The Opportunity is Coming in Commercial Real Estate (How to Take Advantage)

Summary

Summary of "The Opportunity is Coming in Commercial Real Estate (How to Take Advantage)" – BiggerPockets Real Estate Podcast

Episode Details:

• Title: The Opportunity is Coming in Commercial Real Estate (How to Take Advantage)
• Host: Dave Meyer
• Guests: Jim Pifer and Paul Shannon from the Passive Pockets podcast
• Release Date: January 22, 2025

---

1. Introduction to the Commercial Real Estate Market Decline

Host Dave Meyer kicks off the episode by highlighting a significant downturn in the commercial real estate (CRE) market over the past few years. He notes that multifamily properties, along with office spaces, have seen substantial value drops since the pandemic. Despite these challenges, Meyer points out that real estate typically operates in cycles—markets decline, hit a bottom, and then recover—suggesting that current conditions may present unique buying opportunities for savvy investors.

2. Guest Introductions and Backgrounds

Jim Pifer and Paul Shannon join Dave to delve deeper into the state of the CRE market and explore potential investment strategies amidst the downturn.

• Jim Pifer: Co-host of the Passive Pockets podcast. He transitioned from active real estate investing to syndications after realizing his strengths lay in analyzing deals and vetting sponsors rather than asset management. Jim now invests full-time as a limited partner in syndications.

• Paul Shannon: Also co-host of Passive Pockets, based in Indianapolis. Paul's journey in real estate spans from purchasing a duplex to flipping single-family homes, engaging in BRRRR strategies, and managing mid-sized multifamily buildings. He co-launched the Invest Wise Collective fund to help passive investors access better terms and diverse deals.

3. Current State of the Commercial Real Estate Market

Paul Shannon provides a comprehensive analysis of the CRE market's decline:

• Pandemic Impact: The COVID-19 pandemic led to widespread closures of businesses and living spaces, prompting unprecedented fiscal and monetary interventions by the government and the Federal Reserve.

• Inflation and Rising Costs: These interventions spurred inflation, increasing operational expenses such as property taxes and insurance. Concurrently, interest rates surged, with the federal funds rate rising by 500 basis points over 18 months.

• Debt Maturity Wall: Many properties acquired during the peak of the market with floating-rate debt now face refinancing challenges as their deals become less profitable. This scenario creates a "debt maturity wall," where properties may need to be sold or refinanced at reduced values.

Notable Quote:

Paul Shannon [05:31]: "There's a debt maturity wall where a lot of these deals either need to be sold or refinanced and they're just not worth as much as they used to be."

Jim Pifer adds context by stating:

Jim Pifer [05:56]: "If you are someone that did deals on the floating rate debt, the bridge loans, then yeah, I think it's a crash because a lot of people lost all the equity in those deals."

4. Market Distress and the Potential Bottom

Dave Meyer probes why the widespread distress hasn't yet become public knowledge and whether the market has hit its bottom.

Paul Shannon explains that distress is concentrated among properties with specific debt structures, particularly those using floating-rate debt acquired during the market peak. Lenders have been lenient, extending loan terms to avoid becoming property owners, which has delayed the full impact of the downturn.

Notable Quote:

Paul Shannon [07:08]: "I think now could be a good time to get in at a good basis, especially because there's such a housing crisis in this country too."

Jim Pifer observes:

Jim Pifer [10:14]: "There's a lot of hesitance. But you are seeing more deals. But some of them are just the same as they've always been because people are looking at, well, bridge debt."

5. Syndication Investing: Opportunities and Challenges

The discussion shifts to syndications, a collaborative investment structure where multiple investors pool their resources to purchase large real estate assets.

Dave Meyer defines syndication:

"Syndication is a deal structure where multiple investors pool their equity together to purchase large assets... You can pool your money together and you give it to essentially an operator."

Paul Shannon highlights the benefits:

• Diversification: Access to various markets, asset classes, and geographies without needing direct management.
• Leverage Expertise: Investors can leverage the skills and experience of seasoned operators to handle complex investments.

Jim Pifer emphasizes the community aspect:

"Surrounding yourselves with other people that know operators and know deals and know markets is super helpful because this is a different type of investing."

Notable Quote:

Paul Shannon [36:18]: "Leverage the sponsor’s expertise, not just capital, you can get yourself into some deals that you otherwise wouldn't be able to."

Challenges Discussed:

• Liquidity: Syndications are long-term, illiquid investments, restricting access to capital until the investment period concludes.
• Capital Commitment: Significant initial investment is required, often with high minimums, limiting accessibility for some investors.

6. Conducting Due Diligence in Syndications

Dave Meyer and the guests delve into the critical process of due diligence when considering syndication investments.

Paul Shannon outlines key due diligence steps:

• Vet the Sponsor: Assess the operator's background, values, and track record.
• Community Feedback: Utilize platforms like Passive Pockets to gather reviews and insights from other investors.
• Financial Evaluation: Scrutinize the deal’s financial projections and ensure alignment with realistic market expectations.

Jim Pifer introduces practical tools:

"I use a tool, it's a multifamily deal analyzer that we have at Passive Pockets. It basically turns red or green based on whether metrics fit with averages."

Notable Quotes:

Paul Shannon [27:48]: "You never truly know somebody until things go poorly."

Jim Pifer [30:09]: "You want to get to a point where you have questions to ask the operator."

7. Benefits vs. Downsides of Syndication Investing

Benefits:

• Diversification: Spread investments across different markets and asset types.
• Passive Income: Earn returns without the need for active property management.
• Access to Larger Deals: Invest in properties that would be unattainable individually.

Downsides:

• Illiquidity: Capital is tied up for extended periods.
• Dependence on Operators: Success hinges on the operator’s expertise and decision-making.
• High Minimums: Significant initial investment requirements can be a barrier for some investors.

Jim Pifer adds:

"One of the downsides is liquidity because once you invest in this deal, you could get your capital back in two years or 10 and it's completely out of your control."

Notable Quote:

Paul Shannon [34:30]: "The IDEAL acronym—Income, Depreciation, Equity buildup, Appreciation, and Leverage—summarizes what real estate is all about."

8. Final Thoughts and Recommendations

Dave Meyer underscores the importance of maintaining due diligence and leveraging community resources to navigate the syndication landscape effectively. He encourages listeners to consider syndications for diversification and access to larger, more lucrative deals that might otherwise be out of reach.

Jim Pifer and Paul Shannon provide actionable resources:

• Passive Pockets: Offers a seven-day free trial at passivepockets.com to explore their community and tools.
• Invest Wise Collective: Launched by Paul to help passive investors access better syndication deals.

Notable Quote:

Jim Pifer [33:56]: "There’s always the next best deal coming down the line."

Conclusion: The episode provides a nuanced exploration of the current CRE market challenges and the opportunities that arise from them, particularly through syndication investing. By emphasizing the importance of due diligence, community support, and leveraging expertise, Dave Meyer, Jim Pifer, and Paul Shannon offer valuable insights for investors looking to navigate and capitalize on the evolving real estate landscape.

---

Key Takeaways:

• Market Downturn as Opportunity: The current crash in commercial real estate, driven by post-pandemic economic factors, may present significant buying opportunities, especially in multifamily assets.

• Syndication Investing: Pooling resources through syndications allows investors to access larger deals, diversify their portfolios, and leverage the expertise of seasoned operators without managing properties directly.

• Due Diligence is Crucial: Thoroughly vetting operators, assessing deal fundamentals, and leveraging community feedback are essential steps to mitigate risks in syndication investments.

• Community and Resources: Engaging with platforms like Passive Pockets and leveraging available tools can provide invaluable support and insights for successful syndication investing.

---

Notable Quotes:

1. Paul Shannon [05:31]:

   "There's a debt maturity wall where a lot of these deals either need to be sold or refinanced and they're just not worth as much as they used to be."

2. Jim Pifer [05:56]:

   "If you are someone that did deals on the floating rate debt, the bridge loans, then yeah, I think it's a crash because a lot of people lost all the equity in those deals."

3. Paul Shannon [07:08]:

   "If you can acquire with fixed rate debt, if you can get into a growing market and have that upside potential, then, you know, I think it could be a good deal."

4. Paul Shannon [27:48]:

   "You never truly know somebody until things go poorly."

5. Jim Pifer [30:09]:

   "You want to get to a point where you have questions to ask the operator."

6. Paul Shannon [34:30]:

   "The IDEAL acronym—Income, Depreciation, Equity buildup, Appreciation, and Leverage—summarizes what real estate is all about."

7. Jim Pifer [33:56]:

   "There’s always the next best deal coming down the line."

---

Resources Mentioned:

• Passive Pockets: passivepockets.com
• Invest Wise Collective: Fund launched by Paul Shannon for passive investors.
• Syndication Tools: Multifamily deal analyzer from Passive Pockets, based on Brian Burke's "Hands Off Investor."

---

Disclaimer: The content of this summary is intended for informational purposes only. Investment in any asset, including real estate, involves risk. Consult with qualified advisors before making investment decisions.

Transcript

[Jim Pifer]

Foreign.

[Dave Meyer]

Welcome to the BiggerPockets podcast. I'm Dave Meyer. There has been, and I do not use this word lightly, but there has been a legitimate crash in commercial real estate over the last couple years. We all know that office space is tanking, but this is happening in other asset classes too, like multifamily. It's lost a lot of value since the pandemic, and it's generally just been.

[Paul Shannon]

Pretty hard out there.

[Dave Meyer]

But real estate usually moves in cycles. Things go down, they hit a bottom, and then they start to go back up again. And personally, I think we might see a really unique and pretty exciting buying opportunity in the coming years for multifamily and commercial real estate as a whole. So today on the show we're talking about how to potentially spot the bottom of the market so you getting maximum value and how to take advantage of these opportunities even. Even if you're not in a position to go buy a massive apartment building all by yourself, like most of us are. Joining me for this conversation are Jim Pifer and Paul Shannon, who host the Passive Pockets podcast and are both hugely experienced commercial real estate investors. And just to clarify before we jump in, I'm going to use the term commercial real estate and multifamily real estate interchangeably throughout this episode. Commercial real estate does actually refer to all sorts of things like retail, space, industrial. But because the bigger pockets can, community in general is mostly interested in multifamily when it comes to commercial, I'm going to be using both of those terms interchangeably. Just a heads up, let's jump into the show. Jim, Paul, welcome to the Bigger Pockets podcast. Thank you both for being here.

[Jim Pifer]

Thanks for having us.

[Paul Shannon]

Excited to be here, Dave.

[Dave Meyer]

Yeah, let's get our little Bigger Pockets podcast host crossover event underway. Let's just start with introductions since our audience might not know the both of you. So, Jim, let's start with you.

[Jim Pifer]

Yeah, I'm Jim Pifer. I work for Passive Pockets. I'm one of the co hosts of the podcast. And you know, I got my start in investing in 2008. So I was an active real estate investor, some small multifamily, some single family turnkeys. But I realized I was not a good asset manager. And so I discovered this thing called real estate syndications, where you effectively hire an asset manager and they do all the work for you. All you need to do is a lot of work upfront to analyze the deal, vet the sponsor, and then you give them your money and they. They run the show. And I just found that that's kind of where my strength lied. And so I started a community called Left Field Investors. It eventually became Passive Pockets and now I'm a full time investor as a limited partner in syndications.

[Dave Meyer]

Awesome. What about you, Paul?

[Paul Shannon]

I'm in Indianapolis, Indiana. I'm the co host now of the Passive Pockets podcast. I got my start in real estate buying a duplex, worked my way into flipping single family homes, doing brrrr investing, got into small multifamily and then worked my way into, I call it mid sized multifamily, so like 40 unit buildings. But during that time I also found passive investing and was really interested in it because it diversified away from me as an operator myself into, you know, other sponsors who had expertise that maybe I didn't, into different asset classes that I didn't have expertise in and to different geographies that had different characteristics than where I'm at in the Midwest. So have enjoyed kind of the benefits of an active and passive investor. Today I'm, I've invested in about 40 deals from a passive standpoint. We also launched about a year and a half ago our fund, Invest Wise Collective. So now we help other passive investors get into deals that they otherwise wouldn't be able to get into via high minimum investments, for example. Or we try to negotiate better terms with sponsors and raise money for their deals and then pass those better terms along to our investors through our fund.

[Dave Meyer]

Awesome. Great. Well, it's a pleasure to have both of you here to talk about the state of multifamily. We're going to get into syndications and all of that, but let's just, just sort of lay the scene here because in my analysis, definitely not as expert as both of you. We're in an interesting part of the cycle for commercial real estate and multifamily. I'd love to get your takes on that, but maybe you could just help fill in the last few years for our audience here, Paul, and tell us a little bit about where we are, at least in your view, in the commercial real estate market.

[Paul Shannon]

Yeah, I mean we really have to back up to the pandemic to understand what's happening today. And if you remember, as we were all kind of shuttered in, our homes and businesses were closed. It necessitated the federal government and the Federal Reserve really to step in to sort of rescue the economy. And they did that through unprecedented monetary and fiscal stimulus. This all led to eventually inflation. And you've got a situation now where those that acquired in that era, 2021, 2022, did so using Floating rate debt they bought at the peak of the market. Expense growth has caught up now since we had such inflation. Things like property taxes, insurance are a lot more expensive. Interest rates have gone up considerably. The federal funds rate has gone up by 500 basis points in about 18 months it took to reach that. So, you know, all these factors essentially have led to a situation where pro formas have not been hit and now there's this debt maturity wall where a lot of these deals either need to be sold or refinanced and they're just not worth as much as they used to be. So there's a problem, you know, basically and there's, there hasn't manifested in the form of distress. A lot of lenders have sort of extended and pretended, quote, unquote, and we're going to see in 2025, if we see that wall of distress, would you.

[Dave Meyer]

Call it a crash? Because as cap rates have expanded and operating incomes have stagnated at best in some cases, from my analysis, we've seen prices drop 15, 20% multifamily on a national basis. Would you, would you consider it a crash? I know that's kind of an arbitrary word, but Jim, how would you describe this just to people who might not be as intimately familiar with the details here?

[Jim Pifer]

Yeah, I think it's where you're sitting whether it's a crash or not. I think it's asset dependent almost because if you are someone that did deals on the floating rate debt, the bridge loans, then yeah, I think it's a crash because a lot of people lost all the equity in those deals. For investors, we had capital calls, pause distributions, things like that, and very few deals going full cycle. But if you have long term debt or fixed debt, then I think there's time to get through it.

[Dave Meyer]

Sure, yeah, that makes sense. And honestly I've been surprised by the lack of public distress in multifamily. Like you hear about it, if you're in the industry as we are, that people are struggling. But I don't think it's, it's as obvious to people that prices in commercial for the deals that are transacting are often at lower valuations than they were just a couple of years ago. So I, I'm curious, one, Paul, why do you think it's taken so long for this distress to start sort of working its way through the system? And two, is there any hope or line of sight on a bottom here where things might start to grow again soon?

[Paul Shannon]

Yeah, so I think that a lot of the distress is in A certain segment of the market, it's that 1970s, 1980s vintage value add that was acquired with floating rate debt. So it's a specific type of borrower and I don't think it's going to be making you top of the Wall Street Journal news, so. And will there be opportunities for LPs to capitalize on that distress? That's, that's yet to be seen. I think why it hasn't materialized as much is because lenders have been willing to extend loan terms where maybe it was a three year loan initially and they realize that their borrowers are underwater and they don't want to take back the property. You know, they, they remember 2008 and what had to go down at that period. And they don't want to be property owners. So they're willing to, let's say, give that borrower another 12 months to figure out what to do. And I think this year will be the year where it's like, okay, if you haven't figured it out at this point, we can't pretend anymore. We've got to figure out something here. If you can't refinance, we're just going to force you to sell basically, and you're going to have to absorb those losses. And let's clean the slate now. The second part of your question was, are we seeing a bottom? Yes. I think I don't have a crystal ball per se, but is now a good time to enter into the market? I think so. I mean, if you can find deals that cap cash flow, I'm always, you know, a fixed rate debt guy because that's just one variable that you don't have to worry about over the course of your hold period. If you can acquire with fixed rate debt, if you can get into a growing market and have that upshot potential, then, you know, I think it could be a good deal. Especially because there's such a housing crisis in this country too. Right. I think the long term thesis for multifamily is strong. And now there's a lot of yellow lights. It's not like the green lights are all flashing, go, go, go. But I think eventually, you know, things will clear and now could be a good time to get in a good basis.

[Dave Meyer]

I' hear you say that. I mean, I, I just kind of see it the same way. So I, I'm glad to hear some of my thoughts about this, at least confirmed. But I, I'm always skeptical, particularly in the residential market, about trying to quote, unquote, time the market. It's Very, very difficult to do. But I'm always tempted to do it with commercial because it just works in more, I think, defined cycles than the residential market does. And there's a lot more institutional money and these types of things. And so I think it's tempting is the right word. It's more tempting to try and tire in the market. Jim, how do you feel about that? You look at a lot of deals. Are you starting to feel like better deals are showing up on your desk?

[Jim Pifer]

Yes, I'm seeing more deals. But you know, as an investor, you know, people are cautious. Unless there's something remarkable about the deal, a lot of people are hands off. Is it assumable fixed low interest rate debt, then that's a story, right? Or tax abatements where you're getting equity right out of the gates? Those are the deals that I'm looking for now because I'm just not certain. And so there's a lot of hesitance. But you are seeing more deals. But some of them are just the same as they've always been because people are looking at, well, bridge debt. Now maybe we get back into that because they're expecting interest rates to go down. And that's when a time when maybe bridge debt is okay, but I'm still pretty cautious overall.

[Dave Meyer]

All right, well, I want to talk more about the types of deals that you're seeing and thinking about doing. But first we got to take a break and as we go to break, I want to quickly remind everyone about something we're doing here at BiggerPockets called Momentum 2025. If you haven't heard about this yet, something super cool. We're doing it for the first time. It's our eight week virtual investing summit starts February 11th. And anyone who signs up for it is going to get direct access to 18 expert investors to mastermind groups accountability. And Jim, I understand that you're going to be one of our experts speaking there. What are you talking about at Momentum?

[Jim Pifer]

I'm going to be talking about syndications and the limited partner experience.

[Dave Meyer]

I do invest in syndications. We'll talk about that more. But I'm always trying to learn more. So definitely going to be attending that one. If you all want to attend and grab your spot at Momentum 2025, go to biggerpockets.com summit25. We'll be right back.

[Paul Shannon]

Want to invest in real estate but don't have the time or know the best local markets? Rent to retirement has got you covered. Here's the deal. They've helped thousands of investors just like you find turnkey homes across the best US Markets. And best of all, they do all the heavy lifting for you. With over 255 star ratings on bigger pockets, Rent to Retirement experts help you build strategies to retire early through real estate. And right now, Rent to Retirement offers some amazing incentives on turnkey new construction properties. Just for example, you can get up to 30% off new build prices, or you can get 0% down loan options or interest rates available as low as 3.99%. So don't miss out. These deals will not last. Text REI to 33777 or visit biggerpockets.com RET RETIREMENT to start investing in top cash flow markets today.

[Dave Meyer]

What if I told you you could.

[Paul Shannon]

Forget everything you know about investment property loans? Because Host Financial is rewriting the rulebook, tossing out those pesky DTI restrictions, they focus on your property's income potential. No tax returns or personal income statements needed. Simple, efficient, and tailored for investors like you. Imagine a lender that sees the gold mine in your property, not just the numbers on your paycheck. That's the host financial difference, and they're approved in 47 different states, so your next big deal could be just around the corner. Ready to unlock your property's true potential? Visit host financial.com don't let old school lending hold you back another day. That's host financial.com if you're in the landlord game, then you know the importance of solid tenant screening. That's where Rent Ready steps in. Now Rent Ready has a new feature, Proof of Income Verification. And get this with Plaid Certified reports, you'll see everything from income summaries to total earnings by monthly. So say goodbye to those gut check moments and say hello to confidence in renting with Rent Ready. Rent Ready is actually included in your Pro membership at BiggerPockets. If you're not a pro, they're offering a six month plan for $1.

[Dave Meyer]

You can't beat that.

[Paul Shannon]

Visit rentready.com, that's R E N T R E D I.com and use the code BPInvestor. That's BP like Bigger Pockets Investor to get six months of rent ready for just $1. Tired of the headaches that come with hunting down sufficient rental property insurance? Well, say goodbye to the endless calls and all the stress. Real Estate Insurance Group, or as they call it, nreg. With nreg, you can customize your coverage easily, manage it online, and keep every property you own, regardless of occupancy status, protected on one monthly schedule and bill. There's no fuss, just flexible, reliable coverage that adapts to your portfolio. Visit biggerpockets.com insurance to learn how effective insurance can be with National Real Estate insurance group. That's biggerpockets.com insurance. Go visit it to request a proposal today.

[Dave Meyer]

Foreign welcome back to the Bigger Pockets podcast. I'm here with Jim Pifer and Paul Shannon talking about potential opportunities in the multifamily space and syndication investing. When we left off, we were talking. Jim, you mentioned that you were, you were still cautious, but you thought that there might be some good deals. Paul, are you viewing it the same way? Are you seeing an uptick in opportunity right now?

[Paul Shannon]

I do see that there's better deals showing up in my inbox from a passive investing standpoint. I wouldn't say the same locally in my market from an active perspective, but I think there's good deals across the country. It's just a matter of uncovering them. And there's good deals in every part of the market cycle. It's just finding those operators in those markets that have sort of what I call an unfair advantage where they have, you know, maybe economies of scale where they can get labor and materials for cheaper than their competition can, or they can get access to deals before they hit the market, before they go out on a broker's listing or they have in house property management and operations that are just buttoned up to a tee. Those are all things that can give sponsors a competitive advantage as far as timing the market. If you compare real estate to the S&P 500 and the stock market, you certainly don't see a lot of people having success timing the S P500. I think with real estate, particularly maybe commercial real estate, because things move so slowly, you can potentially time the market better. But I'm not necessarily looking to hit the bottom or, you know, time the top. It's more of hey, are there, are there tailwinds or are there headwinds? Is the environment conducive from a macro standpoint to invest now where mistakes can happen and issues can come up in the sponsors plan and things still go right or does everything have to go right? And if one thing goes wrong, like the federal funds rate going up and impacting borrowing costs on a floating right debt deal, does that destroy the entire deal? Those are the things I try to stay away from. So I want to get, you know, they say don't fight the Fed, don't fight the macro when it comes to investing in commercial real estate and stay the course that way. And I think you'll do fine.

[Dave Meyer]

Good advice. I want to shift the conversation a little bit because I am honestly trying to keep a little bit of dry powder for what I think is going to be some good opportunity in multifamily. Let's talk about if other people feel the same way. And you should do your own analysis, of course. How can people get into this? Because it can be daunting to go from residential to commercial real estate, especially if you've only operated smaller properties and now you're talking about bigger properties. Jim, you've made that transition. So tell us a little bit about how you recommend people think about that.

[Paul Shannon]

Yeah.

[Jim Pifer]

And I think if you're switching from, you know, being a single family operator to looking into multifamily, I think you hire asset managers and go through syndications. That's what I did. Because I believe that if you don't have an advantage, meaning you know a market better than anyone else in that market, or you know how to swing a hammer and save costs there, then being an active investor is difficult if you're just a regular person with a W2. That's why I do syndications. But there's a lot that you need to do and that's why I think a community is so important. And what I tell people, it doesn't have to be passive pockets, although that's a fantastic community. But surrounding yourselves with other people that know operators and no deals and no markets is super helpful because this is a different type of investing. These are syndications. Right. They are long term, illiquid investments that are completely out of your control. Now, if you have a single family home and it's an investment and something happens in your life where you need capital, you can sell that tomorrow. Now you might have to take a big haircut, but you can get out of it and get some of your capital back in a syndication. You can't. So you really need to understand how do you partner with the right operator? That's the biggest step you need to make. You need to figure out how to find quality operators. And some of the things that you need to look at now, I think, and there's some people that push back on me on this. I think the next few years it's going to be easier than ever to analyze and vet an operator. Because we just went through some really difficult times for operators. So you can see what happened. How did they make it through these difficult times? What did they learn? What are they going to do different? So it's always been about the operator, but it's more critical now. If they had a capital call five years ago, that was one of our questions. First questions for an operator. Have you ever had a capital call? And if they said yes, it was nice meeting you, goodbye. Right, well, now that answer is going to be different. It's going to be okay. What happened? How did you communicate it? Did you effectively communicate it and did you have a plan and come through it and that's okay? I'm okay with people having struggles. Right. I understand I lost some money investing in some of these deals because of the bridge debt issue. And so I understand that people went through that, but how did you get through it? And so those are some of the questions. So if I'm an investor, I really want to focus on the operator and make sure that they know what they're doing, that they came through this and they had a plan and they have a plan going forward.

[Dave Meyer]

Just for anyone who doesn't know what the term syndication means, it's basically just a deal structure where multiple investors pool their equity together to purchase large assets. So just as an example, let's just say you wanted to buy a 50 unit property. It cost $10 million. Most people don't have enough even for a down payment on that. And so people put together, you know, you grab a couple dozen investors to each put in sizable amounts of money. Usually the minimum is 50,000 or $100,000 to get into these types of deals. But you pool your money together and you give it to essentially an operator. Usually the operator is sort of presenting these deals to investors. And one class of investor, the operator or the gp, is a general partner, does all of the work. Essentially, you know, they, they are managing tenants, they are making decisions about the asset, they decide when to sell, they decide what kind of debt to get. And as an investor, you can be what's known as an LP or a limited partner, which is basically you write a check and then you hope it goes well. And so I think, as Jim saying, the work as an LP is to do a lot of upfront due diligence, because once you write that check, you really have very little control of the outcome of your investment. And that's a very big change for a lot of people who just buy multifamily investments or single family investments. So this is like a whole other world of investing that feels to me at least, or did when I started investing, just to be like a bit different than the normal stuff we talk about here on this podcast. And Jim, you mentioned passive Pockets, it's a community for syndications. Can you just talk a little bit about what you talk about on that show?

[Jim Pifer]

Yeah, yeah. And it's more than a show, it's a community, similar to how BiggerPockets is a podcast and a community. So is Passive Pockets, but we are focused on limited partner investors who want to create financial freedom just like BiggerPockets people do. But instead of swinging hammers, you know, we're analyzing the operators who are the asset managers. And the purpose of the community is to help everybody learn together and grow. So we do things like Paul and I do a deal review series where we interview operators. They have a deal, they present the deal, we ask them a bunch of questions. You know, we ask them the tough questions, and then afterwards we say goodbye to the operator and then we discuss it on our own and kind of tell people, hey, this is, this is what we see. And so you can just learn how to ask the questions. We also have sponsor reviews, so you can go and you know, if ABC sponsor is of interest, you can go on our website and hopefully there's enough reviews. You can see, oh, they got four stars, five stars, and get some information about them. And one of the favorite things is there's a forum, just like at the BiggerPockets forum, where you can ask questions and talk to actual investors. And it's just a great way to learn and grow because think about it, this is a long term deal. You're gonna. It used to be maybe you get your capital back in three or five years. Now it's gonna be five, seven or 10 years. Well, you can't just throw 50 grand at it and say, okay, I'm gonna wait 10 years and decide if I'm gonna make my second investment. So what you do is you talk to other people who've invested with that operator and get feedback. Why? What did you like about them? What didn't you like? And that way you can use other people. You have a shortcut because other people have made mistakes, other people have made money and you can learn from them. And so that's why the power of community in this type of investing is so critical.

[Paul Shannon]

Well said.

[Dave Meyer]

I totally agree. And it's always sort of been an insider sport. Previously, I think. Yes, I didn't get into it for the first few years because I didn't know anyone who was doing it. And without a community, it could be super intimidating.

[Jim Pifer]

It is, absolutely. And my first entrance into it is I went to a seminar because I wanted to learn about this. And I made some really bad choices because I just assumed everybody there knew what they were talking about and were great operators and I started investing with them. But you know, you need to do more due diligence than that. And you know, then I went to Podcast University and started listening to podcasts and that's a great way to find operators. But then you don't know if they're a good operator or a great podcaster, right? And so now I don't invest with a new operator unless they're recommended to be by somebody in my community who I know like and trust who's already invested with that operator. You know, I still do all the due diligence, but you're 100 steps ahead because you know somebody is already invested with them. So, you know, wires are scary, right? You got to send a wire, you know the wire is going to arrive, you know, the communications and things like that. So I just can't overstate how important it is to learn from others, especially in this type of investing.

[Dave Meyer]

Well, we've talked about due diligence quite a few times and I want to dig into what that really means and what the upside is here. Like, why should people embark on this new branch of real estate investing? But first we do have to take a quick break, so we'll be right back.

[Paul Shannon]

Do you want to invest in cash flowing rentals but don't have the time to manage the properties? Is your local market too competitive or expensive to invest in? Rent to Retirement offers new construction turnkey investment properties that you can buy with as little as 5% down and rates as low as 3.99%. Their team handles everything from financing, management, insurance and more so you can live where you want and invest in the markets that offer the best returns. Rent to Retirement has the best reputation in the industry with more five star reviews than any other company on the BiggerPockets website. To learn more, visit biggerpockets.com retirement or just text REI233 777 to start investing in the best markets today.

[E]

Ever feel like managing your business finances is a full time job on top of your actual full time job? Well, you can find some of that lost time with Found. Found is a business banking platform that helps you effortlessly track expenses, manage invoices and prepare for taxes. You can even set aside money for different business goals and control spending with different virtual cards. I have saved so much money because Found helps me identify tax write offs and I've saved so much time that I can now devote to chasing new opportunities and doing the work I enjoy. The best part about Found is that everything is in one place. No more juggling multiple apps or losing track of receipts. Found helps you stay organized and rest easy knowing everything is handled. Oh and by the way, other small businesses are loving Found too. This Found user said Found is going to save me so much headache. It makes everything so much easier. Expenses, income, profits, taxes, invoices even. And found has 30,000 five star reviews just like this. Open a found [e-mail] BiggerPockets Found is a financial technology company, not a bank. Banking services are provided by Piermont bank member fdic. Join thousands of small business owners who have streamlined their finances with Found.

[Paul Shannon]

Tired of traditional lenders holding you back? Host Financial is here to change the game. They've ditched the DTI restrictions and they zero in on what really matters your property's income potential. So no more chasing papers for tax returns or personal income statements. Think about it. A lender that values your property's worth over your paycheck. That's the Host Financial difference approved in 47 states. They are ready to help you make your next big move. Curious if you qualify? Just head over to HostFinancial.com and find out. Stop letting outdated lending practices hold you back. That's HostFinancial.com where your property's potential meets unlimited financing listeners. I'm telling you now, it's not every day you find a game changer like Rent ready. They're not just stopping with just tenant screening. They've rolled out proof of income verification. Let RentReady handle the heavy lifting with automatic checks on financial stability and earnings. Plus, with Plaid Certified reports, you'll have all the info you need right at your fingertips. RentReady is actually included in your pro membership at BiggerPockets. But if you're not a pro, they're offering a six month plan for just a dollar. How great is that? So visit rentready.com, that's R-E-N-T-R-E-D-I.com and use the code BPInvestor. That's BP like BiggerPockets Investor to get six months of rent ready for a dollar. Worried about your investment properties weathering a storm? Experience peace of mind with coverage from National Real Estate Insurance Group, or NRIC as they call it. They've built the largest investment insurance program in the country. They focus solely on residential, tenant occupied, vacant and renovation properties, all customizable to your specific needs with just a couple of clicks. So while the Rain pours outside. Rest assured your properties are covered with comprehensive insurance from NREC. Visit biggerpockets.com insurance to learn how effective insurance can actually be with national real estate insurance. True, that's biggerpockets.com insurance. Go visit today to request a proposal.

[Dave Meyer]

All right, we're back on the BiggerPockets podcast talking about multifamily opportunities and syndication investing with Paul Shannon and Jim Pifer. Paul, we, we've talked a little bit about due diligence and I kind of want to just dig in if you can give us like the ABCs here, because it is probably intuitive to most people. Yeah, vet the people that you're going to partner with. But, but you know, in my experience at least, it's kind of like interviewing someone with a job. Like, of course you should interview people, but there's kind of a skill that you need to learn to really sort of get under the hood and figure out who you're going to be doing business with. So I'm sure you talk about this in length in the podcast, but can you give us sort of a high level overview of how you actually logistically do quality due diligence? Yeah.

[Paul Shannon]

Well, you alluded to it, Dave. I think the most important thing is the sponsor is the operator. Right. And we use those words kind of interchangeably. Knowing who you're investing with, are their personal values aligned with yours? Are they, you know, good people? Do they have a criminal background? You can do criminal background checks. Right. You can vet these people via word of mouth. You can talk to other people in communities like Passive Pockets, and see if they've invested with the folks that you're interested in. So that's all part of it. Right. You have to kind of vet that person. And sometimes it takes a while to get to know somebody. So you have to take a chance at some point. You never truly know somebody, I don't think, until things go poorly. So ideally it never happens. But, but I think really it starts with knowing that they can execute the business plan, that they're a fiduciary of the capital that you've entrusted them with, they're a good person overall and they're going to honor their commitment to you to do the best they can with their capital. So assuming that you get by that point and you can trust that individual and you have enough references to validate that, then it's on to actually evaluating the deal itself. And we could go down a real rabbit hole there. But I think that the more times that you evaluate these deals the more pitch decks you look at that.

[Dave Meyer]

Yep.

[Paul Shannon]

The more underwriting files you see, the more deals in general, you just evaluate. You start to create this sort of memory bank in your head and you start to understand what a good deal looks like and what a bad deal looks like. So just like you do a back of the napkin analysis on the evaluation of a single family home, before you move into a more technical analysis and really get into the weeds, you want to just kind of fly by and exclude and look for a reason to say no right off the bat. And you can usually do that in that pitch deck and say, oh, okay, this guy is, let's just use an egregious example. He's projecting 10% rent growth or, you know, he's got an exit cap assumption that's 2% or something like that. Okay, this isn't interesting at all. To me, this is an unrealistic assumption. Let's just get this one out the door. But then as far as taking it to that next level, there's a level of financial acumen that needs to be built up over time to really understand the actual market that you're investing in. Are the projections realistic? What are the equivalent financial ratios that you need to be evaluating to, to make sure that this is in line with your risk tolerance, et cetera, et cetera. And it just comes from Reps. Brian Burke's book, the Hands Off Investor. I think that's a fantastic place for listeners to start as far as getting kind of the bones of the structure of how that might look.

[Jim Pifer]

I use a tool, it's a multifamily deal analyzer that we have at Passive pockets. And basically you can take the pitch deck and just dump the financials in this spreadsheet. And a lot of the information we got was from Brian's book, the Metric. And it basically just turns red or green. Whether those metrics fit with the averages and it doesn't tell you this is a good deal or bad deal. But as Paul said, the repetitions, you do 10 of those and throw all that info in the deal analyzer 10 times, you're going to know, oh, here's the things that are interesting to me, here's things that I should ask questions about. And that's what you want. You want to get to a point where you have questions to ask the operator. Because one of the most important things to me when evaluating an operator is communication, because again, these are out of your control long term. Right. So what I do is I test the operator and ask them a Bunch of questions. And I want to see are they going to get back to me in a reasonable amount of time and with quality answers. And then when they respond, even if I don't have any more questions, I reply and ask them more questions because I want to see are they going to handle it when I'm a little bit of a pain in the butt, right? I have some more questions. So you got to test them, and that's a critical part of it. And then I'll say one more thing. Paul said, you know, you got to check the operator. They're a good person or the values match yours. But also, you're in a business with this person, with this company. You're a limited partner, but you're part of their company. So I recommend you don't invest with people that you don't like, no matter how good their deal is, because if something goes wrong or something goes well, you're not going to want to call them up and be like, you know, having a conversation because you don't like them. So do business with people that you like and can tolerate.

[Paul Shannon]

Good advice.

[Dave Meyer]

I think it's such good advice. I have the same policy about investing in different markets. I want to invest in markets I don't like going to. It's the same kind of thing. Like, you should make your investing comfortable for you. Obviously, there's still risk, but, like, on a personal level, you should do that. And you said something, Paul. I wanted to add on to, like, I am an optimist when it comes to residential real estate. Like, I go into every house, I'm like, there's a way to make this work. And there's usually not. But, like, I'm always like, kind of like going in there. Like, I can make this work. Work. I am such a skeptic when it comes to syndication investing. Every deal I look at, I'm like, there's no way this is going to work. And then occasionally people can convince me that it's going to. And I've just always found that it's, like, better to be really skeptical about operators that you're potentially working with. And if they can woo you, they've really earned your money. But I. I think you got to pass on a lot of deals, especially in the beginning, before you really find good ones.

[Paul Shannon]

Stay that way, Dave. Never change. That is going to keep you out of a lot of trouble. And I'm always looking to kind of tear apart, you know, what is it that I don't see? What is it that I don't know what's being kept for me, and maybe it's nothing, but I want to go in with that skeptic's eye and really analyze and know what I'm getting myself involved in.

[Jim Pifer]

Especially because these are all salespeople, too. Right. Nothing wrong with that. But they are trying to sell you on this deal. When you call them up and talk to them, it's the best deal they've ever seen. Right. Because they want your capital, and that doesn't mean they're dishonest. They're excited about the deal, presumably because they bought it. But going in, trying to find a reason to say no is absolutely the best approach. And Paul's really good at that. I'm trying to get better at it.

[Dave Meyer]

Yeah. And, like, there's always more people who want your money. Right. Like, if you. If there's no rush. I think once you get into this, you'll see that there's an abundance of deals.

[Jim Pifer]

Yes.

[Dave Meyer]

So don't feel like one deal is precious. You should just take your time and feel comfortable, especially on the first few.

[Jim Pifer]

Yeah. I had one guy, MC Laubshire is. Is a guy that. I've been on his podcast couple times. He's been on our. He came. I don't know if he came up with it, but instead of fomo, Fear of missing out, he coined the phrase joy of missing out Jomo. And that's what I try to look at. Like, okay, I just saw five deals. I'm going to be happy to pass on all of them because there's always the next best deal is coming down the line.

[Dave Meyer]

I've had some Jomo the last few years. When I look, when I see or hear people in deals that I pass on, I'm like, oh, I don't have a perfect track record. Don't get me wrong. But being a skeptic, the last few years has been beneficial. So let's wind down here, but with just talking about the benefits. So, Jim, you mentioned, you know, sort of being passive, but there are downsides. The lack of liquidity. You know, you're entering a new business. So, Paul, let's start with you. Like, what makes it worth it to you to invest in syndications? And perhaps you can tell us a little bit about what type of investor you think is well suited for this type of investing.

[Paul Shannon]

Sure. So what type of investor? It's. It's probably somebody who sees the value in real estate, but doesn't want to pick up the hammer, so to speak. Doesn't want to deal with tenants and toilets, doesn't want to have property management responsibility, doesn't want to trust a property manager in their town. And this is a way to kind of do it and create that passive income and reap the benefits of real estate without that direct active involvement. So there's an acronym that I really like that summarizes what real estate's all about. It's ideal. So I is for income, D is depreciation, E is for equity buildup, A is for appreciation, and L is for leverage. So using money basically that's borrowed to buy something that's bigger than you could otherwise afford. And I think you could take that last piece, leverage and leverage. The sponsor, their skill sets, their business, what they've gone through to grow to the point where they're able to acquire 100 plus unit apartment building, for example. So if you can leverage that person's expertise, not just leverage capital, you can get yourself into some deals that you otherwise wouldn't be able to able to get into. And I think that's probably the biggest benefit. But as I mentioned at the top of the show, for my personal portfolio and for others that are looking to diversify, this is a great strategy to do it in real estate because it's not that easy to diversify in real estate. You know, in this way you can get into different markets that you don't have expertise in. You can get exposure to different areas of the country that are experiencing different, you know, economic or population booms. Again, you can leverage that sponsor and you know, you can leverage the ability to get into different asset classes. I don't know how to operate, let's say an industrial facility or a retail strip center or a mobile home park. But these are all things that you can invest in as a limited partner without that specific expertise. As an operator, you leverage other people's skills.

[Jim Pifer]

Yeah, I think diversification is probably the number one exciting thing about this type of investing because as Paul said, by market, by operator, by asset class. And you can just get a really bright breadth of investment and you're still in real estate. And the other upside is Paul mentioned you're effectively hiring an asset manager. This is their profession, this is what they do all day. Right. So they're going to be better at it than you probably, if, especially if you're going in an asset class you know nothing about. Right. Like there's car washes, there's RV parks, I mean, there's everything. And as far as the downsides, you mentioned it, Dave. One of the things that I did not Think about enough stuff is liquidity, right? Because I just kind of went all in and then I realized, oh yeah, I need to save some cash in case there's other opportunities or emergencies. And so I think liquidity is something to think about. And also to be honest, this isn't something that, you know, you can't get in it by house hacking or wholesaling. You need capital. And you mentioned it, $50,000 is typically the minimum if you're part of a community. Oftentimes you can get into deals for 25,000, but that's, you're not going much lower than that unless you do some, some different types of things. So you have to have capital and you have to understand that you need to protect liquidity because once you invest in this deal, you could get your capital back in two years or 10 and it's completely out of your control.

[Dave Meyer]

I agree with you. I've used it for diversification and to open up skill sets I don't have. Like, I think what sometimes when I tell people I invest in syndications or more passively, I get pushback. They're like, I don't want to pay someone else or something. Like, you know, you have lower returns, returns. And I just don't think that's true because I'm not going to rehab a 50 unit building myself. I can't even rehab a 5 unit building myself. So, you know, I hire people to do that, you know, and so I'm just going to hire people to expose me to these bigger opportunities because I'd rather get, you know, pay someone 2% management fee to get these huge opportunities for equity gains that you can get in these markets. And I, I encourage people to think of it that way. You might be given up a little bit, but you're paying, as Jim just said, you're paying an expert to help guide your investing. And oftentimes that can lead to much bigger profits because it's run really efficiently and you're going to get exposed to opportunities you wouldn't otherwise. Well, that's what we got today. Thank you both so much for being here. Jim, if people want to learn more about passive pockets and syndication investing, where should they do that?

[Jim Pifer]

Go to passivepockets.com you can sign up for a seven day free trial. Check out the community, check out the tools, the resources, the forum, all of it completely free. If you love it, stay on. If you don't, you know, seven day free trial. But Passive pockets dot com.

[Dave Meyer]

All right, well, Paul and Jim, thank you both for being here.

[Jim Pifer]

Thanks for having us.

[Paul Shannon]

Thank you, Dave.

[Dave Meyer]

And thank you all so much for listening. We'll see you for another episode of the Biggerpockets Podcast in just a few days. Thank you all for listening to the.

[Paul Shannon]

Biggerpockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of.

[Dave Meyer]

The show, Dave Meyer.

[Paul Shannon]

The show is produced by E E and K, copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast.