All Forum Posts by: Brian Burke

 Yeah in one case I had a simple non-payment of rent eviction.  It took 7 years, $250K in legal fees, two state superior court lawsuits, one federal court lawsuit, one appeal, one attempted appeal to federal court, and three bankruptcies that I had to petition the BK court for relief.  And for 7 years, zero income.  No hope for recovery, no funds escrowed with the court, nothing.  Money judgment only covered about four months and is uncollectible.  

Thankfully I owned the property free and clear, and had the capital to fund the legal fees, but a typical 20% down landlord would have been wiped out and then some. Maybe even have to sell their own home to dig out of the hole of legal costs. Anyone that says that you have to be dumb, make mistakes, or over leverage to get wiped out in a SFR investment just hasn't been doing this long enough to see that this business carries risk, whether you are active or passive, smart or dumb, make good decisions or bad, over leverage or not—there are risks and you can lose money, period.

And in an interesting twist that makes this case study a double lesson: this “tenant” claims to be the CEO of a real estate private equity firm.  If that doesn’t underscore the importance of sponsor due diligence, I don’t know what does.  Not that it matters with this guy, the SEC is now after him for allegedly bilking his investors.  Reality is sometimes so crazy that you can’t even make up stuff like this and have it sound more preposterous.

This is very true, Jay.  Over the years I've bought well over a hundred houses at foreclosure auctions that were rentals when I purchased them.  The foreclosed-out owner/landlords were 100% wiped out--and I'm not talking just in the GFC.  In those days even lenders were taking major haircuts in addition to wiped out landlords.

Some of us really try, Alan.  Doing the right thing doesn’t always mean doing the easy thing, but this business is a marathon, not a sprint.

Case in point: I had a large investor place several million with me into two deals.  One was a profit, one was a loss (like @Jay Hinrichs just wrote, it happens, even to us experienced guys).  The loss was a rounding error to this investor, but in making my final cash distribution last week I allocated a share of my profit split from the profitable deal to the investor to zero out the loss on the other deal.  Did I have to?  Absolutely not.  Did it matter to the investor?  Probably not.  But deposits to the karma bank earn a higher rate of return than any investment that I’m aware of.

There is a characterization projected by some people on this site that fund sponsors are just a bunch of hucksters in it for themselves and ripping off investors, or living the high life off of fees earned on losing projects.  There are managers deserving of that title, but just as you can’t paint all passive investments as bad, the same broad brush shouldn’t be painted on the managers either.

Maybe just another reason why I believe that manager selection is more important than the deal itself.

Thank you for your trust, Bryn, I assure you I don’t take it for granted.

The last three years or so has been a tough time for commercial real estate, multifamily included. For a syndicate (or active investor, for that matter) to survive an adverse market it comes down to two things: don’t run out of time, and don’t run out of money. I don’t know anything about the deal you are losing on, but I suspect that one or both of those have run out, so the syndicate is unable to survive through the trough to sell into a better market.

The primary culprit comes down to the composition of the capital stack. Short-term loan maturities are a primary cause, and high leverage and high interest rates are contributors. If the loan is maturing, the lender can force a sale even at the worst possible time. The sponsor can beg the lender for an extension, but that’s just prolonging the inevitable. You’ll constantly be at their mercy, and their mercy will run out as soon as the value rises enough for the lender to recover most of their principal.

A key difference you’ll find with the investment you made with us is our loans were low-leverage and had 10-year maturities. That may seem like a simple point, but it makes all the difference.

Buying with high leverage and short maturities may work out fine at the bottom of a market cycle, but at the top it’s a death sentence. You learned this the hard way, it sounds, but this lesson can be applied to improve your tactics if you decide to invest passively again. And if you do jump back in, don’t wait until the next market top to get comfortable. There will be market-bottom opportunities in the coming few years that could give you an opportunity to reverse your loss, if you have the stomach for it. Just choose carefully.

@Bryn Kaufman it really sucks to hear about your passive investing experience.  You aren’t alone, I’ve talked to a LOT of people over the last year or so who are sharing a similar experience to yours.  Obviously nothing I or anyone else can say here will heal this wound.

But for the benefit of other readers of this thread I’ll share some balance.

Syndications carry risk, including the risk of complete loss of principal.  But wipeout is the exception, not the rule.  I’ve managed nearly 50 syndicates over multiple decades, funded by thousands of investors and hundreds of millions of investor capital, and I’ve never lost even a single dime of investor capital.  The problem isn’t “passive investing,” it’s that there are syndicators that shouldn’t be raising capital, there are investors that shouldn’t be investing in syndicates, and there are structures that are inappropriate for the position in the market cycle.  It’s likely that one or more of these factors played a role in your experience here.

I wrote a book (published by BP) that is entirely focused on selecting and examining passive syndication investments.  I wonder how many of the investors in your deal read it?  Or how many did, and ignored the advice?  Due diligence on these deals is hard, and most people don’t want to do the work.  I get it, I don’t always want to either, but if I make a passive investment and don’t practice all the work I preach, I do so knowing I’m taking a flyer.

Comparing syndicates with index funds is legit from the lens of comparing return, but is unfair to compare from the lens of risk.  Compare a syndication to investing in stocks from a margin account, or a leveraged ETF.  Those can go to zero in a hurry, as can leveraged real estate (the real estate doesn’t go to zero, the equity does, just like stock on margin, the stock doesn’t go to zero but your brokerage account does).

Bryn, you stated above “I would add "passive" in front of the RE. If you buy a property directly, the investment does not go to $0. Sure, you can lose money on it, but not 100%.”  This is completely untrue.  I know one guy who lost over 50 rental houses to foreclosure when the market dropped in the GFC.  He was wiped out, completely bankrupt.  I know another guy that lost $50 million when he lost all his properties.  Wiped out.  And these guys were all-in active RE guys so they had to start their lives over. 

It isn’t the “passive” that wipes you out. It’s the leverage.  If you are investing actively, you choose the leverage. If you are investing passively you can still choose the leverage—it’s done by doing due diligence on these deals, understanding the investment plan and leverage being employed, and then choosing to either invest in that deal or pass and look for a different one.  This becomes increasingly critical when you are a decade-plus into a bull run, which is probably when the deal you invested in was bought.

I agree with @Evan Polaski, I'm not a fan.  Here's why:

1. 6.5% pref is below market.  There are better alternatives available.

2. 50/50 split over the pref for a buy/hold income property is below market.

3. No bank debt = no leverage at all, which is problematic in multiple ways, one is that returns will suffer, likely falling in the 5-8% range and I can get that from good dividend stocks with full liquidity or from a debt fund with first-lien rights and the ability to foreclose or redeem depending on the structure.  And second, it will require you to raise a mountain of capital for one deal, which means a few things: First is you might not be able to execute, leaving the deal stuck and unable to close, resulting in a loss of costs to that point, second that it will be difficult for you to scale, and without scale you won't earn enough to live off of and would either be a weekend-warrior investment sponsor, or an absent sponsor, neither of which are beneficial to an LP.

4. Capital returned + 10% bonus at refinance, I don't understand what you're saying here. Does this mean that your promote drops from 50% to 40% if some of my capital is returned?  Or all of it?  Not that it really matters because 50% was too rich for this type of plan to begin with.

5. Optional equity buy-in at refinance:  I don't understand this either, because if I'm the sole investor, don't I own 100% of the equity interests already?  Or are you saying that your promote can be further reduced by 20%, but I have to "buy in" to get it?  No thanks.

6.  No GP Fees:  I don't like this idea because a GP that isn't making any money is going to get a job and leave this investment in the dust.  Fees are there for a reason--to keep you working.  In this case, there's no debt, meaning the investment has to throw off more than a 6.5% return for you to make a dime, and a multifamily deal trading at today's prevailing cap rate of 5% or so isn't likely to exceed the pref for quite some time, and with accrued pref stacking up you might not make a dollar for 3-5 years.  I'd be concerned that a sponsor who isn't making any money because of no fees and can't scale because of the mountain of capital needed to buy assets all cash wouldn't last long and I'd be stuck dealing with the aftermath myself, which isn't why I invest passively.

7. No initial equity, lender-style, with first money out: Huh? If the property is unlevered and I'm the only investor, who else could be in front of me? I'm first money out regardless. And to invest 100% cash for a full-stack deal and take a lender position? You're asking me to be a 100% LTV lender--that didn't work out so well for Countrywide and a slew of other subprime lenders back in 2005-2008 so maybe someone who hasn't lived through that wouldn't know the risk they are taking in exchange for such low reward here.

I guess aside from all that, it sounds OK.  

There's no single answer, unfortunately.  This depends mostly on your relationships with the sources of capital.  If you have a lot of investor relationships and a strong track record with those investors, you can raise the capital quickly in most cases.  If you are just developing these relationships, and/or have a thin track record, it will take quite a bit of time and a mountain of effort.  Best practice is to start small and work your way up to larger deals as your track record thickens and your investor relationships grow.

I don't agree that it's not a good idea to invest in a syndicate unless you are running it--but I do feel strongly that it's not a good idea to invest in a syndicate if you don't fully understand exactly what you are investing in, how it works, what the risks are, and how to select syndicates and manage that risk.  That's the gap I tried to fill with The Hands-Off Investor.  www.biggerpockets.com/syndicationbook 

My answer relates to @Mark Kenney’s post 3 or 4 posts above here:  of all the issues he mentioned, high interest rate, rate cap, and most importantly buy-downs to “extend loans” all relate to one thing—using short-term bridge debt, which was often done at high leverage points.

Financing structure is an under appreciated factor in all real estate investing, not just syndications.  Bridge debt was designed to allow buyers to acquire underperforming properties that otherwise wouldn’t qualify for conventional debt (such as agency debt), and giving a short time to improve the underperformance and refinance when the property qualifies.  But when markets get overheated, more and more buyers repurposed bridge debt to allow them to engineer higher returns and to scale larger portfolios with less equity.  What many groups in trouble today didn’t appreciate (or due to lack of experience didn’t know, or out of desperation to buy more deals and generate fees, didn’t care) is that high leverage amplifies results in both directions—meaning when things go bad, they go very bad.  Making matters worse, 3-year maturities run out in the blink of an eye, and if the date comes up in the middle of a downturn, you’re hosed.  Folks who think that they can extend these loans until the market gets good enough for them to get out with their principal intact will find themselves disappointed.

So to answer your question, in the GFC I learned to not overpay for assets, not to use high leverage (especially deep into a bull run), and not to use short maturities without an extraordinarily certain take-out path.  Thankfully I didn’t have to learn these lessons by losing investor’s money (never lost a dime of it), but I did feel my share of pain, lost a lot of my own money that took many years to recover from, saw plenty of pain experienced by others, and bought hundreds of assets through foreclosures where the previous owners violated these principles.

That depends. If you are looking to buy/syndicate large multifamily (or invest passively in same), this is not the best time.  It’s not the worst, either, that would have been 2005-2008, or 2022-2024.  Prices are better now, which is why I say it’s not the worst time.  But there will be more distress ahead, so I believe that an even better time will be 2026 or even 2027.  But we’ll see.

But if you are talking about buying small “mom and pop” size multifamily for a personal investment, and holding for years or even decades, this is a great time.