Investors are nervous. The stock market is proving to be highly volatile. It had a good run, but that run may be over. The commodity market continues to lose ground, with no bottom in sight. Bonds and other traditional investment vehicles are producing low yields and many investors are wondering if they should just sit on cash.
Meanwhile, real estate is rebounding and may prove to be the best place now for investment dollars. However, the way investors traditionally look at real estate as an investment vehicle is not attractive. It’s too much work and not as simple as trading stocks.
Or is it? The question to ask is how can investors take advantage of an asset class that has rebounded, focus on their lives and careers and still maintain their sanity?
Traditional real estate strategy requires sifting through properties until one makes sense, rolling up your sleeves, and pursuing it yourself. To an investor, that involves the risks of learning as one goes, and expending time and energy that is difficult to commit. The benefit of this strategy is owning your own real estate, where the downside is you become an active investor, so the lack of experience could lead you down the road of disaster and into a pit.
Today’s investor has the option of investing in a “real estate syndication,” which is becoming increasingly popular as real estate is now being viewed as a fourth asset class. In a syndication, the investor participation is limited to the purchase of shares quite similar to the experience of purchasing stock in a publicly traded company. The benefit of this strategy is its passive nature, where the syndicator handles the process of finding a profitable property, makes the necessary improvements, and manages the tenants, leaving the investor free to pursue his/her life.
What Are the Best Advantages of a Syndication?
Experience is the most obvious advantage and can prove to be irreplaceable when you consider the disaster of investing in the wrong market, choosing the wrong property or just poor timing.
Syndications are private offerings and usually offer higher or more stable returns than their public counterpart, the REIT, which are public offerings and are subject to the same degree of volatility as the stock market has demonstrated lately. In most cases, investors can expect as good a return in a syndication as they may be able to create on a property they purchase themselves.
A good syndicator can also find better deals. Don’t be fooled into thinking technologists, ex-bankers or real estate brokers should be picking deals for investors. Real estate is far more complicated than it may appear, and requires expertise in understanding markets, determining current and exit values, understanding rents and cap rates, building the right capital stack, and how all these components affect the investment return. Note – a good syndicator will make you money when they buy.
A syndicator can create savings in multiple ways that a single investor cannot. This may include lessor material costs per unit, spreading labor over multiple properties and other efficiencies that come with the ownership of larger assets.
Finally, syndicators maintain capital reserves to account for elements outside of their control. A single investor can get into trouble quickly when the property experiences a short-term need for cash, or the market takes an unexpected turn for the worse. Capital reserves alleviate those issues.
What this says is that a good syndicator is someone who can make your life a lot easier if you can find one.
Once you are introduced to a syndication, follow these basic guidelines and you should have a high probability of investing wisely:
- First, do you get a good sense from the operator and his or her principals? The most important consideration often overlooked is your “gut check.” The best syndicators are interested in a long-term relationship and you should be able to sense that. Don’t be afraid to ask for some referrals if you are unsure.
- Second, is their moral compass aligned with yours? Everyone has heard about an investment that went bad because the syndicator was not doing what was right. Pretend the market takes a turn for the worse. Do you want to be invested with poor character, or with someone you can trust to make the tough decisions in the best interest of everyone involved?
- Third, do they know how to choose the right projects? The success of the investment depends on choosing properties that possess a profitable potential.
Some folks would see this list as an inverse priority, but our experience has shown us that it doesn’t matter how good the deal is if the operator is not honorable.
Invest wisely! QCBN
Jack is a passionate business and family man, a visionary, and a people-person. Jack has been building strategic relationships with capital partners, particularly in the real estate and investment market, since he co-founded Bakerson, LLC in 2002. His ability to identify great opportunities is incomparable, as is his passion for powerful relationships, and his clients have more fun investing than they ever thought possible. Tweet with @JackMartinCo.