Now a quarter deep into the topsy-turvy market of 2023, where do things stand for real estate syndications?
Should you be investing new money in, say, new multifamily syndications or funds at this time? The influential blog at BiggerPockets is reporting that the answer is "mostly no." You should read the whole reasoning for yourself, as ever, but the basic rationale that author Andrew Syrios offers is that
returns are lower because interest rates are higher, and (at least as of now) prices have not come down much to soothe that reduced cash flow. And as noted above, there is no reason to think real estate prices will go up much, if at all, in the near future. And they will almost certainly not keep pace with inflation. So, most of the advantages that real estate syndications offer are no longer there, particularly for passive investors.
As you might imagine, some of those who are offering syndications or managing them are singing a bit of a different tune than Mr. Syrios.
For instance, Ellie Perlman at Blue Lake Capital remains bullish on investing in multifamily syndications. In fact, she notes:
Despite the economic news, we're continuing to stay active in the market. In fact, we even launched the new Blue Lake Multifamily Fund. I've said before that I still believe in real estate, particularly multifamily, as a great long term investment and I continue to feel that way today.
It is no surprise that those who are making their living promoting deals and encouraging you to move your money from cash or stocks and bonds into real estate syndications continue to be bullish--and urge you to make the leap on an ongoing basis.
Looking at our 20 or so investments at the end of Q1 2023, we are seeing that both of these points of view may be correct.
To state the obvious: It is not a great time to be in a lousy deal. That's probably a true statement most of the time, but the last few years may have been an exception--the red hot market covered up a lot of sins (poor choices in property selection, weak property management, bad financing decisions, and so forth). Now that the tide has gone out (yes, metaphor mixed in this paragraph now!), there's no hiding. Those poor deals are just poor deals. As we've reported on this site, one of those deals has had a capital call (last fall) and another one continuously threatens one (though no actual capital call... curiously).
The good deals, though, with good operators look really strong. Where we got the debt cheap and fixed a few years ago, where the value-add has taken place, where the properties have been well-managed, where the rents have been rising--those are looking like really good deals. Nothing is ever guaranteed but they certainly have been doing as well or better than most stock-and-bond Wall Street-type investments for the past year-plus. Even with the decent first quarter for stocks in 2023, we're not at all sorry to have a pile of investments in multifamily syndications and related investments (e.g., Fundrise, which continues to grow and perform well).
Where does that leave us? Should we lay low in Q2 2023 or stay the course?
We come back to the strategy of choosing well: keep investing but be really choosey. For the moment, we are not excited about funds where we don't know the deals that will be available and where the fees are high and opaque. We are focused on specific projects from one or two operators that have done especially well with our investments over the past several years. We're not interested in doubling down with those who are middling or poor in terms of their performance and we're not interested in offering a blank check to anyone to "go hunting" unless we have super-high conviction in that person or firm.
This perspective is behind a premise of this site: there's too little transparency and too little reliable data for people like us who wish to invest in private real estate syndications. It's only by trial and error--which is pretty expensive experience--that we can narrow effectively the list of those with whom we prefer to invest. Over time there will need to be a better source of data and way to compare track records and experiences than there is today.