I’ve heard this story hundreds of times, maybe a thousand: “I was so excited about investing in real estate! Then I tried it. It was nothing like I saw on HGTV.”
These real estate investors started with big dreams. They heard about real estate on TV, from a friend, or by renting out their own house after moving. Many educated themselves through venues like the BiggerPockets podcast, real estate books, or a weekend guru program (buyer beware!). But most of them were not prepared when reality slapped them in the face.
You see, most of these investors already had a day job, plus hobbies, family, friends, and a life. But most of them didn’t have extensive real-world experience acquiring, repairing, and managing properties.
Many of these investors found they were spending all their free time seeking out that perfect acquisition. And they didn’t anticipate the fact that most projects take twice as long and cost twice as much as they budgeted (especially for rookies).
They also never dreamed about the hassles that would be involved once they added a tenant into the mix. Or how a new roof or HVAC system could eat up years of profits. Or how much a frustrating eviction would really cost —in money, time, and emotional energy.
“I’m Only on House No. 3”
I was on the phone with a prospective investor for my syndicated commercial real estate fund. He was a dentist in the Pacific Northwest. He started by telling me about his goal to replace his income with 20 rental homes.
This investor sounded enthusiastic at first. Then his voice trailed off. He sounded depressed.
He proceeded to describe his phone calls to painters between patient appointments, and his evenings away from the family, screening tenants, finally confessing, “And I’m only on house No. 3.”
My new investor friend said that he still loved real estate. He loved the potential income, tax benefits, and long-term appreciation.
But he had learned that passive real estate income was anything but passive. That’s why he was considering a new strategy—one of investing in real estate without the toilets, tenants, and trash. This strategy was passively investing in syndicated commercial real estate.
So what are common real estate investing problems, and how can syndications help solve them? Here’s a look at each.
Dealing With Tenants
People are a pain. They typically cause the biggest problems for real estate investors. There’s seemingly no limit to the human species’ ability to wreak havoc—on your property, bank account, and life.
I spent my first decade-plus in real estate in the residential rental realm. I sold my Detroit company to a public firm in 1997, and decided I was now a real estate investor.
I acquired a slightly used manufactured home from a southwest Virginia bank. It was on an acre about 90 minutes from my home. It just needed a little paint, some carpet, and appliances to replace the ones that had been stolen by the prior owner during foreclosure.
I recruited a few handy friends, and we started the project. We had it all ready for a tenant in just…errr…11 months.
I was fortunate enough to get a wonderful tenant. A local lady and her fiancé were the perfect fit, and we started a three-year lease-to-own. She made almost every payment on time and in full.
But when three years were up, she informed me that she didn’t have the credit score and down payment to close as planned. She asked for more time. I gladly granted it, believing I’d make more in the end. Four years turned into five, six, and eventually, we were in year eight.
That’s when the payments stopped. I reached out to her by phone, and she told me her tale: “Ray and I broke up last year. And I moved back to Baltimore. I didn’t want to lose all I’d put into the house, so I subleased it. But the new tenants never paid me. I’m sorry. The house is yours.”
I made the 90-minute drive for the first time in several years. I can’t describe the conflagration I saw when I pulled into the driveway. You can’t imagine how one family could cause this much damage in a few months.
Rummaging through the debris, I recognized the drama involved a dog—or dogs. A baby—or babies. And alcohol— in large quantities.
Though they’d never made a payment, these tenants had clearly gone out of their way to wreak havoc on my property. They stole the appliances and dragged knife blades across the walls—and did much more.
I got a few rehab estimates, but there was no use. I ended up paying a company to haul this previously pristine doublewide off to the scrapyard. I was fortunate enough to sell the lot for $15,000. Years of rental payments went down the drain, and I lost most of my principal.
This is an extreme case, but something similar happened to me more than once in my decade of residential investing. And I’ve heard many worse stories from others.
Investing in a syndication completely solves this problem for investors. The syndicator sits in the seat of acquisition manager, construction manager, asset manager, and property manager. They are pros at managing people problems.
Syndication investors never have to deal with tenants and the potential horrors they wreak on unsuspecting property owners. Once the investor completes rigorous due diligence, they are free to enjoy their career and life. If the syndication goes as planned, they can potentially make money while they sleep.
The Time Commitment
Are you planning to flip a home? Chip and Joanna Gaines on HGTV seem to finish them in a week. And it looks like so much fun!
The reality is quite different.
If you have a full-time career, this part-time project could eat up your most valuable asset: your time. And as we saw with the example with the dentist, owning rental properties can be just as taxing—even with a property manager.
I meet a lot of flippers and rental property owners who spend almost all their free time—lunch breaks, evenings, weekends, and even vacations—looking for the next deal or working on those they have. And most are disappointed with the profits they make for the time and money they invest.
Passive syndication investors are often surprised that they can make as much profit or more without lifting a finger, other than the time they spend in due diligence—and the time to walk to the mailbox to get their checks.
It just makes sense. The vast majority of successful people trust a professional to diagnose their ailments, fix their car, and do their taxes. It is possible, and so often more profitable, to do the same in real estate. You don’t have to do this alone.
Lack of Local Investments
I couldn’t understand why my partner, Jack, wouldn’t do deals outside of Roanoke, Virginia. It seemed like the world was our oyster, and when our market got overheated, I expanded my search to a two-hour radius. And I did some on my own, including the disaster I discussed.
Jack was managing the projects. I was the marketer and financier. Jack knew firsthand how hard it is to rehab, rent, and manage properties outside your immediate area.
It really is hard to be a successful, active, hands-on real estate investor when your properties are far from home. Yet it’s tough to get good deals when your local market is overheated.
You may love the rent growth in the Sunbelt, but you may be in Detroit. Or you may be in Tucson, longing to do your first rehab in the Motor City, where some houses can be acquired for almost nothing.
Syndicated commercial real estate can solve this problem for investors. Passive investors can find just about any strategy within almost any geography and invest from wherever they are.
You don’t have to be a Coloradoan to root for the Broncos. And you don’t have to live in Denver to invest there. In either case, you’ll have a professional doing the heavy lifting on your behalf—while you enjoy the game from the comfort of your recliner.
Lack of Diversification
Any deal can go bad, no matter how good it looks upfront. There is no end to the black swans, unexpected weather problems, zoning changes, and economic shocks that can adversely impact your property. (For four years, I hosted a podcast called How to Lose Money, so I have lots of stories!)
Diversification is a commonly used strategy to spread your risk around. The goal is that these inevitable bad deals won’t destroy your wealth.
But there’s a problem: Most real estate investors don’t have the financial capability to invest in a wide variety of assets to provide the diversification they need to protect them.
My hedge fund manager friend calls this concentration risk, and he says it is deadly. In fact, he only invests up to 3% of his assets in any one investment. With $9 billion to play with, he has the bandwidth to successfully diversify. Most of us do not.
Investing in syndications can provide broad diversification for investors. As a fund manager, I seek to provide my investors with diversification across multiple commercial real estate asset types, operators, geographies, strategies, and properties.
More recently, we’ve added diversification across multiple positions in the capital stack, investing in common equity, preferred equity, and debt. Our investors don’t have to do anything to achieve this diversification. It’s all done for them.
You can achieve diversification like this by spreading your investments into different asset types, geographies, strategies, and capital stack positions. And by all means, diversify between operators who are experts in their respective asset types.
Liability
Remember how I mentioned that tenants cause most of the problems for real estate investors? They also create a ton of liability.
We live in the most litigious nation in world history. Property owners are generally assumed to be wealthy and privileged. This often makes them targets.
Insurance and asset protection strategies are great, but they can’t protect anyone from the massive time and energy drain that can arise from a lawsuit. One of my multimillionaire friends mused to me about why he wasn’t a billionaire. He concluded that one reason was the mammoth time and energy drain of two or three lawsuits that dragged out for several years each.
While syndicated properties and syndicators themselves live with this liability to some degree, syndication structures shield investors from being targets because the properties are inside corporations (like LLCs) designed to protect individual owners.
Difficulty Finding Deals
For years, I struggled to find residential real estate deals to flip and hold as rentals. And I was doing it full-time. I can’t imagine how hard it would be to do this as a part-timer.
Let’s face it: This is a lucrative business, and those with the most experience, best financing, and inside connections get the best deals.
And they’re best suited to evaluate them. If you outbid one of them, you may have missed something. They may have insights about the property you don’t. That happened to me multiple times in my early years.
When investing with a carefully selected syndicator, you’re investing with someone who will do the heavy lifting. They will select the deals, secure the debt, and (hopefully) have the experience to provide you with cash flow and appreciation for years to come.
Scalability
So you’ve made it! You’ve successfully amassed a residential real estate portfolio that is the envy of your local meetup. You’ve quit your job, and your spouse has too. Where do you go from here?
I’ve talked to only a few dozen real estate investors who have this problem. One guy, from North Dakota if I recall, contacted me to consider investing in syndications. He had built the largest portfolio I’ve ever heard of: over 200 units.
But he said he wasn’t happy. Though he had a great team of asset and property managers, he couldn’t escape the burden of this large portfolio. He described a recent visit to the zoo with his kids, and said he was on the phone all day. He needed a different way to build a portfolio.
Honestly, he was unique. Most residential investors I speak to don’t build a portfolio larger than 20 or 30 units. Remember the dentist who was burned out with three?
Syndicated real estate completely solves this problem for investors. Passive investors in syndications are only limited by their liquid cash and ability to do due diligence on operators and deals. There are no other practical limits to building a passive commercial real estate portfolio.
Lack of Desire
I talked to a really smart IT guy the other day. He had already been studying real estate for quite a while when we spoke, and he seemed more knowledgeable than most experienced investors.
There were no stars in this guy’s eyes. He said (I’m paraphrasing):
“I have no illusions about personally buying and managing real estate. I have a hard enough time maintaining my own house. And as a busy professional, I’m already stretched thin as I try to balance a career, my family, exercise, and hobbies. And I don’t believe this so-called ‘passive income’ would be passive for me at all.”
“Yet I understand the benefits of real estate. I don’t trust the guys on Wall Street, and I like the fact that real estate generates cash flow, appreciation, and tax benefits along the way. I know it’s a great inflation hedge. That’s why I want to find the right syndicator to invest with.”
He got it. I told him his mindset would save him years of potential headaches, hassles, and risks. And if he chose well, he would probably create more wealth in the end.
Final Thoughts
Do you want to build true wealth? I believe real estate investing provides a vehicle to create it. (Most of the world’s wealthiest people agree.)
True wealth isn’t defined by fancy cars and spacious mansions. True wealth is having assets that produce cash flow. It’s that simple.
Do you want to create wealth through real estate investing? Thousands of investors are enjoying the wealth-building opportunity provided by commercial real estate—with pros who do their heavy lifting. They are not harnessed with the burdens of toilets, tenants, and trash. They enjoy principal protection, tax-shielded income, and appreciation. These investors enjoy the opportunity to build true wealth without sacrificing their lives and families along the way.
I’m well into my third decade as a real investor, and I can’t imagine doing it any other way.