Thanks for all the replies. One suggestion is joining Communities. Does it mean joining BP or something paid like passive pockets and becoming a Pro member. I also saw Spark Rental Investing run by G. Brian Davis which meets regularly and vets the deals. I found out after reading an article in email from BP and then googled to find this thread.
https://www.biggerpockets.com/forums/48/topics/1162486-spark...
I am admittedly biased here @John Ki, but I think PassivePockets would be a great place to start. There are paid Communities and there are free Communities. I think the most important thing is to find a Community where the culture fits your personality. You need to find a place where you can comfortably connect with other people. Some Communities are buttoned-up and intimidating and others are more about sharing and educating - it's critical to find a network that is comfortable for you.
If you are planning on investing in even one deal a year, the cost of the membership is likely a drop in the bucket compared with the capital you will commit when investing. Knowledge is key in this type of investing, so finding "your people" will help you immensely. Join more than one - you will fairly quickly figure out where you spend most of your time, which will tell you all you need to know!
Good luck!
@John Ki Passively investing in real estate syndications is a great way to get exposure to real estate investing for those who don't have the time or knowledge needed to actively buy real estate. I used to be active but found that I wasn't a very good asset manager. I found real estate syndications and have been a full time passive investor since then. I think the best way to learn about syndications and to find quality investment partners is to join a Community.
This type of investing is long-term, illiquid and completely out of your control. The most important thing to do is to find quality operators to partner with. It is very difficult to vet an operator - they all say they are experienced, conservative and will be a good steward of your capital. You can, and should, interview them and ask them all of the appropriate screening questions - but you won't be able to "test" them out without contributing significant capital as part of your test. This is where a Community can help. You can get unbiased opinions from people in the Community who have invested with different operators. They can give you real feedback on their actual experiences with the operators. There are many other benefits from these Communities as well - you will find like-minded people who are interested in building wealth through real estate the same way you are. You can learn from them and bounce ideas off of them. I think finding a network of people is the most powerful force multiplier for this type of investing. You can, and should, read books, listen to podcasts and interview operators - and all of that knowledge will be fortified and verified only if you find others whose experience you can share and use. Trust transfers and so can experience and knowledge!
As @Chris Seveney said, it would be helpful to have more information. Personally, I would put most of it in passive real estate syndications - but I am a full time passive investor so that makes the most sense for me.
The first decision you would need to make from my perspective is whether you want to invest passively or actively (your profile says rental property investor, so I would assume you are currently an active investor). Many successful active investors transition to passive investing as a way to diversify into new asset classes or markets and to earn back some of their time and still benefit from the positives of real estate investing.
To answer your question - I would allocate a portion of the $200,000 to MF as I believe this is a good time to invest in an asset class that has recently struggled. I would also put part of it in a debt fund. For the rest I would consider a triple net lease deal or fund in industrial or commercial real estate. But again, as Chris said it is difficult to recommend something to you without knowing more information. My allocation I mentioned above is purely what I would do based on my current financial situation.
Good luck!
I think the first question you need to answer for yourself is - do you want to be an active real estate investor or passive? An active real estate investor will buy a property and rent it out (long term or short term) or flip it. This takes a lot of time, expertise and knowledge. A lot of people do it, enjoy it and make a lot of money - it's a great option! This is how I started out - it was not passive, even though I hired contractors to do the work and property managers to manage the tenants. It was, at the very least, a part time and active job. I was not very good at managing the assets.
When I discovered passive investing in real estate syndications everything changed for me. With this approach, you can truly be passive - effectively hiring an asset manager to deal with finding a quality property, hiring contractors to do the work and hiring property managers to handle the tenants. These asset managers operate the entire property on behalf of the investors. You get similar returns as active investing, the same great tax benefits and none of the hassle. There are clearly downsides - the investments are even less liquid than active real estate, they are completely out of your control and they are long term in nature. Although the investment is passive, the finding of a quality operator and good deals is not - that is very active. The nice thing is you can do all of that from the comfort of your mobile home, Airbnb or however you are traveling!
I made the switch from active to passive because it fits my skillset and my lifestyle. I don't have a W2 - I am a full time passive investor in real estate. And now, there is plenty of help as BiggerPockets is launching a Community focused on passive investing called PassivePockets. It is critical to educate yourself on this type of investing and joining a Community of like-minded investors is a great way to find and vet operators together, analyze deals and work together to become better investors.
Good luck!
I am a full time passive investor in real estate syndications. There are two books that have been the most helpful in my journey and I believe both are must reads for any new and experienced investors:
The Hand's Off Investor by @Brian Burke. It takes you through the whole process, including specific details on how to analyze a deal.
Avoiding Rookie Errors as a Left Field Investor by @Steve S.. This book highlights 20 lessons learned by Steve over his 14 years of investing in syndications. It allows you to learn from the mistakes of others so you can shortcut the process and avoid common mistakes investors make.
The good news is that it's going to be a lot easier to vet a quality GP in the next few years than it has been in the past. Experience is key for sure - but there is also the reality of LPs needing to allocate capital and the number of experienced operators available to invest with will likely be smaller than the LPs who want to invest. As @Evan Polaski said there are different kinds of experience and we will be going into a cycle where any operator who has been around longer than five years will have experience in a tough market. My "experience" evaluation will take into account how they made it through the markets from 2019 to 2025 - that will tell you a lot.
I will be looking at how the operator handled their deals during this time, how they communicated during this time and what they learned. Prior to 2022, it was difficult to find an operator who didn't make a lot of money on their real estate syndications. At the same time, there just weren't that many operators serving LPs who had been doing this long enough to have gone through turbulent markets. The 2012 Jobs Act is what made syndication investing more accessible so it was smooth sailing in this industry for a decade. Now it's not - - cue the Warren Buffet quote about when the tide goes out you see who is swimming naked.
The key for me will be to evaluate how they came through these difficult times. Did they stop distributions or have a capital call? These will not be disqualifying for me - I will want to understand it in context. There is a difference between an operator who did not communicate any problems until the email about the capital went out and the operator who was constantly updating investors on the asset and the difficulties and challenges and preparing investors for the possibility of a capital call prior to actually going through with a capital call.
I think the biggest lesson I have learned as an LP over the past few years is that I will absolutely require consistent, thorough and realistic communication from any operator I invest with. My due diligence will include reviewing past reports - on assets that performed and those that didn't. I have always put communication as one of the top criteria for operators, but I also excused those who were poor communicators but had "good" deals. I am paying for that now.
I will also do all of the other due diligence prior to investing - experience of the operator, referrals from those in my Community and network who have invested with the operator, responsiveness and other factors - but proof of effective communication will remain a priority for me. I will also remember to be patient - it's ok to invest the minimum and wait a year or two before getting into a deal with the same operator. Patience would have avoided a lot of the current pain.
Syndication investments are long-term, illiquid investments completely out of your control. If you don't choose an operator who will effectively and honestly communicate with you, then you will be a frustrated, and likely poorer investor.
@Brian Burke gives some great advice. I think one thing that investors are learning is that stopping regular distributions might not be a bad thing. It certainly means things aren't going to plan - but that is very common in MF syndications these days.
As Brian has often said, distributions are made from the profit of an operating business - if there isn't any profit, there should not be distributions. In many cases right now, I am pleased if the operator stops distributions in order to build up reserves and protect the asset - as long as they are sharing the reasons behind it.
You mentioned they are also doing a capital call, that is a difficult thing to contend with and, in my opinion, the decision to participate is going to depend on the operator and their communication. If they can present quality information describing why they need the capital, what the current state of the asset is, how this capital will be used to solidify the asset - then at least I can evaluate the capital call and make a decision to participate or not. If they give very little information or the new capital will only add a year or two to the viability of the deal, then I am likely not going to give them more money.
The changing or stopping of distributions and calling capital are very stressful and concerning events when you combine it with a lack of information and transparency from the syndicator. When you have full information and an operator who is willing to communicate and give full transparency - it can still be difficult - but it's much easier to make decisions and evaluate the situation when you are informed. Too many operators are procrastinating telling the true story, likely because they hope conditions will change and they won't have to share difficult new. These are the operators I will not invest with again.
Syndication investments are long term, illiquid investments that are completely out of your control. Syndication investors are learning hard lessons about finding quality operators who will transparently share good AND bad news with investors.
In your case, I would continue asking questions and looking for information - that is the only way you can find out if it's truly a failed deal or not.
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).
@Sook Kim thank you for setting the record straight, I should have caught this when it was posted. While I wish that the statement about selling my portfolio by 2021 were true, it's only about 75% true. Approaching what we now see (using 20/20 hindsight) was the peak of the market in 2022, I had a portfolio of around 4,000 units. I began aggressively selling and by the middle of 2022, right as the market was peaking, I had just under 1,000 units left. I had 200 units go into contract about a month before the market's light switch was flipped, but that deal failed to close because the market had collapsed in the subsequent weeks and the buyer was unable to cross the finish line, so I still have that one.
These last 1,000 units were all part of my last two multifamily funds, fund VI and VII. Fund VI did get one sale with a large gain but still has properties left, as does fund VII which had no sales.
Had I been able to sell all of these properties by 2Q2022, this would have been a great story to tell! It's still a pretty good story, but investors who are in funds VI and VII rightfully couldn't care less about the great timing of sales they had no part of.
Sook, I appreciate your kind words about not being "fly by night", our rigorous accounting, K-1 delivery, and comprehensive reporting--your trust in us is not taken for granted.
You say that you've invested with other sponsors who's properties have held their value--if you are ever in the mood to share more specifics on that with us I'd love to see what they are doing differently and perhaps I can learn something. The industry as a whole benefits when sponsors do a better job and I'm always seeking improvement. I've seen values fall across the board in almost every market so I'm very curious to see how they avoided this.
As it relates to returns, we never sell ourselves as the leader in investment returns. Our value proposition is over 100,000 units of experience across multiple decades and having survived multiple market cycles. We try to achieve good returns at a lower risk than syndicators who use high leverage, short-term debt, invest in sketchy properties, or financially engineer their capital stack, so finding higher returns elsewhere is something I hear often. I'm not willing to extend further out on the risk curve, so this is unlikely to change.
@Forest Wu thanks for asking what's going on. Sook already knows because our last quarterly report was 16 pages long (mostly text) describing exactly what is happening, but certainly anyone not in the fund who is reading this thread doesn't have that information. I'll spare you a 16 page description and summarize. The markets today are like a 4-way intersection, approaching from each of the four directions were rent growth, interest rates, cap rates, and expenses. They all collided in the intersection. Rent growth turned negative, interest rates skyrocketed, cap rates rose (meaning values fell), and expenses increased (inflation hits everything, payroll goes up, insurance--you know that story) pretty much all at the same time (around 2Q2022).
We did one smart thing--we financed with long-term debt and we used low leverage (60% +/-) so we have a wide margin of safety and no threat of a loan maturity until 2031, so we have plenty of time to ride this out until the next market cycle. But we made one decision that history may one day show was the wrong choice--our rate is floating. This has served us well for decades because floating rate debt allows us to escape yield maintenance risk, but the tradeoff is we must accept interest rate risk (I wrote an entire article on interest rate risk vs. yield maintenance risk so I won't rehash here). Long story long, our interest rate skyrocketed and when you couple that with declining rents and increasing expenses, distributable cash flow erodes.
We don't hide that by continuing distributions--so we cut those off early to preserve cash reserves. That turned out to be a good move so far. Investors hate it, but they hate losing their money even more. Preserving cash is the other key to surviving to the next cycle.
Regarding capital call--there are threads here on BP where investors have posted that they were surprised by a capital call, or were issued a sudden capital call. I wouldn't do that to my investors, so even though I am not sure that a capital call will be needed, and if it is, it would be small relative to capital invested and likely not even this year, I felt it was my responsibility to give investors a distant heads-up that this is a possibility so they can be prepared if and when we have to take this step (and I should note we've never issued a capital call in our multi-decade history so I don't take this lightly). The only purpose of such a move is to provide the reserves to get to the next cycle should it turn out that we don't have enough already.
Sook astutely pointed out in his post that investing in syndications is complex. So is managing them--we have never lost investor principal and don't plan to start now, and we will fight to the end of the earth to protect our investor's interests. Sometimes this requires making tough and unpopular decisions. We have and will continue to make those tough decisions and clearly explain them, and the reasons for them, to our investors. We are hands-on managers--we have our own management company and manage our assets internally, so we have complete control over what is controllable. What we cannot control, we can only take every step we can to mitigate and communicate.
Happy to answer any other questions, too, and clarify if I've missed anything.
These are the type of thoughtful, non-combative responses to LP questions and comments that all GPs would benefit from reading - and putting in to practice. Proactive communication, addressing issues head-on with plain language, acknowledging mistakes and not just blaming "the market" or "interest rates".
I am invested with a few operators who have made capital calls - all of them came as a surprise and only one was messaged appropriately. I am an investor with Praxis and if that call comes, I will understand completely why and I will have been adequately prepared.
Syndication investments are long-term, illiquid investments completely out of the control of the LP investor - after we send our wire the only thing we have is communication. GPs communicate through sending (or not) distributions and sending (or not) comprehensive reports. This should include a future outlook for the asset - good or bad. Too many operators are VERY poor at communicating and many more compound poor communication by thinking that if they don't share bad information, the bad stuff won't come. This is why an LP should always ask for prior reports from an operator BEFORE they invest - it will tell you a lot about the operator and how they handle business and just as important, how they value LPs.
I don't see many other GPs on this Forum being this transparent and it's greatly appreciated! I also don't need the GPs to share on public forums, but they should absolutely be this clear and transparent in their communication with LPs. That is my number one takeaway from this difficult time in syndication investing - invest with operators who communicate transparently and often and those who will answer the hard questions.
There are a lot of good responses here - one thing I would like to add is that you are going to pay the taxes on the 401k regardless, so we are really only talking about the 10% penalty and the timing. Taxes are the biggest eroder of your wealth. When you use a 401k you are partnering with the government and they can change the rules at anytime. Do you think taxes will be higher or lower when you retire? If you think higher (which seems to make sense), you are electing to defer taxes now when rates are low so that you can pay more tax later when taxes are higher. Yes, you might be in a lower tax bracket at retirement - but I don't want to be! I want to grow my income as I get older!
So back to the question - if you cash in your 401k now, it is going to be painful to write that check to the IRS, but you are going to do it eventually anyway - it's only the 10% penalty you need to make up. If you invest in real estate (I invest passively in syndications), you will likely never pay tax on that money again - if you do it right. So I think it would be relatively easy over a long period to be better off having cashed our a 401k then not. That said, I have done it with part of my retirement accounts, but not all of it. Mostly just to keep diversified in many different ways - including tax deferral and having some money in the market.
This is a very case by case type decision and the only answer that I think is "wrong" is the answer that include definitely DO it or definitely do NOT do it!
Those are some great recommendations! My two favorites by far are The Hand's Off Investor by @Brian Burke and Avoiding Rookie Errors as a Left Field Investor: 20 Lessons Learned From 14 Years of Passive Investing in Private Syndications by @Steve S.
Brian's book digs into how to analyze a deal in depth and gives great tips in how to vet a sponsor. It's required reading for anyone interested in syndication investing.
Steve's book has lessons based on mistakes Steve and others made in their investing careers. Each mistake includes tips and tricks to make sure you don't make the same mistake. It's great for beginners and veterans and also a must read!!