It Was All a Dream...
Many years ago, as a young and aspiring commercial broker, I fell in love with the premise behind real estate investing.
I wanted cash flow, I wanted my money to work for me even as I slept, and I wanted financial freedom.
Brushing shoulders with guys that have 500+ unit portfolios can have that effect on you!
Something in my mind shifted forever and I knew that I wanted to be like them and be a full time investor, rather than an agent hustling for each commission.
In those years I absorbed every scrap of real estate investing knowledge there is.
I Made a Plan
I formulated a plan that would allow my hard earned money to grow through my real estate portfolio, quit my job as a commercial agent, and focus full time on asset management of my rental properties and sourcing new acquisitions.
Now, I knew the risks associated with single family rentals due to the all-or-nothing nature of vacancies.
The best way, I thought, was to start with buying a duplex or a three family building.
Our development company was generating enough profit with each project that we could continually purchase mid-sized multifamily properties.
If we repeated that process across a few acquisitions, we would eventually get to the other side of the rainbow and be living the good life…
Unfortunately, my plan was flawed.
I knew that I was doing the right thing by purchasing multifamily properties and my business partner and I had built up some pretty serious cash flow through our investments.
So why didn’t this feel like the dream life we had envisioned?
Well, the truth is, our skill set was and always has been in executing a business plan, asset management, sourcing deals, and underwriting.
While we had a great property manager, she was a one-person operation and much of the management responsibilities inevitably filtered down to us.
Changing Roles and Thinking Big
We wanted to be less active in the day to day minutia and change our roles to a bigger-picture managerial role.
The mistake we made was that we hadn’t thought big enough.
In order to transition away from that jack-of-all-trades wearing more hats than our heads could fit role, we needed to scale up to larger deals where the operating income and size of the property allowed for us to hire only the best, most sophisticated, and most experienced rental property management companies in each market.
The data was compelling, too.
In our research we found that you are actually getting a better return on your investment, even on a per unit basis, when you scale up to larger multifamily purchases.
Year over year rent growth is stronger in larger apartments than other rental properties, allowing for you to boost your net operating income and cash flow more efficiently during your ownership period.
Enter the World of Real Estate Syndication
The solution to all of our problems was to work together with our investors from our development projects to purchase those larger properties.
A real estate syndication is when a group called the general partners finds a large investment for purchase, underwrites and performs due diligence, then pools funds from their investors to purchase a property that would have been out of reach for any of those individual investors if they were trying to purchase it on their own.
The investors, who do not have to do any of the work, are called limited partners.
In order to invest in most real estate syndications, you have to meet the criteria of an accredited investor: you must have either a $1 million net worth (not including your equity in your primary residence) or you have an annual income of $200,000 if you are single or $300,000 if you are married.
Like any typical real estate purchase, you use a combination of debt financing and the equity capital from you and your investors to fund the acquisition.
We were already familiar with this structure as we had used it for several of our larger development projects.
Our investors loved it as it allowed for them to be partial owners of high level multifamily assets completely passively.
They could receive regular cash flow distributions, much as they would if they bought a duplex, but with no work involved. Pretty good deal.
Have you ever heard the phrase “the rich get richer?”
This is especially true in commercial real estate, as economies of scale allow larger, 100+ unit multifamily properties to obtain more favorable terms on the debt financing- so long as the general partner team meets the net worth and liquidity requirements necessary for the asset size and scope.
This is in addition to the stronger year over year rent increases in larger buildings we discussed earlier.
Couple that with the fact that these large complexes are the only properties that top-level managers will give the time of day to, and you can see why playing around with duplexes, three families, and even smaller 20-30 units apartment buildings is less of a stepping stone to the big leagues and more of a road block to your progress.
Here are a few of the advantages of investing passively in a multifamily syndication:
1. Capital:
As someone who is interested in real estate investing, you’ve likely built up some capital that you can use to invest.
Maybe you’ve saved up enough for a down payment on a few smaller rental properties.
That’s great, but the question is, have you saved up enough money to purchase the amount of units you would need to have enough cash flow to hire a full time asset manager and top-level property manager?
That’s what you really would need to do in order to make your business a truly passive one.
Investing in a real estate syndication allows you to live that passive investment life you’re dreaming of without paying your dues spending years saving up enough down payment capital to cobble together a portfolio of smaller rental properties until you’ve finally reached the scale you need.
You’re riding alongside the general partners’ and other investors’ capital in order to achieve the scale that allows for you to truly take a passive role with no responsibilities.
2. Industry Experts
Maybe this will work…
Buying a rental property seems simple enough on paper, but as someone who has been in this industry for years, I’ll tell you firsthand that you find yourself encountering something new seemingly every week.
When you buy your first few rental properties, you’ll soon realize the wide-ranging knowledge you need for proper asset management.
For your first few rental properties, this can sometimes seem doable enough.
Maybe your systems aren’t the most efficient and you don’t have the experience to efficiently navigate problems as they come, but you’re still cash flowing.
Sounds okay, right?
If you take that attitude into more and more purchases, which you will need to do in order to achieve significant cash flow from smaller properties, you will eventually be in for a rude awakening.
The truth is, if your goal is cash flow that allows you to retire or to at least significantly supplement your income, you’re going to need to build out robust asset management systems, learn the ins and outs of construction, and become an expert at underwriting deals.
When you invest in a real estate syndication, the general partners are industry experts with knowledge of all phases of real estate that would take years of experience and effort to replicate on your own.
For example, our team has direct experience in ground up construction, sales, property management, and asset management.
As a passive investor, you can rest easy knowing you don’t have to re-invent the wheel and figure everything out on your own.
Brokers:
Getting the Cold Shoulder
One unfortunate truth about the high level world of real estate transactions is that top commercial brokers very often outright ignore new clients who approach them.
You might be thinking, “how could you become a top broker with that kind of attitude?,” which is understandable.
I remember thinking similarly when I was still an agent myself. What you’ll come to find is that, much like yourself, top brokers value their time above all else and it’s often in their best interest to focus their efforts on sourcing new deals and schmoozing with the clients they already KNOW are ready to pull the trigger when a good deal is sent their way.
Brokers Value Their Time
To give you a hypothetical scenario that illustrates my point, envision that you are a very wealthy, yet inexperienced real estate investor.
There are several disaster scenarios that can occur with this type of client that make top brokers reluctant to put much time into them.
The most common would be that the investor has no clear plan in mind for their investment.
They might not know what type of asset they would like to purchase, the size range of properties that interest them, what market they want to invest in, or some ungodly combination of all of these factors.
It’s easy to imagine how that type of client could waste a broker’s time.
It’s Okay to Be New
If you’re honest with yourself, you might realize that you ARE that type of client.
I would imagine if you’re reading this site, you are a bit savvier than that, but don’t be surprised if that type of indecision doesn’t begin to rear its ugly head when you start dealing with larger purchases, which seems to be a psychological trigger for most people.
Hopefully you can understand a little why top level brokers might sometimes ghost you.
It’s a hard club to break in to.
Luckily, the general partners in a syndication take care of all of this for you by having a strong network of commercial brokers in each market that know they are serious buyers capable of delivering when a good deal is put in front of them.
We manage a CRM database of brokers in all of our target markets, so we never miss a deal.
Debt Financing:
Getting Tripped Up
This is a massive stumbling block that trips investors up even when they go to purchase a mid sized (20-50 units) multifamily building.
While lenders rightfully view investment properties through the lens of a business and the lending standards are very different than for a primary residence, the borrower still needs to meet a number of requirements in order to prove they are capable of handling the loan.
When you’re dealing with very large loans as you are with 100+ unit multifamily properties, the things that will hold the vast majority of people back will be the net worth and liquidity requirements.
For example, while there is no industry standard, it’s typical that the general partner team needs to have a net worth that is equivalent to or exceeds the total loan amount.
When you’re discussing loans that are often in excess of $20 million, you’re obviously ruling out the majority of people right off the bat.
Relying on General Partners
When you invest in a real estate syndication, you can rely on the general partners to meet all of these requirements, so you don’t have to.
As we mentioned earlier, the beautiful thing is that the some of the most attractive financing terms are available for the largest multifamily purchases, so having the general partners that meet these requirements opens up this new world of lending to you through your syndication investments.
Time:
People Are Walking Around Like They’re Coming Back!
Perhaps it’s become a bit of a cliche, but it’s true: time is your most valuable resource.
Unlike money, you can’t earn time back when you lose it.
It’s just gone forever.
Time is the motivating factor that has driven so many people towards real estate and the general goal of financial freedom.
Finding Purpose and Fulfillment
We want to live fulfilling lives, which is difficult if all of your time is spent working.
Juggling your career with your side job of being a landlord can be pretty miserable.
Adding insult to injury, you can’t even be a great real estate investor while still maintaining another career.
Investing and asset management are full time jobs in and of themselves and you will only get subpar results when you have so many balls up in the air.
You’ll be putting yourself through the ringer only to get average or below average results.
In a real estate syndication, there is no time commitment as a passive investor. In my opinion, this is the greatest advantage of all.
Your money is working for you in deals that were sourced, underwritten, and managed at a professional level.
If you want to, you can take a nap, go on vacation, or even find other ways to make money all while earning returns better than the stock market.
Pretty good, right?
It’s Up to You!
In truth, there’s no right or wrong answer here – it’s all up to you how you want to invest your capital in real estate.
Some people are able to endure the hardships and get fulfillment from being a small-time landlord.
Perhaps you dream someday of being a general partner in a syndication yourself and need the experience necessary to work your way up there.
In that case, I would definitely recommend getting your feet wet as an active landlord.
For the majority of people, however, passive investing in a real estate syndication is a more appropriate option that deserves consideration.
There’s a reason that real estate syndications have exploded in popularity over the past ten years.
What was once a private, exclusive world that only savvy investors were aware of, the advantages and conveniences presented to the investors in a real estate syndication are so attractive that this model has pushed its way into the mainstream conversation.
