All Forum Posts by: John Drowns

A quick thought:  If you are an accredited investor (net worth of $1M or make $200k per year; are some basic parameters), you could invest in 506c syndicated partnerships.  Truly passive (no asset management on your part), low correlation to public markets as you are invested in a commercial property, monthly distribution checks (depending on the Sponsor), and tax benefits.  They are not liquid like your stocks, but because of that they are less volatile and can preserve generational wealth (kids will spend cash but they can maintain wealth if you are passing down units of investment in commercial property).  In this type of investment you need to find a good Sponsor that has been around a long time and has been through market cycles and are truly real estate operators.  Then you choose property type and geographic location you like from their offerings.  Getting comfortable with a Sponsor takes some research, but is a good way to set up passive streams of income and benefit from property appreciation upon sale of the asset.  Hope that is helpful. 

Syndication hold periods can be longer than 5 years.  In fact, if the Sponsor is focused on preserving, protecting and returning capital, they should be presenting some opportunities that are providing a steady risk-adjusted cash distribution that are 7 - 10 year holds (or reorganization at that point) depending on debt terms that are placed.  If investors' interest is paramount, they will find a 1031 replacement to roll the proceeds into to keep your investment working toward your legacy/generational wealth. 

@Carlos Ptriawan - good add to the macroecon that is, of course, relevant.  If I had the access to capital and knew how macro economics affected real estate in a particular area better than a Sponsor, I would either always do my own deals, or find a different Sponsor.  Like everyone has said, I believe it is a question of personal strategy and assumptions one is comfortable with, rather than there being greater or lesser path to travel. Great nuggets from everyone on this thread! 

Good points @Mike Dymski.  The choice in Sponsor is paramount in syndication investments.  I would caution on syndicators who have only just appeared during this robust climb where it seems everyone is making money regardless of skillset.  Does the Sponsor have history through an economic downturn, longevity overall as a company, and are they commercial real estate practitioners in more than just the syndication space?  Some could make the case that there are a lot of Sponsors out there that are heavily weighted in the C space.  Will those properties weather the impending contraction as well as an A?  Maybe for another thread but something to think about. 

Good questions @Thomas Loggins. I hope you find the below helpful (as I have the same question as @Charles Seaman above). At least, these are some thoughts about the questions in your post.  A paramount qualification for the types of investors that pursue 506c offerings should be that they are sophisticated.  A sponsor should avoid having investors in deals that are not making informed decisions based on their own due diligence.  Just a few reasons why the pooling of such funds from multiple investors is a more viable strategy for many sponsors are as follows: (a) Multiple sources are less risky than having (1) or (2) large institutions that might pull their equity (for whatever reason) right before close, thereby tanking the deal in the ninth inning.  It is much easier to back-fill an oversubscribed opportunity if one or two investors find that they do not want to, or cannot participate due to liquidity issues (this happens).  Worst case, a sponsor can come up with the equity in order to close, but forming a waiting list is also prudent.  The ability and certainty of closing is vital to a sponsor's reputation in the marketplace.  Lenders, owners, investors, listing and off-market sourcing brokers do not want to work with sponsors who have not been able to close.  That can be true for even one deal, years ago that has fallen through. (b) the sponsor should be the expert in managing the asset and will want to have control over the operations and execution (with investors voting on larger issues).  Institutions that take a majority of the equity, will also want varying degrees of control which can slow execution for a sponsor. (c) while some groups may have access to "more sophisticated investors", the frequency at which those same investors can invest may not adequately supply the equity needs of the sponsor company's deal flow; meaning they need more investors (larger pool) to keep doing what they do best which is close on good opportunities.  Lastly, companies will differ in their strategies.  Some are out just to raise as much money as possible.  Others truly believe that they have a wealth building, wealth preserving tool that the individual investor should be able to harness and they want to share that, as that is their service.  You help us buy and execute deals, we will help you grow your wealth and create income streams.  There are other reasons (takes time for groups to approve funding the larger the allotment, Old School investment mindset keeps them in Wall St. etc.), but I hope this is a helpful start.

Are you an accredited investor, or looking for non-accredited opportunities? 

@Chris Collins has asked some great questions.  Quick thoughts.  House hacking can be a great way to start.  Duplexes are great starters, but 4+ units can be more scalable and can help mitigate risks on vacancy/turnover downtime.  Buy good fundamentals, not projections.  Good luck and welcome to BP.  You will learn a ton.  Learn more before you jump into anything.

Good points made by all! Utilizing the power of leverage (lots of attractive financing in the current environment) while still keeping a reserve and identifying some up-front uses of the capital to improve a property are good considerations.  Given your current experience, a suggestion would be to purchase an existing building rather than try to develop raw land, unless you have a good relationship with a company that has performed ground-up development and understands the process. Depending on the municipality and product type you plan to build, you may find yourself needing an advanced level of knowledge to get it done (infrastructure concerns that @Lior Rozhansky mentioned above come to mind).  Buying raw land is usually a longer investment horizon, but as you know, every deal is different.  There could be a ripe little parcel in an area of gentrification that could work well, but the owners who hold that land my already have that priced in.  Obviously, rent comparables are key whether you are building new, or buying to reposition.  A helpful question to ask yourself is can the rents (and reasonable growth in those rents) support the development/capital improvement costs, plus what you plan to yield?  If apartments, what improvements are other communities getting best rent premiums on, etc.?  In some cases, just adding new supply to a densely populated area where all the surrounding communities are at 95+% occupancy might even be enough with minimal amenities.

Good advice above. I would also suggest setting up an LLC or multiple depending on if you want to hold each property under a different LLC.

@mtgtme mtgtme

I concur with those above that you need some more education before getting into this type of deal. Further down the road, you definitely want to understand the net rents and the rent comparables to the subject property. One quick example from what you provided is what kind of premiums are the comps getting on their upgraded versus non-upgraded units? Are the projections on the rent for the upgraded units at your subject property achievable given that knowledge? That sort of thing. Obviously, track record of whomever is the syndicator is most important. If they have a good reputation for not over inflating assumptions and have been around through a few cycles, you may be able to get a good feel for how they can perform. If they are good at what they do, they aren't going anywhere and they will continue to present good opportunities, so you don't have to feel like you "missed it". Use the "Education" tab and then research some of the metrics used in evaluating CRE (IRR, Equity Multiple, Cash-on-cash). Hope this is helpful.