainer. 

I joined a mentorship group and they charge slightly MORE than 25k for the first year. After almost a year and a half of working on multifamily followed by 7 months in the program, I got my first deal under contract late last year, which is a 128 unit C-class in a small town (MSA of ~170k) in Texas. I had 3 very experienced syndicators in the general partnership with me, one of whom is my paid mentor Mark Kenney. They collectively have acquired over 500mm in apartments. 

So obviously it was worth it for me. The bottom line with taking a big risk like this is to understand that your mileage will vary. But hands down, the most important input variable is relentless persistence. If somebody pays the 25k but falters in the effort department, they will almost certainly probably be disappointed with the results. 

What you pay to a mentor is not an investment. It is a fee you're paying to essentially buy a set of tools. You still have to work really hard to learn how to use those tools and of course use them. 

You know the guy who has an expensive mountain bike and never rides it, or the lady with the expensive guitar that doesn't get played? People like that buy real estate mentorships too.