Syndication Investing With A Passive Real Estate Investor
Many people would like to invest in real estate but they could be limited on time, money, or expereince. That is were real estate syndication comes in. This is where many people come together, pooling their resources to create one large company (LLC).
What is Real Estate Syndication?
Real estate syndication is a way for many investors to pool their money, experience, and business together to purchase much larger properties and projects than they could investing on their own. Real estate syndication would basically be a group of investors buying an apartment building together and sharing the profits.
Even now, there are many crowd funding sites that are starting up that help investors to pool their money and resources together for a common investment.
Listen to the Podcast Episode:
Syndication Investing with a Passive Real Estate Investor
Today, I talk with Robert Farrington who has invested in multi-family syndication in Phoenix AZ. He is sharing with us how he did it and the lessons he learnt.
How Robert Got Started Investing in Real Estate Syndications
Robert really liked the idea of syndicated properties. While he was investing in REITs, he wanted to own more of them and own the actual property.
He remembered doing all of the work on the properties when he was younger, and he didn’t want that part of it.
With syndication, he is an owner, a limited partner, of a large apartment complex, near GCU. They have a general partner and a real estate management company that handles everything.
There is risk and loss involved in syndication, but you get everything you would get by owning a real estate property. Robert gets about eight percent, or whatever it happens to be, of the income, depreciation, expenses, etc., and he includes that on his taxes.
Robert wanted to get into syndication, but you have to vet it like a regular property you would buy. In addition, you need to vet the general partner.
Not only is he looking at the asset, he is looking at the others involved. Do they know what they are doing? Do they have experience?
Most of the time you are in a syndicated deal, they are larger properties. The one he is in has 110 units.
Robert is a numbers guy and he likes looking at the paperwork, but he doesn’t necessarily want to paint an apartment when it is vacant.
Robert loved the idea of a physical property, because people always need a place to live. You need to think about where it is located, like near a college or near jobs.
Many people believe that real estate is safe, because you have a tangible property, but there are risks. There have been plenty of cases where the real estate market tanked.
Think of Detroit. The auto industry closed and there were a lot of vacancies. It is not always a stable thing.
Historically, real estate has a really strong part in a lot of portfolios. Robert thinks of himself as the first part of his portfolio, because of his ability to make money that he can funnel into other areas.
The second basket of his portfolio is stocks and 401(k)s.
The third basket, physical property, real estate, is a great asset you can invest in, because it performs differently than you or the stock market. There are different risks and rewards.
Within real estate, you have residential, commercial, industrial, mixed-use properties, etc., and these all perform differently and the risks are also different. There is more vacancy risk with commercial than residential, but people may not maintain a residential unit as a business would a commercial unit.
Tell us what you think syndication means. How does that play out being the passive investor?
There are different ways you can structure a deal, but Robert likes the deals where they start as an LLC. Then, that company buys a property, like a 100-unit apartment complex. The general partner usually owns the highest percentage, for instance 60 percent, and they are responsible for the plan, the main financing sources, and also the maintenance and leasing.
General partners should know what they are doing, they should have a property management company lined up, and they should have previous experience with this type of deal.
After they start the company, the general partner then looks to fill in the remaining percent of ownership and look for other partners that want to invest with them.
Each person owns a fractional share of that property. If you are a five percent owner of that property, you don’t have that much control. Once you are in the deal, you are an owner, or a silent partner, and you won’t have a lot of say.
If the general partner needs to raise more money to make improvements to the property, and you own five percent, your share may be diluted to two percent if someone else invests.
If everything is going well, the reward is that you get five percent of the income, depreciation, and expenses. You get a K-1 statement for taxes, which represents your share. If there is a sale of the property, you get your percentage of the earnings.
The reward is that you are an owner, but you have less work. You have different risks than you would by just owning a property directly.
If somebody approaches you about a syndication deal, what is your process?
It is two-fold: who are you, and what is your experience?
Robert googles the company and the founders. He wants to see their experience and their portfolio holdings. What is the plan for the property? Buy and hold? Refinance in seven years? Are you going to gut the property? Move it from a Class B apartment to a Class A apartment? What is their plan?
What is the property? He looks at the location, condition, price, etc. Are they raising enough for the investment?
Robert has seen these different situations play out. For instance, he saw a general partner who wanted to do a fix and flip and didn’t raise enough money, so he had to go out and borrow more.
He has seen companies that have a target of five to seven years to refinance their debt. Five years ago, they took a variable rate loan and the rates went down. Do you think that will happen in five to seven years, if you buy today?
Are you going to buy and hold? What do the economics of the area look like? What does the actual housing project look like?
If you are buying a mixed use, what do the tenants look like today and how is that going to play out? What are your anchor tenants? Do you have a big-box retailer? Retail is a scary place right now. There are a lot of retail companies going bankrupt. Are there going to be vacancies and who is going to fund that? What is the plan? It is a catch-22.
Robert likes the numbers, the math, and the due diligence of it, which is why he likes syndication. It is like a puzzle with a little bit of research and reading.
Are you looking to do anything in the future, like syndication or something on your own?
Robert would like to do both, but he feels like properties are overvalued right now.
There was a meme about millennial's on the sidelines waiting for a recession. He feels like that right now.
Robert feels like things are going to correct in the future and he is waiting for a recession. He likes deals that are cash-flow positive from day one.
Robert is in San Diego, which is a higher cost of living market. Properties are higher, but rents are also higher. The math can still work.
Robert is waiting for that time to come. He is young and he has time to wait. The worst you can be is an impatient investor. You can get 2.25 percent interest on your cash in a high interest savings account while you wait for the right deal. That isn’t a bad return in the meantime.
What are your thoughts about the current market and where are we going?
You can’t predict the market, but statistics show that we are well overdue for a correction.
You never know, but we are past the 95 percentile of it happening, because usually there is a correction in the stock market. We are also at historical lows for unemployment, which will revert to the mean. There is always a reversion to the mean, which means unemployment will rise and the stock market will fall.
We are in a very dynamic world, which means some retailers are folding, but companies like Amazon are succeeding.
The real estate market is in flux. Seattle and San Francisco are going great, but that doesn’t mean it will always be that way. Those companies are looking to move elsewhere too, because their employees can’t afford the high cost of living.
All you can ever do is take care of yourself. The stock market is going to fall, but if you take care of yourself and diversify with equities, real estate, side hustles, etc., be ready and things will come along.
It is really important to build your network. This is how Robert finds deals.
Recently, there was a mixed-use commercial building about a mile from Robert’s house and it was sold well below market value. It was a distressed owner and the real estate agent had the deal. The owner just needed cash and the property went for about 70 percent of what it was worth.
The property was probably worth about $1.5 million, and it went for about $350,000. It had an anchor 7-11 tenant.
These deals still exist and you hear about them, if you are networking and connecting with other people and if you are ready for them. You need to get all of your ducks in a row.
Tell us about the very first investment property you bought.
Robert grew up around real estate. His grandparents had apartment complexes in San Diego.
Robert’s mom house hacked by buying a triplex. She lived in the back and rented the other duplex in the front.
As a kid, Robert remembers helping out by painting.
The first investment he made was a REIT, after he graduated college. He only had $100, but he wanted to invest in real estate. REITs did well for a time and then they didn’t. He learned a lot about them during that time.
There are many different types of REITs, including those that invest in residential property, commercial property, and mortgages. There are all different ways to invest in real estate.
Robert had some syndication deals and he has been slowly investing in various ways over time.
Tell us a about thecollegeinvestor.com and where it is today.
All the money in the world is not going to change your life. Money cannot buy you happiness.
Every business decision and every deal comes with complications and work. You need to decide if it is worth it.
Robert started his website when he was in college and he was working at Target. It was his side hustle and passion project, because he wanted to share his thoughts on investing and personal finance.
He was getting out of student loan debt at the time and it was resonating with people, so he started writing more and more.
Fast forward 10 years and it is no longer a side hustle, but his full-time job. Robert enjoys talking to people and helping them and he earns revenue from it.
Robert loved working at Target and he did the job for so long that he found it easy. He liked working with people and the job paid really well. At the time, his son was four, and Robert had to work nights, weekends, and holidays. He had to make a choice and he chose to work on his website full time, so he could spend more time with his family.
Real estate is also work, even though it is passive.
It is important to ask yourself where you are and if you want to spend your time doing what you are doing. Does it fit your values?
If you were to go back to the beginning, what would you say to your younger self?
Get organized. If you are not organized with your personal finances, you can’t even make informed decisions about what you want to do.
Save until it hurts. We blow so much money when we are young on the silliest things. Robert used to have subwoofers in his car, and it cost him about $1,800. Save that money, because when you are in your 20s, it doesn’t matter what you invest in, because the number one driver of your wealth is how much you can save.
If you can invest $100 a month, you can start earning eight to ten percent and you can start moving the needle.
For the first 10, 15, or 20 years of your life, the amount you save is going to be the biggest definer of your future wealth, than any type of investment vehicle you choose. If you don’t have any money to invest, it doesn’t matter the return you get, because it is not enough to grow into something meaningful.
Do you do anything with your kids to teach responsibility with money?
Robert doesn’t give his kids an allowance, but they have birthday money and Christmas money.
Robert’s son recycles, and his daughter has been helping. Robert will drink beer, La Croix, and bottled water, and his son will take the bottles to the recycling center, which is about three blocks from his house once a week. He gets about $4 or $5.
He saves some and spends some. Robert likes to give time to charities. Giving back is important to Robert’s family.
Teaching his son to spend his money is very interesting. It is fun to see if it is worth it to his son to buy something.
Robert isn’t sure about college for his kids, but if he instills solid values, responsibility, and how to manage their money, he will feel successful.
Do you have any books or resources you recommend?
I Will Teach You to Be Rich, by Ramit Sethi.
This has solid fundamentals about how to set up your finances.
If you would like to find Robert, You can catch him on his site: www.thecollegeinvestor.com
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