Theo Hicks continues the conversation on what you should know before becoming a real estate syndicator. In the previous episode of Syndication School, Theo talks about the reasons you may elect not to passively invest in real estate syndications. Today he discusses 5 things to consider before deciding real estate syndication is for you.
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Theo Hicks: Hello Best Ever listeners and welcome back to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. In the previous Syndication School episode we went over some of the reasons why someone might elect to not passively invest in real estate syndications. In that episode, I mentioned that I also wanted to look at it from the other side of the coin, which are some of the reasons why you might elect not to become a commercial real estate syndicator, or in this case, an apartment syndicator. But we’re going to talk about it as a syndicator in general, so not why you should not become an apartment syndicator in lieu of becoming, say, a self-storage indicator, but a syndicator in general. The reason why is to provide you with some of the characteristics of a good syndicator.
Essentially, these are a list of things that if you don’t like doing these things, or you don’t have these things in your track record, then you aren’t either ready to become a syndicator or you might consider not becoming a syndicator because it is not a good fit based off of you personally.
Again, I don’t want this to be a “Hey, if any of these things apply to you, you can’t become a syndicator,” or “Hey, every single person who’s a commercial real estate syndicator, these don’t apply to them.” That’s not what I’m saying. These are just kind of in general high-level things to think about before becoming a commercial real estate syndicator. Obviously, if you’re listening to this show, you know what a commercial real estate syndicator is, but just really quickly, it’s when you are the operator, you find the deal, you manage the deal, you sell the deal, and then your passive investors are the ones who fund the majority of the project costs, with the exception of the mortgage debt. You as the operator are using other people’s money to buy commercial real estate. So what are five reasons why you might consider not becoming a commercial real estate syndicator?
I think the biggest reason why would be if you have anxiety over managing or losing other people’s money. Once you enter the realm of commercial real estate syndications, you’re managing other people’s money. Sure, there are other investment strategies like joint ventures, for example, where you’re leveraging other people’s money to invest in real estate… But syndications are unique in that the other people’s money you are managing is entirely passive, so they are limited partners. In a joint venture, they need to have some other involvement in a deal, whereas syndication is completely passive, no say-so whatsoever over the business plan. They are entrusting you with their money and you are hopefully at least preserving their capital and ideally growing it as well.
Now, like all investments, there are no guarantees in these commercial real estate syndications. It is rare, but it is possible that the person investing loses all of their money, loses a portion of their money, maybe doesn’t make as much money as was projected, which would be the best worse-case scenario, is they still made money, just not as much as they expected. But the worst-case scenario is that all their money is gone. Now it is again rare, assuming that the passive investor is properly vetting you, your deal, and your market, but it is still possible that money is lost.
So if the thought of managing someone else’s money, being responsible for their hard-earned money, if they’re investing hundreds of thousands of dollars with you, if the thought of losing that money gives you the anxiety of having those difficult conversations with your passive investors, letting them know that “Hey, something went wrong and your money is gone, or I lost a portion of your capital, or we have to change the distribution frequencies…” Essentially, if you’re fearful of having those tough conversations when something goes wrong, then commercial real estate syndication might not be the best option for you.
Break: [00:06:00] – [00:08:02]
Theo Hicks: I’ve talked to a lot of people on this podcast that are using their own money to buy deals and say they’ll never do syndications. The number one reason why is because they don’t want to be responsible for other people’s money. That gives them anxiety, they don’t want to deal with those tough conversations. If you fall into that camp, there’s plenty of examples of people out there who are successful not doing syndications.
Now, of course, this is one of those things that it’s kind of a fine line, because I don’t think anyone has no anxiety whatsoever when they’re managing other people’s money, or they have no anxiety whatsoever about losing other people’s money… But if it’s something that is going to keep you up at night, hoping that nothing goes wrong at the property because you don’t want to have those tough conversations, then is that stress really worth it? So the number one reason why you should not become a commercial real estate syndicator is if you have crippling anxiety over managing other people’s money and then losing other people’s money.
Number two and three kind of go hand in hand. We’ve talked about this on Syndication School before… Before you become a commercial real estate syndicator –I guess in this case, apartment syndicator, but we’re going to talk about it for all commercial real estate– there are two things that you need to do. The first one is that you need to have real estate experience. The second one is business experiences; that is points two and three.
Focusing on a real estate experience for now – you don’t necessarily need to have real estate experience in whatever it is you plan on syndicating, or even in commercial real estate in general. Obviously, that’s not the case, because if you needed experience in something before you did it, you’d never be able to do it. But the point is, you need to have success investing in some sort of real estate, or at the very least, have some sort of experience in real estate if you are investing… Because you will have a very difficult time getting someone to invest with you if you have no real estate experience whatsoever, and you haven’t invested any of your own money into your deals.
Obviously, from a real estate experience perspective, they’re not going to trust that you know what you’re doing, and from investing your own capital, why would they invest with you if you don’t have your own skin in the game? There’s that level of alignment of interest. Sure, some people might, but that’s going to be an objection that a lot of people will have. “Hey, you’ve never invested your own money in a deal before? You’ve never invested, period? How do I know that you’re going to be able to preserve and grow my capital?”
So even if it’s something like Joe, which is purchasing a handful of single-family rentals all the way up to working for a large commercial real estate firm, and getting experience that way, you can leverage that experience when you’re raising money from passive investors. “Hey, I haven’t done an apartment deal before, but I’ve done single family rentals before and this is just a scaled-up version of that. I understand how transactions work, how to underwrite deals, how to asset-manage deals, how to analyze a market, how to find team members, yadda-yadda-yadda.” A lot of those skill sets apply to multifamily and other large commercial real estate.
So if you’ve never done a deal before using your own money, or I guess family members’ money, or friends, or if you haven’t worked in real estate in any form, so you basically have no real experience whatsoever, then you’re probably not ready for commercial real estate syndications. You’re going to want to do a couple of deals first or work for someone who’s doing deals before you transition to doing your own deals with other people’s money. That’s number two.
Number three, as I mentioned, similar to number two, is the second requirement needed to become a commercial real estate syndicator. Not necessarily as important as the real estate experience, but still important, which is the business experience. I believe that when we talked about this before, we said that it is an either-or. So you need to have real estate experience or business experience. But really, if you want to maximize your chances of success, you should have both.
Now, you could technically have business experience by starting your own real estate company. If you start a single-family rental company, for example, sure, that could be counted as business experience. But let’s say buying one property is probably not considered business experience. Starting your own other business, or something unrelated to real estate, working for a large corporation and being promoted, seeing how a larger business operates and clearly being successful at it – that’s what I mean by business experience.
As I’ll talk about a little bit later, when you are a commercial real estate syndicator, you are running a business. People do it on the side part-time, but when we’ve talked about how to vet, when they’re vetting you, at least on an Actively Passive Investing Show when we’re talking to passive investors, we’re telling them to look for someone who’s doing this full time. It’s their full-time attention, it’s not their side gig. You want someone investing a lot of time into managing your capital. It’s the same thing here – you’re going to be running a business, so you’re going to want to have experience and understanding of how businesses function, how they operate. So if you started a business in the past and you’ve worked for a big business, then you have that experience. If you haven’t started your own business –again, this could be real estate related or not– and you haven’t been promoted within a large corporation, then you might not be ready to become a commercial real estate syndicator.
Break: [00:13:34] – [00:14:11]
Theo Hicks: I’d probably say that out of all the things on this list, this might be the most controversial. I’m sure there’s plenty of syndicators out there who have not started their own business and have not been promoted with any large company before becoming a syndicator… But the point is that this is an objection that you might get from passive investors. So it would suck if you went through all that effort creating your business and no one invests with you because you have no business experience. Of course, you could offset this by bringing on a partner who has business experience as well. Again, none of the things are automatic, objective disqualifiers. There are ways to offset this. But the point is that these are just things to think about. So that’s number three, you have no business experience.
Moving on to the fourth reason why you might not want to become a commercial real estate syndicator –I kind of already touched on this– is if you want to work part-time in real estate. There are plenty of people that we’ve interviewed on the show who are part-time real estate investors while also working a full-time job. They invest in single-family rentals, maybe they’re turnkey single-family rentals, maybe they’re actively doing them themselves, they’re buying small multifamily like duplexes and fourplexes, maybe they’re wholesaling, maybe they’re fix and flipping, maybe they’re doing something else, but the whole point is that they work a nine to five, and then after work on weekends they’re doing their real estate business. Or they have a very flexible job where they can do both during the day.
They can work their full-time job while they’re doing their real estate investing business.
People have amassed large portfolios doing this. They’re using their own money and they’re not investing a ton of time into it, they’re outsourcing it to team members… Whereas most commercial real estate syndicators are doing it as their full-time job. Maybe they start their first deal and they’re doing it part-time, but once they scale and they’re going out and pursuing other people’s money besides family and friends, they’re most likely doing it full time, or at least they should be doing it full time, as we’ve talked about. This is what we’re telling passive investors on the Actively Passive Investing Show – a criterion of a good sponsor is they’re doing it full-time and it’s not their side gig. Managing other people’s money, millions of dollars’ worth of real estate, managing a team, finding new deals, finding new investors requires a lot of time and attention.
If you don’t have the time to do this or don’t want to work full-time hours on your business, then commercial real estate syndications might not be for you. A lot of people get into real estate because they want to leave their nine to five jobs, have that passive income, and have financial freedom. Syndications is not really that type of strategy. You’re, in a sense, starting a full-time business. Again, sure, there are people that might not work full-time hours on their syndication business, but the majority of commercial real estate syndicators are. It’s a full-time job, like going to an office for example. So yeah, it’s not a part-time endeavor. If you’re looking for a part-time job or a part-time real estate investing business, then you probably want to focus on something else.
Last but not least is number five, which I’ll go over really quickly, which is you don’t want to be liable if something bad happens. What does this mean? This is more focused on deciding whether or not you want to be an active or passive investor in syndications. Again, I’m not an SEC attorney or anything like that, but if you read the guidelines, the commercial real estate syndicator is the general partner, and the general partner can be personally liable in certain situations, which means that in certain situations, more than just the collateral –which is the property– can be taken. For example, if the GPs are signing on the loan, the debt is recourse and they default on the loan, then they could be personally liable. If it’s a non-recourse loan that they’ve guaranteed, and they trigger a carve-out –like gross negligence or fraud– and they default on the loan, they can be personally liable. If they’re sued by a resident or a vendor, they could possibly be personally liable. Again, lawsuits and loan defaults aren’t happening every single day to every single sponsor, but they are possible.
It’s something just like the first point, losing other people’s money – it’s something you need to be comfortable with. Again, no one wants to be sued, but the point is that it can happen. If you aren’t prepared for that mentally or you want to completely avoid it, then you probably aren’t going to want to become a commercial real estate syndicator. You might want to focus on maybe smaller real estate investing where you are not exposed as much. Or you could become a limited partner where you aren’t personally liable at all. Those are kind of five top reasons why you might want to not consider becoming a commercial real estate syndicator.
Just to summarize, you have anxiety over managing or losing other people’s money… And I guess something I could add here as well is managing other people’s homes. I remember I talked to someone else who does retail, buys and then rents out, Family Dollars, Starbucks and Panera’s, these big corporations, because she doesn’t want to deal with the residents, because that’s their home and they live there, and from her, she wasn’t comfortable evicting someone from their house… Whereas she’s not really too worried about evicting Starbucks or pressuring Starbucks to pay their money, because they’re a multibillion-dollar company, as opposed to this person who’s maybe barely making ends meet or whatever.
So I guess a 1A or an addendum to number one could be that you also have anxiety over managing other people or you’re not a people person. You don’t want to have those tough conversations with your investors, you don’t want to deal with team members, you don’t want to deal with residents… Of course, there are ways to go around that, but an addendum to this would be you also have anxiety over evicting other people. So that’s number one.
Number two is you have no real estate experience. Number three is you have no business experience. Number four is you want to work part-time in real estate. Number five is you don’t want to be liable if something bad happens… Then you might want to not consider becoming a commercial real estate syndicator.
Again, and I’ve said this multiple times – I’m not saying that if any of these apply to you, do not become a syndicator, you can’t do it, you’ve got no chance. I’m not saying that these five things don’t apply to someone who’s a successful syndicator. The whole entire point is that these are not to be interpreted as black and white. It’s just things to think about and things to reflect on before you start a career as a commercial real estate syndicator.
That will wrap up this show. Thank you for tuning in, and make sure you check out some of our other Syndication School episodes. We’ve got a lot of free documents that we’ve given away as well for those shows. They’re all at syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
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