My First Passive Investment in a Syndication
Updated: Jan 3
Once I got the bug for investing in real estate, I quickly moved past single family rentals and jumped straight into educating myself about multifamily; more specifically, commercial multifamily (anything 5 units or more).
I was fascinated by the concept of forcing appreciation instead of relying on the market to determine the value of the property.
In my quest to learn about everything multifamily, I came across a new concept called Syndication, which is when a group of investors pool their money together to purchase an asset, and is the process by which the majority of large apartment buildings in the U.S. are purchased & owned.
The more educated I got, the more I realized how many different ways there are to benefit from investing in apartments, and decided this was the method I wanted to master.
I ultimately wanted to be a deal sponsor/general partner (GP), but felt that first it would be a good idea to invest on the passive side and get an idea how a seasoned operator does business.
How I Met the General Partners
After countless books, blogs & podcasts on the subject, I felt that the next step was to get to some in-person educational events and meet some people who actually own apartments, both on the active and passive side.
In the Fall of 2019, I would travel to Dallas multiple times to learn more about buying apartments and network with owners and investors.
I met so many awesome people who own thousands of units and had been investing in apartments for many years.
They were all happy to share their knowledge and lend a helping hand.
I came across one individual who I developed a strong rapport with and kept in touch with over the following months.
After my networking events in Dallas, I began receiving a good amount of opportunities to passively invest.
It wasn’t until mid January of 2020 that I received one that I really liked, and it happened to be from the operator who I had developed a strong rapport with during the events.
The offering looked like this:
200 unit, B class, value-add in Dallas, TX
8% projected Cash on Cash return (to be distributed quarterly)
88% projected total return
5 year hold period
Minimum investment: $50K
This is a pretty common offering in the syndication world, give or take a couple percentage points in the returns. The strategy to add value is as follows:
Burn off loss to lease with unit upgrades (bring below market rents up to market rate)
Implement water savings program (reduce expenses)
Hire professional property management (optimize efficiency)
Cost segregation w/ bonus depreciation (tax bennies)
Construct fenced yards for $75/mo premium (increase income)
Washer/dryer installation for $40/mo premium (increase income)
Conservative 68% Loan to Value ratio (conservative leverage)
The reason i liked this deal most was not because of the potential returns or the business plan.
After seeing enough of these deals, they all kind of blend together.
The reason I chose to invest in this deal is because of the GP team.
Aside from the GP that I knew, there were multiple other team members who would be GP’s that I thought highly of.
Although I saw no issues with the business plan and return structure, I was betting on the jockey, not the horse.
Wiring the Money
Despite having as much faith and trust as I possibly could in the GP team, I was still a nervous wreck when it came time to wire my $50K to the escrow account.
I’d done this once before when I was buying my personal residence, but that was different.
I was fully entrusting someone else with $50K of my hard earned money.
This was more than just a $50k wire to me.
Just a few years prior to this, I was up to my neck in student loan debt and avoiding calls from collectors.
I had to exercise a tremendous amount of discipline to get out of debt and save this money.
This would be the first milestone in my journey to becoming an apartment syndicator and ultimately to financial independence.
Despite the nerves and fear I was experiencing, I went forward with the wire.
Ultimately, everything worked out and the money arrived without any issues.
The deal closed in early 2020, right as COVID 19 was rapidly spreading throughout the world.
The economy was shutting down, many people were unable to work, and the government implemented eviction moratoriums to prevent a flood of homelessness.
I could not believe that I had made my first real estate investment simultaneous to the largest black swan event in the past century.
I was devastated and had come to the point that I thought my investment would be a wash. I was already chalking this one up as a learning experience.
As time went on, it became apparent that the investment was not performing nearly as poorly as I had expected.
If you recall, this is a B Class property and the tenant base had white collar jobs, enabling a lot of them to work from home.
In turn, the overall income base was less impacted by the pandemic than lower class properties.
On top of COVID, a good part of TX was hit by a severe winter storm that cause a lot of damage and forced the GP team to withhold distributions for a couple of quarters.
Not the most desirable outcome, but whats more important is that the GP’s were fully transparent about the situation.
It’s important to understand that unforeseen issues will inevitably arise.
What’s even more important is to be fully confident that the GP team will keep you abreast of everything that is happening.
Communications from the sponsors
The GP team has been extremely transparent about the day to day operations and performance since day one.
That means they are not always reporting out good news.
Given the unprecedented environment we are operating in, I did not expect everything to be going as well as originally predicted.
I have received monthly updates since we took ownership of the deal and have had a front row seat to the inner workings of an experienced apartment ownership team.
Performance of the Investment
At first, the GP team decided to hold off on cashflow distributions to boost the capital reserves.
This was due to the raging pandemic and a general state of unknown.
The horror stories had already been spreading about tenants not paying their rents and apartment owners not being able to pay their bills.
I thought this decision made perfect sense.
Roughly 6 months into the investment, the GP’s decided to push out the first two rounds of cashflow distributions that had been withheld.
This decision was based on the performance of the property and the amount of capital reserves in store.
I had almost forgotten about the investment at this point and was pleasantly surprised when $2K was directly deposited into my bank account.
As the pandemic wore on and things started to calm down, operations began to stabilize and the business plan was able to commence further.
To date, the annualized cash on cash return is 5.1%, compared to the projected 8%.
Multifamily as a Superior Asset Class
Although the cashflow is not currently meeting the original projection, the deal is still performing extremely well.
This deal was closed almost simultaneously with one of the biggest black swan events this country has ever seen.
Despite the cashflow, we are looking to potentially sell the property this year (2022) and likely will meet or exceed the original total return projections.
This is because there has been so much money (stimulus) competing to purchase multifamily assets and the prices have been driven sky high!
This experience has only solidified my belief in the many superior properties of the multifamily asset class.
I was able to put $50K of my hard earned money into a real estate investment with no more experience than books, podcasts and networking.
I was able to leverage the experience of veteran operators and not have to do any of the dirty work.
Only time will tell if the investment meets its projections over the longer term, but things could not be looking better given the current environment.