NOTE: The following post is a story of my path to investing in real estate syndications. I will provide you with remedial overviews of real estate syndications. I am by no means a topic expert, and I implore you to utilize the links below to more qualified educational sources.

This post, like the others on Enough About It is intended to provide the reader with enough information to be informed and inspired to take a deeper dive into said topic.

It all started with a broken oven

In the Fall prior to the 2019 COVID pandemic, our home’s oven was on the fritz. I tried in vain to fix it, even attempting to solder in new electronics to the motherboard (fail).

Like the rest of the world, during the pandemic, we spent time at home staring at the glaring home improvement issues that otherwise never would have bothered us. My wife and I concluded that instead of just replacing the oven, it was time for a remodel!

The remodel turned out beautifully, and thankfully, the relationship between my wife and me is stronger than ever. I suggest traveling and home remodeling as tests for any young couple before they decide to make a lifelong commitment.

Our Contractor, Denny Wilson was fantastic and has since become a family friend. As remodels go, it was a long and arduous process, beginning with the kitchen, expanding to the rest of the house, and inevitably went over budget.

Not an actual image of my wallet, but very close!

We had savings set aside and, with the rapidly declining interest rates, tapped into our home’s equity to pay the remaining balance of the remodel. I opened a line of credit for more than I needed in case something else came along, such as an investment opportunity or an emergency event.

We had one rental property, and it had been a goal of mine to purchase another later on down the road. During the time of our remodel (2020–2021), the cost of borrowing money dropped.

One could lock in mortgage rates at or below 3%! This was my opportunity to lock in a low rate and finally purchase that next cash-flowing asset.

I live in California. Property in California is not inexpensive, and a second mortgage in the Golden State was not in the cards for me. I began to research and look elsewhere.

An investment property from afar?

I spent time looking into “out-of-state listings”, and connected with several builders and turnkey property retailers. Ultimately, I decided against purchasing a property out of state for the following reasons:

1. The numbers penciled in less and less favorably as home values skyrocketed.

2. I am not an expert in market trends and did not feel confident in my ability to identify a market to purchase an investment property.

3. There are many steps involved in the purchase of a home that I had little desire to take given my lack of confidence in the above.

**Maybe I should buy a local fixer-upper, which may be more affordable**

The BRRRR Method: Buy, Rehab, Rent, Refinance, Repeat

According to an article written by Lauren Nowacki on www.rocketmortgage.com, the BRRRR method is a real estate investment approach that involves flipping a distressed property, renting it out, and then getting a cash-out to refinance on it to fund further rental property investments.

I’d encourage you to read the link below to Lauren’s article to take a deeper dive if you are further interested in the BRRRR method.

Was BRRRR right for me?

I would like to believe that I’m an above-average handyman, but handling a remodel or rehab on my own is way out of my league. I have a career and family, and my “me-time” typically takes place between the hours of 5-7 am at the gym or on a running trail.

The BRRRR method is not conducive to my schedule. I simply do not have the ability to actively manage another real estate investment.

I’ve been actively managing a rental for 9+ years

Our rental was purchased in December of 2007 (talk about timing the market), right before the 2008 crash. We held onto it even as we purchased our current residence.

The fact that we were underwater on it (meaning: the value of the home did not exceed the outstanding loan) made the decision to “hold onto it” for us. The rental has since been refinanced and produces a nice monthly cash flow.

I am the landlord, marketing manager, and maintenance man all rolled into one For the most part, managing the property has been smooth. I’ve had great tenants, and there have been minimal issues besides the routine:

· Broken toilets

· Clogged or cracked garbage disposal

· Malfunctioning appliances

· Clothing dryer repair

· and so on…

Despite the several trips to Home Depot and Lowes, this list of issues isn’t that bad, and the experience has thus far been an education. Check out www.biggerpockets.com for some real horror stories.

My experience as a property manager allowed me to recognize that I did not want to be actively involved in another rental property. Someday, I may sell this home and wash my hands of it completely.

Give me a few more clogged toilets, and I may accelerate that decision to move on.

Active vs. Passive Real Estate Investing

Consider the BRRRR method and my experience with our rental property. These are examples of actively managing real estate. Rolling up one’s sleeves and doing the dirty work certainly produces “sweat equity”.

Passive real estate investing allows for a “hands-off” approach

According to an article by Carla Ayers at www.rocketmortgage.com, a passive real estate investment doesn’t require extensive effort from the investor to maintain.

With these types of investments, you can make extra income without doing any physical labor or acting as a landlord. Passive investors don’t generally deal with properties in person and may never even see the real estate they’ve invested in.

You had me at: “make extra income without doing any physical labor or acting as a landlord”

There are many types of passive real estate investments and I encourage you to learn more about them.

My desire to take a passive approach to investing in real estate lead me to a crowdfunded style of investing known as syndication.

According to an article written by Dr. Peter Kim of Passive Income MD featured on www.whitecoatinvestor.com; a real estate syndication is a group of two or more investors or investment companies coming together for a common goal—to raise capital for purchasing real estate or building a new property. The advantage of pooling your money with other investors is that you can invest in a much bigger, more lucrative deal that could be otherwise too expensive for an individual investor.

The down payment I had set aside for a single-family rental property turned into my first participation in a Real Estate Syndication.

Real Estate Syndication Pros

1. 100% passive - besides choosing which asset class and with whom you invest, your work is hands-off. No toilets to unclog!

2. Invest alongside professionals - Note: like any investment there are risks. These risks are mitigated by investing alongside sponsors with a proven track record through multiple economic cycles.

3. Easy to diversify - one can invest in several types of real estate asset classes such as multifamily, industrial, triple-net lease, self-storage, development, mobile home/manufactured housing, RV parks, retail, hospitality, and so on.

4. Several ways to invest - through a single asset, a fund, as an individual, through a Self-Directed IRA, as an LLC, etc.

Real Estate Syndication Cons

1. Syndications are not liquid investments. Your money may be tied up for a long period of time. Typical syndication investments last 3-7 years or longer. Do not invest with money that you may need in the immediate future.

2. You are in the backseat: one of the perks of passive investing is the hands-off approach. The other edge of that sword is that you have little to no control over how your funds are utilized. Choose your sponsors wisely!

Can anyone invest in a syndication?

Most syndication offerings require the investor to be accredited

According to www.investopedia.com, an accredited investor has a net worth of more than $1 million excluding the value of their primary residence or an income of more than $200,000 annually (or $300,000 combined income with a spouse).

A non-accredited investor is anyone making less than $200,000 annually (less than $300,000 including a spouse) that also has a total net worth of less than $1 million when their primary residence is excluded.

What does typical returns look like from a Real Estate Syndication?

Performances will vary.

The vanilla explanation of ideal returns can range from:

1.5x-2.5x return on investment

ex: $100,000 investment may return $50,000-$150,000 on top of the original capital.

Hold Time: typically, 4-7 years. Some may go shorter or longer.

Run, don’t walk away from sponsors promising the world to you such as: quadrupling your money in two years. If it sounds too good to be true, then it most likely is. Keep your antennae up!

Projected returns should be steady and conservative. The better sponsors will undersell and overdeliver.

The Remedial Step-By-Step Guide

1. Raise capital (that you have earmarked for an illiquid investment): the minimum investment is typically $50,000–$100,000, but minimums may be lower depending on the sponsor.

2. Identify the sponsor: This is hands-down the most important decision. The jockey (sponsor) is significantly more important than the horse (asset). Interview several sponsors, and do not give money to the first sponsor that shows you a nice PowerPoint presentation pitch deck.

3. Sign your paperwork: Before signing anything, read through the documents thoroughly. Ask questions and do background checks on all parties involved. You may be surprised at what you can find on someone that may reveal a business deal that went south or was mismanaged.

4. Wire your funds: This is it. Say goodbye. Double-check that the wiring information is correct before hitting send. Confirm with the sponsor that the funds have been received.

5. Receive Distributions: There will be a quiet time as capital is deployed and the business plan laid out by the sponsor is put into motion. Then one day, you wake up and check your Savings account, and there’s been a distribution. It’s like a visit from the tooth fairy!

The first distribution is the most exciting, as you see things begin to come together and visualize what a world could look like where you are receiving multiple distributions from several cash-flowing assets. Year one will typically yield the fewest distributions as it takes time for the business plan to become fully executed.

6. Expect Quality Communication: The business plan may or may not go as expected. As an investor, it should be an expectation to receive constant communication on your asset from the sponsor. One may invest in a few deals that perform, but due to poor communication, one may decide against future repeat investments. It’s a sign of professionalism and courtesy to one’s investors.

7. Exit: This is the end game. An exit occurs when a capital event is triggered and funds are returned to investors. This could be via a refinance, returning all capital to the investors as an asset continues to produce cash flow over and above the original investment. Or it may be the sale of an asset where the original capital plus an equity share is awarded to the investors.

Passive Cashflow is attainable via participation in real estate syndications and alternative asset investing. These are some of the additional baskets, as described in “Don’t Place All Your Eggs in One Basket” that one can utilize to secure one’s financial future.

What I have learned in two years

Let me start this section by saying: I am a firm believer in being a lifetime learner. To date (6/21/23), I’ve been researching and investing in real estate syndications for two and a half years. The investor I am today differs from the investor I was six months ago. We can thank the Federal Reserve and interest rates for that.

I have now entered into ten different syndication-type deals. Some have been fantastic. Others have not fared as well. The “dogs” in my portfolio may not be total losses (I’ll tell you in three years), but they have certainly been an education.

Latch on to those with experience. I found that investing is, in a weird way, like researching a product. I can’t just base an opinion on one or two reviews. I need to understand the fine details and find consistent positive reviews of the sponsor and asset class before pulling the trigger.

Mistakes I’ve made

Jumping in too quickly: see below, “Don’t fret about FOMO”. It’s okay to be patient.
Not understanding debt and the strategy behind how it is used. There are several ways to finance a deal. Before you can become a wise investor, I’d spend time learning the art of underwriting, or the fundamentals of underwriting. When you understand this, you can more effectively gauge the risk involved in a deal.
Splits to the LP. What is or is not a favorable split? There are several sponsors out there vying for LP capital. If you love a sponsor, perhaps there is an opportunity to invest with others for a more favorable split of profits. See the groups mentioned below.
Listen to investor presentations without the intent to invest. Nitpick a pitch deck as an exercise. What’s the debt structure? How are the investors paid? Ask for a sensitivity analysis (a stress test on the deal). You’ll learn something new after each presentation you listen to.

Choosing the Sponsor and the Deal

Understand who is raising the capital. Capital raisers (sometimes listed on the deal as “Co-GP”) are the people who make commissions on your allocated capital. In my experience, these individuals are not as vested in the deals they bring you. Go to the source and work directly with the sponsor of the deal. The better operators don’t need to elicit help to raise money. They already have an investor base, because they’ve built it over time with successful returns.
Experience is key. Ask if they have been through several cycles. Everyone made money between 2016 and 2021. The party has come to a halt. The best sponsors weather storms and make money through all parts of the cycle through savvy underwriting and wise acquisitions.
Ensure that the sponsor shows conservative underwriting and stress tests for unforeseen market conditions. Don’t get hung up on fancy presentations with gaudy return projections. What happens if interest rates spike or occupancy is low? Can the deal still make money? The money should be made on the purchase of the deal.
Avoid high leverage. Think about it like this: 40% down on a home provides much better protection from a market downturn than 20%, right? If a deal can pencil in favorable returns without a ton of leverage, then it was a conservative acquisition.
Invest the minimum. If the stated minimum investment is $50,000, ask if they will allow $25,000 for a first-time investor. You never know unless you ask. Get to know the sponsor before committing excess capital to them.
Spread your chips around the table. Don’t go all-in on one sponsor or asset class. This was excellent advice that I received, and it is paying off.
Meet the sponsors. Attend dinners and events to get to know the sponsors. The greatest value here is networking with other investors and drawing upon their experiences.
Don’t fret about FOMO (fear of missing out). There are a ton of sponsors, deals, and opportunities for you to invest your money. Be slow to invest and quick to move on if something does not pass the sniff test.

Resources

There is a lot to unpack here, and my summaries above are only the tip of the iceberg. The following will provide a compass to point you in the right direction on your journey.

This material will also help you understand the alternative path that one can take to wealth generation and ultimately wealth preservation.

Books

-Robert Kiyosaki’s Rich DadPoor Dad is considered a launch pad for cashflow “asset” investing

-Brian Burke’s Hand’s-Off Investor is an encyclopedia of knowledge on Real Estate Syndications. This is the book to take a real deep dive. Use it as a reference guide.

Podcasts

These two podcasts below are on my regular rotation of listens. There are several episodes available, and I often find that the featured guests make fantastic recommendations for additional content.