SS212: Acquisition Machine Syndicators

SS212: Acquisition Machine Syndicators

Many passive investors believe their investment will be more secure or better protected with a real estate syndicator with billions of dollars of assets under management or tens of thousands of units under management. In this episode, Charles discusses what to be aware of when investing with large real estate syndicators.

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Talking Points:

  • Many passive investors believe their investment will be more secure or better protected with a real estate syndicator with billions of dollars of assets under management or tens of thousands of units under management. These syndicators create these large organizations, align themselves with capital raisers, and, in essence, create a real estate acquisition machine that needs to be consistently fed in up, down, and sideways markets.
  • As a side note, most syndicators cover their company’s expenses using the acquisition fees generated after an asset is purchased. They also typically receive an ongoing asset management fee, but similar to the acquisition fee, it usually just goes towards covering overhead, employees, etc. Syndicators are mainly compensated once an asset goes full cycle and generates a profit. Syndicators are then compensated with a percentage of the profits, usually 20%-40%.
  • When interest rates started going up in 2022 and 2023, you saw some real estate syndicators expand out of real estate entirely as deals started drying up. I got emails from syndicators saying they were now developing their own properties or raising money for car washes, ATMs, or quick-service restaurants. Really anything that could be done to generate an acquisition fee.
  • Large syndicators that stood firm in their real estate asset class were faced with fewer and fewer deals, particularly good deals. Investors who were unlucky enough to invest in these properties and funds now face interest rates that have dramatically increased and valuations that have dramatically decreased.
  • In a small mastermind I am part of, a couple of the large capital raisers explained how their portfolios are scattered with deals where investors are most likely just breaking even or, worse yet, losing their investment.
    I personally have passively invested in 2 funds like this, which will most likely end up being break-even investments. It’s always better than losing money, but I won’t make anything, and after thinking through this, it has left me with 2 main takeaways.
  • First, the most successful passive real estate investments I have made have been with small group syndicators where there is a small full-time team of people and a couple of very experienced partners (15-20 years in the business) who are independently wealthy and not required to do deals consistently to cover their overhead or compensate themselves. I like this because they are highly focused on one asset class and are usually heavily invested with their own money in every deal they do.
  • Secondly, when you look at the most successful private equity firms that are active in many different asset classes, they are usually structured so that the partners identify a new asset class they would like to start investing in and then spend all of their time finding the best, most experienced people to bring onto their team to do just that.
  • It is the decision private equity firms and syndicators must make when the market changes. Deals we have been buying over the past X years have dried up. Do we stop doing deals and lay off people? Do we pay people out of pocket and wait for the market to turn? Do we keep doing deals that aren’t great, but we won’t need to change, or do we bring on new asset classes and experienced personnel to begin successfully doing deals again?
  • I just finished reading the book What It Takes by Stephen Schwarzman, the co-founder of Blackstone. Each time he and his partners identified a new asset class; they spent all their time trying to find the best people to bring on their team to start successfully doing deals. They didn’t speak to a car wash operator one day and then pitch the deal to their investor base the next, and they definitely did not continue to do sub-par deals to keep the lights on.

This episode is not to scare anyone away from passive investing but to share a few things I have noticed over the years as an active and passive syndication investor and where I have been the most successful. I would stress that passive investors should look beyond the façade of a large syndication firm and perform thorough due diligence on each individual deal.

Transcript:

Charles:
Are large real estate syndicators really the safest bet? Or is there a hidden risk investors keep overlooking? I began actively investing in multifamily real estate in 2006 and investing in syndications in 2018 and haven’t invested passively in funds that did really well and others that barely broke even. I’ve seen firsthand what works and what doesn’t. Everything you think you know about syndications could be wrong, and today we’re diving deep to real why bigger isn’t always better in real estate investing.

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing real estate acquisition machine syndicators. We’ll explore how these organizations operate, the challenges they face in volatile markets and why smaller syndicators might just hold the key to your investing success.

Charles:
Why do some syndicators pivot to random asset classes when the market shifts? And how do acquisition fees impact the safety of your investments? And most importantly, what should you look for to avoid breaking even or worse on your passive investments?

Charles:
So many passive investors believe their investment will be more secure or better protected with a real estate syndicator with billions of dollars of assets under management or tens of thousands of units under management. And these syndicators create these large organizations aligning themselves with capital Raises, in essence create a real estate acquisition machine that needs to be consistently fed in, up, down, and sideways market. That was a side note. Most indicators cover their company’s expenses using the acquisition fees and generate after an asset’s purchased. They also typically receive an ongoing asset management fee, but similar to the acquisition fee, a user just goes toward covering overhead employees, et cetera. Now, syndicators are mainly compensated once an asset goes full cycle, which means that it’s been purchased, it’s been renovated, and it’s been sold, and hopefully it generates a profit.

Charles:
Now syndicators are then compensated with a percentage of the profits, usually 20 to 40% with a balance of that going to the past investors. Now, when interest rates started going up in 20 22, 20 23, you saw some real estate syndicators expand out of real estate entirely as deals started drying up, like got emails from syndicators saying they were now developing their own properties or raising money for car washes, ATMs, or quick service restaurants. Really anything that could be done to create an acquisition fee. Large syndicators that stood firm in their real estate asset class were faced with fewer and fewer deals, particularly good deals, and investors who were unlucky enough to invest in these properties and funds now faced interest rates that have dramatically increased and valuations that have dramatically decreased. In a small mastermind, I’m part of a couple of large capital raisers, explained how their portfolios are scattered with deals where investors are most likely just breaking even or worse yet losing their investment.

Charles:
I personally have invested passively in two funds like this, which will most likely end up being break even investments. Now, it’s always better than losing money, but I won’t make anything. And after thinking through this, it left me with two main takeaways. First, the most successful passive real estate investments I have made have been with small group syndicators where there is a small full-time team of people and a couple very experienced partners, 15, 20 years plus in the business of just real estate investing, not just syndicating who are independently wealthy and not required to do deals consistently to cover their overhead or compensate themselves. I like this because they are highly focused on one asset class and are usually heavily invested with their own money in every deal they do. Secondly, when you look at the most successful private equity firms that are active in many different asset classes, they’re usually structured so that the partners identify a new asset class they would like to start investing in, and they spend all their time finding the best and most experienced people to bring onto their team to do just that.

Charles:
It is the decision private equity firms and syndicators must make when the market changes we have been buying over the past so many years have dried up. So do we stop doing deals and lay off people? Do we pay people out of pocket and wait for the market to turn? Do we keep doing deals that aren’t great, but we won’t need to change, you know, kind of our whole business plan, or do we bring on new asset classes and experienced personnel to begin successfully doing deals again? Now I just finished reading the book what it Takes by Steven Schwartzman, the co-founder of Flagstone, and each time he and his partners identified a new asset class, they spent all their time trying to find the best people to bring onto their team to start successfully doing deals in that asset class. They didn’t speak to a car wash operator one day and pitch the deal to their investment base the next day, and they definitely did not continue to do subpart deals to keep the lights on.

Charles:
Now, this episode is not to scare away anyone from passive investing, but to share a few things that I have noticed over the years as an active and passive syndication investor and where I’ve been the most successful. I would stress that passive investors should look beyond the facade of a large syndication firm and perform thorough due diligence on every individual deal. So I hope you enjoyed. Please remember to rate, review, subscribe to make comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstores.com. That is syndicationsuperstores.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding, and didn’t want tenants calling you? Since 2006, I’ve been buying income producing properties in great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out invest with harborside.com. If you like the idea of investing in real estate, if you like the idea of passive income, partner with us@investwithharborside.com. That’s invest with harborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication Superstars, LLC exclusively.

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