How do you choose a syndicator?
The main reason for this website is to help ordinary people make good decisions when investing in real estate syndications. We mainly focus on private real estate syndications that invest in multifamily housing. We know it is a wild world out there--and not a ton of reliable, publicly-accessible information, especially when you are starting out but even then.
The main difficulty for most people who want to invest in this asset class is picking the right person or firm to trust with your money. It is extremely hard to know what to do from the get-go. What if you don't know anyone who invests in this asset class? What if you don't really understand the nature of the relationship between an investor and a syndicator? How do you make your first investment in a real estate syndication? How do you make your 20th investment in a syndication?
This process can really matter to investors. Never is the importance of a sound process clearer than it is today. This topic vaulted to the top of the news this week in the mainstream financial press.
This week, we woke up to the top story in the Wall Street Journal with the following headline: "A Housing Bust Comes for Thousands of Small-Time Investors." Sub-heading: "They were offered the benefits of owning apartment-building rentals without any of the work, in real-estate investments that have already left some people empty-handed."
The article detailed the failure of a series of syndication offerings in Houston, Texas this spring. The investments were led by Applesway Investment Group which (too?) quickly became one of Houston's largest landlords. The founder touted the investments on YouTube. As the Journal reported:
In April, Gajavelli’s company lost more than 3,000 apartments at four rental complexes taken in foreclosure, one of the biggest commercial real-estate blowups since the financial crisis. Investors lost millions. Gajavelli didn’t respond to requests for comment.
The article detailed the process that syndicators go through to raise funds and the possible worst outcome:
Syndicators generally invest little of their own money. They collect acquisition fees from investors that typically go from about 2% to as high as 5% of an apartment building’s purchase price. They also take management fees of 2% to 3% from the building’s gross income. Syndicators often profit even if the investment is a failure, which real-estate analysts say encourages excessive risk-taking at the expense of inexperienced investors.
During the pandemic, syndicators found it easier than ever to raise money. Sean Tate, a Dallas-based real-estate attorney who has worked with syndicators, said he was inundated with calls from people seeking help to syndicate rental-apartment deals.
For the next series of posts, we will detail the process that we go through in order to select a syndicator, the traits we look for, and the traits we evolve. This process has evolved over the years for us--and continues to evolve as the market changes. Here are the first five traits we look for:
- Trustworthy: easier said than done, but can you come to trust the person you are sending the funds to and who will make all or virtually all of the decisions related to YOUR investment?
- Experienced: do they have the experience needed not just to acquire the deal but to finance it and manage it, through thick and thin? Is this their first deal in the space or their 25th or their 50th? If you are friends with the person and really want to be the guinea pig, be our guest. And everyone needs to get their shot to start. But we're not interested in "first deals" from someone who has just finished a "guru" course or a "mastermind" and is out on YouTube raising money. Those just starting out can invest as Limited Partners themselves, pair up with experienced investors, earn the ropes the right way and over time, and build their own firm based on that shared experience. That slow and steady approach to getting going as a syndicator is for us.
- Conservative: most syndicators will tell you in a solemn tone that they have "underwritten the deal conservatively." We suspect many syndicators have used this solemn tone and described as "conservative" plenty of deals that have underperformed or even blown up. Is their underwriting truly conservative? If not, are you truly aware of the risks you are running together in the deal? (This is not a political statement, by the way--that's up to you if you want to support conservatives, liberals, moderates, whatever. We mean do that actually underwrite conservatively. N.B.: virtually everyone says they do!!! And it is simply untrue.)
- Communicative: we have found essentially a 1:1 relationship between those syndicators that communicate well and frequently and those who perform well. Our worst performers finance-wise are also our worst communicating syndicators in our family's portfolio. Timing of K-1s are also nearly a perfect indicator of successful syndicators in our view: those who get K-1s to you by the deadline of March 15, or at least by April 15, tend to be on top of their game--and that corresponds to other forms of success.
- Values-aligned: not everyone will care about this last one in our "top five" but it does matter to us. If the syndicator seems to share our values of taking care of others, acting ethically, not cutting corners, supporting causes in the places that are generating wealth for them, building families and communities... we are interested. If the person seems to be in it just for themselves, just for the money, just for a quick buck... that's a hard pass for us. As with being "trustworthy" you have to see it and experience it to make a call on it, but all the more reason to do your due diligence before you invest with someone--especially the first time.
More to come in later posts to build out this framework and add more details. But as the headlines tell us this week, though it may be rare, it is possible to lose an entire syndication investment if the syndicator does not do their job well. Buyer beware. Do YOUR job of vetting the syndicator before you send them your wire or check.