In addition, many of you are aware that I’m a real estate syndication investor and might realize that those deals often involve borrowing (and thus could be susceptible to interest rate changes — for instance, having variable rate debt in a rising rate world.)
Given that, I get a lot of questions of “how are your syndication investments doing?”, “what do you think of this or that investment?”, and so on.
That’s why I thought I’d answer some of these questions by giving an update on where I currently stand.
BTW, the Millionaire Money Mentors (MMM) site has been invaluable for me as many members are syndication investors who offer their thoughts and share information. There are also many nay-sayers (who balance out the rah-rah element) with their disdain for syndication investments, so there’s a wide range of opinions — giving anyone considering these investment options a lot to consider before they make any moves.
With all that said, let’s get to it…
How We Got Here
Before we get to current results, let’s revisit my journey for a bit.
I learned about syndication investing in the MMM forums when we had Ask Me Anything sessions with a couple syndicators. These then started conversations with mentors and members who had experience with syndications.
After doing some due diligence, I invested $50k each in two deals. You can read about this in My Real Estate Syndication Investing Journey.
As an important point of reference, in that post I said the following:
My situation is unique and whether or not these are right for you will vary based on your unique goals, situation, and so forth.
Some of my thoughts:
- The money I am investing here is completely AT RISK and ILLIQUID. I would probably never have invested like this earlier in my investing career though others have/do. It depends on the risks you want to take and your goals and I’m not a big fan of either large risk or illiquidity. So before you invest this way, know it’s on the upper end of the risk scale. There’s a reason they want accredited investors for these deals.
- In addition, there’s no control. At least with my own properties, I’m driving the ship. With these investments I am a fly on the wall and along for the ride, which makes these even less desirable.
- Those said, I had cash on the sideline earning nothing. I was losing money to inflation having it in “high interest” accounts. That’s a known loss, so it effectively reduces the risk a bit.
- In addition, the amount I have invested is meaningless in the grand scheme of things. If I lost all $100k I’ve invested so far, it would have zero impact on my lifestyle, future, etc. I would not lose a minute of sleep over it. (Not that I want to lose it, but it wouldn’t hurt to do so.)
- My main goal is to get more/new passive income at decent return rates and this fits nicely into that goal. If your goals are different, this may not work as well for you.
- I am planning on reducing risk in a few ways. I will be diversifying by general partner, area of the country, and type of real estate (apartments, storage units, etc.) In addition I will ladder my investments, jumping in every several months or so. That way I’ll create a cycle where (eventually) I’ll always have one deal coming up to close and will use the proceeds from it to either cash out or reinvest into a new deal.
In the end, I’m not sure how much I’ll put into real estate syndications. I’ll play it by ear for now, but will likely do at last a couple more deals, so my minimum will be $200k or so. Time will tell.
Well, I ended up doing a lot more than $200k because…
Selling My Rentals
About the same time I was making those investments I was becoming more and more fed up with the aggravation and frustration of dealing with my real estate property manager (those of you who have one likely know the feeling.) I knew my rentals had appreciated nicely and also realized the market was currently strong for them. That’s when I decided to sell them all and get out.
During the summer of 2021, I sold my rental properties (which in hindsight looks like pretty good timing). Now I had a TON of cash that was sitting around, earning nothing (remember interest rates were very low), and was begging for investment.
BTW, I considered DST investments but ruled those out along the way because they were inconvenient and didn’t pay much (around 5% at the time).
At this point I started looking at more syndication deals. After evaluating many (both on my own and in discussion with forum members), I invested in several. I still had a lot of cash on the sidelines, but when you sell three big pieces of real estate AND you make more than you spend, there’s always a good amount of cash around. (BTW, the private lending deals I had went full cycle around this time and paid back all my invested money — so I had even more cash available.) As such I picked up investments over time.
Before we get into what I did from here, let me take a moment to discuss what a syndication can be. Because when people hear “syndications,” many seem to immediately think of “5-7 year multi-family investments.”
This is certainly part of the equation, but it’s far from the total set of options. There are syndications in land, business park developments, mobile home parks, storage facilities, ATMs, car washes, and debt as well as multi-family projects. And the time horizons vary too — I’ve seen as short as a year and as long as “up to 10 years.” Finally, some syndications are single investments (one apartment complex or piece of land) and some are funds (a set of apartment buildings or storage facilities.)
All of these investments involve debt of some sort which is where much of the concern is today. The syndicators/deals who locked in long-term rates when they were low are fine, but those with variable rates can be in trouble because virtually no one foresaw that the Fed would raise rates so far so fast — and those that didn’t respond are seeing their profits eaten up (and thus their investors money could be at risk).
BTW, many (including me) think that almost all should have locked in long-term deals when rates were low. We didn’t know rates would take off, but we did know we were at historically low rates — why not lock them in when you could? It almost seems like a no-brainer. And yet many syndicators didn’t.
I followed the general investment principles listed above and diversified among a wide range of investments. In addition, I only had one that I put in more than $125k (it has since come full circle and delivered as promised) so I spread out my money.
At the height I had about $1.6 million invested. For the most part, I reinvested money when the few deals I had ended.
Many of the investments I made allowed me to accelerate depreciation to the level where it offset the depreciation recapture from my rental places. I was prepared to pay the entire tax on those and move on, but I was able to kick that can down the road a bit until the current investments sell.
With many syndications there are two elements: income and appreciation. They pay both a monthly distribution and allow the investor to share in the appreciation, if there is any, when the property is sold. If the income distributions are paused for any reason, they accrue to the investor and are paid first once the property sells. These are the sorts of deals I went for — a combination of income and gains.
So after the interest rate issue became worse and worse (by what seemed like never-ending hikes), I called each of my syndicators and spoke to their investment teams. I wanted to see how each of my investments were doing given the market issues — especially since several had paused distributions (some because of interest rate issues and others for different reasons). They do send monthly updates, but those are generally at a very high level and I wanted more specifics. I made the calls in October and November.
We’ll start with the results since I know most of you are interested in them more than anything else. 😉
As I talked to each syndicator, I categorized the investments as follows:
- Solid — I think they will deliver what they said, close to it, or better than it.
- Ok — I think they will likely deliver a good return which may or may not be as high as they had promised.
- Concern — I think they are at risk of not delivering what they promised and my capital may even be at risk.
After talking to these, here’s where I’m currently putting my investments:
- 11 deals in the solid category
- 3 deals in the ok category
- 1 deal in the concern category
Also to note: I have three deals that have run full cycle and paid exactly what they said.
After going through the calls and ranking the investments, here were a couple of my takeaways:
- I thought there would be more in the “concern” category (I had estimated 3). And maybe there are…and I just don’t know it.
- Two of the three “ok” deals are with a syndicator I felt was the best of the lot – and I expected more from them. But this is why you spread your money around – because you don’t know who’s really solid until you’ve been through a couple investments with them.
As we discussed my results as well as what’s going on in general with syndication investments in the MMM forums, I shared some additional insights about how I look at these investments. This may be different from how many look at them, but I’m managing for me and not everyone else. Hahaha.
Here’s my take on syndications…
I invest in these to give me exposure to an asset class that I like (real estate) while also making it pretty passive. The days are over when I want to own and manage my own properties. I am thankful I did get into them, but I’m too old for that mess these days.
That said, being a more active real estate investor in the past has given me some experiences that I account for when I do invest in syndications. Namely:
- I know things come at you that are completely unexpected. That is the nature of real estate. Maintenance issues, people issues, government issues, and more — it’s part of the game — things happen that you often couldn’t foresee or plan for. If you want an investment that runs smoothly like clockwork all the time, real estate is not it.
- I do not count on the returns the syndicators promise. I discount them, knowing that if they say they will hit X% return, I’m actually happy with X% – Y% (an example of this is that they may estimate 17% annual returns counting both distributions and capital gains while I’m fine with 12.5% for many of them.) The reasons I do this are because 1) it gives me a margin of safety and 2) I know things can go wrong (see #1.) That said, I still hold the syndicators accountable to do what they said. And if they vary from it, they hear from me for sure.
- I diversify in many ways. This is because I know things can go wrong, I diversify by syndicator, time frame, type of real estate, and part of the country. For everything to go bad, the whole US economy basically has to tank, and if that happens, nothing is safe anyway. Part of this is that I also know there will be winners and losers in these investments just like any other (they all can’t be winners, can they?) and just like picking stocks, the winners will cover for the losers.
- I don’t need income right now. So if syndicators promise distributions, I will take them (of course) but I’d rather have the property managed correctly to maximize total value and I’d rather have it in capital gains several years from now than now (since I have enough income currently). So if a syndicator pauses distributions to take time and make the asset ultimately stronger, I’m ok with that.
I understand these are issues associated with owning real estate because I dealt with all of these factors as a private real estate investor:
- I had unexpected things happen (and when I say “unexpected” I mean :unexpected” and “bad”.)
- I had goals for my properties but had lower numbers I planned for (margin of safety).
- I diversified (still in one city) in a few ways (area of city, type of real estate, etc.)
- I had to pause distributions to myself at times (to get a new parking lot, to pay for renovations, etc.) but it was for the greater good and things turned out very well.
All that to say, I have been there and done that — and I may be playing by different rules than others are playing by. And even if I lost every penny I’ve invested, I’d be ok (not that I want to, of course, but that’s a HUGE margin of safety).
Syndications in Trouble
As I mentioned above, there’s a group of nay-sayers (in the forums, on social media, in the news, etc.) who don’t like anything about syndications. And that’s fine, not every investment is for everyone. But a small group of them are making a lot of noise these days with comments like “See, I told you so” even though there’s not really anything to see…at least yet.
Many are acting as if every deal ever done with every syndicator is a disaster that has an impending capital call at best or a forced liquidation at 10% value at worst. That is far from the case.
In support of that statement I’d submit my results above. Currently I’m at 1 concerned investment (which still may do ok) out of 18. If you move the “ok” ones to “concerned” that’s still only 4 out of 18 that are “bad”. It’s actually pretty decent – much better results than I get with picking my own stocks – and might be better when all is said and done than what I earned on my own real estate.
In addition, we’re only into the 2nd or 3rd inning in some of these investments, so there’s time. No one, syndicator investors or nay-sayers, can declare victory at this point. And my guess is there won’t be total victory either way — there will be winners and there will be losers — which is the nature of many an investment.
But there’s also a group of syndicator investors who are quite upset/fearful these days. They are worried that their investments are worth nothing (which they may be — but it’s too soon to tell) and are quite vocal about it.
Overall, the people (both investors and non-investors) who seem to have the largest issue with syndications are those who:
- Haven’t invested in real estate directly themselves (and thus don’t know what to expect.)
- Expect every deal to go 100% to plan. Which is not how the world of investing (in almost anything) works.
So I guess my point here is to simply say “relax a bit.” There may be trouble or there may not, but often bumps in the road are simply a cost of investing in real estate. Many times they work out. And if they don’t work out, worrying about them now won’t do you any good. So relax and let’s see what happens.
My Next Steps
Here’s how I plan to proceed with my deals:
- I’ll still hold all syndicators accountable for doing what they said they’ll do. I’ll do this by emailing in the short-term, then re-doing my round of calls in 6-8 months to get any updates (we’ll also have a better feel for where interest rates are headed by then.)
- Five of my remaining 15 deals are short-term projects that will pay out in 2024. All are in the solid category, so I expect them to payout as promised. If that happens, that will leave me with 8 deals in the bank having done what they said they would do.
- By the end of 2024 I’ll be left with 10 deals and $900k invested (assuming none sell or go bust by then), which is around where I want to be long term. I’ll hold onto those and see them through. I’ll make decisions on reinvesting the proceeds on a case-by-case basis as each goes full cycle.
What I Have Learned
Someone in the forums asked me what I have learned in this process. I didn’t have an answer then and even now my responses will evolve over time, but here’s where I am as of now — some of these reinforce what I thought prior to investing, some are new, and some contradict what I thought and/or are new learnings:
- You have no control of the investment. There’s a plus and a minus to this. The plus is you don’t have to manage it (so it’s totally passive.) The minus is that you may have made different decisions if you were in control.
- You have to keep in touch with your syndicators. Read the monthly updates, call them with questions, and (if you’re a member) discuss them in the MMM forums. These are passive investments but you still should take some time to keep on top of them. It’s been an interesting process and one I’ll likely repeat sometime around the middle of next year…just to see how things are going.
- Trust and competency/experience are key with syndicators. If you can’t trust someone, it doesn’t matter how skilled they are. And if you can trust them but they are baffoons, that does no good either. They need to have both qualities. Unfortunately the only clear way to determine this is to try them out for yourselves. Asking others is great too, but what works for someone else may or may not work for you.
- How they handle adversity is vital. This is really where you see the true colors of a syndicator. I know that in a year or two I will have winners and losers — those I cast off and those I invest with for probably the rest of my life.
- Diversify your investments. One good move I made was to divide my money many different ways. I think it’s a prudent way to do things with real estate syndications (as it is with many investments). These are like buying stocks — some big winners some losers, in the end you net out on the positive.
- Short-term deals can be good. Since they are shorter term there are far fewer risks and the future is easier to predict (compared to 7 years out.) And they pay pretty well too (11%.)
- These are risky, illiquid investments. Knowing this you really need to be comfortable with these factors before you invest a penny into them.
- I like deals where the syndicator has lots of money invested. I want the general partner in the same boat as us limited partners.
Anyway, that where I stand as of now. Any questions?