BiggerPockets Real Estate Podcast - Episode: Real Estate Syndications 101: What To Know BEFORE You Invest
Host: Jim Pifer
Guest: Devon Kennard
Release Date: December 25, 2024
Introduction to Syndication Investing
In this insightful episode of the BiggerPockets Real Estate Podcast, host Jim Pifer welcomes Devon Kennard, a seasoned real estate investor and author, to delve into the fundamentals of real estate syndications. The discussion is tailored for both novice and experienced investors seeking to understand passive investment strategies in real estate.
Jim Pifer sets the stage by emphasizing the importance of syndications for investors looking to diversify their portfolios without the hands-on management of properties:
"We're starting at the beginning. It's the 101 on syndications and who should invest in them."
[01:28]
Understanding Real Estate Syndications
Devon Kennard provides a comprehensive definition of syndications, explaining the roles of General Partners (GPs) and Limited Partners (LPs):
"A syndication is essentially, it could be an individual or a group of people. So let's say, for example, Case, it's me and you, we're the general partners... the limited partners underwrite us."
[05:09]
He contrasts syndications with funds, highlighting the nuanced differences in investment opportunities and management structures.
Essential Documents in Syndication
Jim emphasizes the critical nature of understanding key documents involved in syndications, particularly for accredited investors:
"The operating agreement... subscription agreement and then the private placement memorandum."
[08:10]
Devon concurs, reiterating the importance of these documents in outlining roles, responsibilities, and financial projections.
Advantages of Syndication Investing
Devon outlines several compelling benefits of syndication investing:
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Scalability:
"It's much easier to scale... allowing you to scale a lot faster in investments and reach certain financial goals you may have."
[09:31] -
Passivity:
"The passivity level to where most of the work if you're investing in syndications is upfront... that's all you have to do."
[10:00] -
Diversification:
"You get to diversify an asset class and location that's hard to do on your own."
[10:30] -
Tax Benefits:
"You get to participate in depreciation and all of those type of things... get K1s that will show losses a lot of the times."
[11:08]
Jim adds that strategies like cost segregation can enhance these tax benefits:
"There's a thing called cost segregation which allows you to get something called bonus depreciation, which gives you more depreciation up front."
[12:15]
Disadvantages of Syndication Investing
Devon doesn't shy away from addressing potential drawbacks:
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Illiquidity:
"Typically you know it's going to be like pulling teeth if you want to get your money out earlier... it's locked up."
[19:17] -
Trust in General Partners:
"You have to really trust the operator in their business model and their decision making."
[19:50] -
Complex Tax Documents:
"You'll get used to and comfortable with the K1s as well."
[13:48]
Jim echoes concerns about tax document delays:
"My last K1 came in October, which was very disappointing... you might have to extend your tax returns."
[21:23]
Vetting General Partners
A significant portion of the discussion focuses on the due diligence required when selecting GPs:
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Track Record:
"I want to know what their track record is... how they've navigated interest rates going up."
[25:12] -
Communication:
"I want to know about their contractors, their property managers, the law team they have in place."
[28:49] -
Consistency in Strategy:
"Are they changing lanes or staying in their lane?"
[31:00]
Devon underscores the importance of a consistent and experienced team:
"I'm really kind of paying Attention to that and how their current deals are going."
[26:50]
Jim highlights how challenging current market conditions make vetting more critical:
"...interest rates and cap rate compression... deals aren't working out."
[27:29]
Investment Process and Communication
Once an investment decision is made, Jim and Devon discuss what investors can expect:
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Distribution Structure:
"The general standard of a syndication is a 70/30 split."
[40:13] -
Preferred Returns:
Devon explains the concept with an example of receiving an 8% annual preferred return, either distributed quarterly or deferred to the end of the investment period: "A hundred thousand dollars invested... I got $40,000... at the five year mark, they refinanced, I got my capital back..."
[44:18]
Jim clarifies scenarios where preferred returns might be deferred:
"If they paid you $2,000 a year instead of $8,000, they have to catch you up at the capital event."
[46:09]
Red Flags and Risk Management
The conversation also covers warning signs to watch for:
-
Unexpected Capital Calls:
"The biggest red flag is when they're all of a sudden asking for money out of the blue."
[42:00] -
Poor Communication:
"If their communication starts to lapse... that's a sign something is wrong."
[43:28]
Devon advises maintaining a proactive approach by engaging with a community like Passive Pockets to stay informed and seek advice:
"Share with others and talk to them... how can we put pressure on the operator."
[43:00]
Exit Strategies and Expected Returns
Devon shares a successful investment scenario to illustrate potential outcomes:
"I invested a hundred thousand dollars, got $40k over five years, and then at the exit I got another $50k."
[45:31]
Jim elaborates on how preferred returns and capital repayment work, ensuring investors understand the financial flow:
"You still end up with that 140. You just didn't get it all along the way."
[46:09]
Advice for Prospective Investors
Before concluding, Devon offers actionable advice for those considering syndication investments:
-
Develop a Checklist:
"Start to build out your own checklist of things to look for on the GP, things to look for for a deal."
[47:30] -
Leverage Community Support:
"With a community like Passive Pockets leaning on other investors to help you."
[47:50]
Jim reinforces the value of community and shared knowledge in navigating the complexities of syndications:
"Passion projects become more manageable when you have a network to support you."
[48:00]
Conclusion and Final Thoughts
Devon highlights his new book, "Real Estate Side Hustle," as a resource for busy professionals seeking passive investment strategies. The book covers various investment vehicles, with a strong emphasis on syndications, providing readers with the tools to create effective investment checklists and streamline their investment processes.
"It's essentially how busy professionals can invest in real estate passively... All these listeners will love the syndication chapters."
[48:09]
Jim concludes the episode by thanking Devon and encouraging listeners to subscribe for more valuable insights.
Key Takeaways
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Real Estate Syndications offer a scalable and passive investment avenue, allowing investors to diversify across asset classes and locations without direct property management.
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Due Diligence is paramount: thoroughly vetting General Partners by examining their track record, communication practices, and the consistency of their investment strategies is essential to mitigate risks.
-
Understanding Key Documents such as the operating agreement, subscription agreement, and private placement memorandum is crucial for informed investment decisions.
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Be Aware of Disadvantages like illiquidity and potential tax complexities. Ensure that your investment horizon aligns with the typical syndication timeline.
-
Leverage Community Resources like Passive Pockets to share knowledge, seek advice, and stay informed about best practices and red flags in syndication investing.
For more detailed strategies and expert advice, consider tuning into future episodes of the BiggerPockets Real Estate Podcast and exploring Devon Kennard’s book, Real Estate Side Hustle.
Note: All timestamps are approximate and correspond to key points in the podcast transcript.