The Syndicate

Real estate syndications, and how I’m still not in any.

A while back I got interested in real estate syndications. And then a few weeks ago I almost pulled the trigger on finally investing in one. I didn’t. In the end it was yet another journey of self reflection, discovery, and a reminder that my ego has a seruptius pull that likes to masquerade as logic.

What the hell is a real estate syndication? Take it away, Motley Fool:

“Real estate syndication involves a group of investors who collectively raise capital to purchase commercial real estate or build a new property. For example, most people couldn’t simply decide to finance and construct a large hotel all by themselves, but a syndicate of a few dozen investors might be able to raise enough capital to do so. In practice, real estate syndication typically pairs developers and knowledgeable real estate professionals with investors who are looking to put capital to work.“

Basically you give your money to some people and they use it to buy a big chunk of real estate, and hopefully they eventually give you back a multiple of the cash you threw their way. If you’ve gone down the real estate rabbit hole, you’ve probably heard of the concept. Normally syndications are only available to accredited investors (you’ve got over a million bucks in net worth, minus the value of your house, or you make over $200k a year, or you manage shit tons of money for other peeps). That is changing, with a bunch of platforms popping up that use crowdfunding and relaxed regs to get around that requirement.

How’d I get wrapped up in this? Like most, after entering the FI space, I found out about the two ways most people were investing:

• Public Stocks and Bonds, usually through Index Funds.
• Real Estate, usually through buying and holding some single family homes and renting them out.

Thanks to dudes like JL Collins and Pete Adeney, I was able to grasp the basics of the stock/bond side of things. I was drawn to the simplicity of index funds, and sold on the idea that they mostly beat out active investors. Plus simplicity=easy. And easy is appealing to my lazy side. All I had to do was set up an account with Vanguard, transfer money, and click buy on something like VTSAX. Maybe takes 20 minutes to set up the first time, and less than 5 minutes each time I want to invest more money. Awesomesauce. For a guy that was working 60-80 hour weeks, going to grad school, and then trying to raise kids, it was perfect. Especially when compared to that real estate thing.

Buying, preparing, and then managing a rental property seems like a shit ton of work. I’ve bought two houses as residences, and just finding an acceptable house took more time than I’ve ever spent buying VTSAX. There’s people who like real estate because they can physically go see their investment. Good for them. Me? I don’t give two fucks. Seeing numbers on a spreadsheet is plenty for me. The only thing that appealed to me about real estate is the greater returns that such investment properties might produce. After reading/watching/listening to oodles of real estate investment content, I admitted to myself that buying and managing investment properties was just not worth it to me, especially back when I was working more than full time.

Then I heard about syndications. Better returns than VTSAX, and almost as simple to invest in? Commence rabbit hole! And so it went. A friend of mine was also having some success in syndications, and observing what he was doing really increased my interest. In the end, I got on the email list of a syndicator that seemed good, which my friend had success with. I’ve been on the list for four years and I still haven’t pulled the trigger on one of their offerings. Why?

Laziness, and I kept on getting distracted by shiny things.

The syndicator required a minimum of $20K to invest. Back when I was working, my savings rate was over 70%, but since I was maxing out my 457, this left me about $2k in surplus cash to invest every month. Before finding out about syndications, I just chucked the excess cash at VTSAX. But after finding out about syndications, I started keeping that extra $2k a month in a savings account with the goal of building up to that $20k minimum so I could get in one. No problem, right? Should have taken less than a year to build that up. But two things kept happening:

1. I’d get antsy about all that cash sitting in a savings account barely earning anything, while watching my investments grow. That cash felt like dead weight on my death march to FI.
2. Then the market would take a dive. My investments would go down 10% or more. And I’d have like 13 grand just sitting in a savings account. I then consistently said “fuck it” and dumped the money I was building up for a syndication into VTSAX.

This cycle was repeated a handful of times. I then hit FI, but continued to work. Again my interest in real estate rose. I figured I could afford to miss out on the public market gains, and try to actually get into this syndication thing. But then I finally decided to bounce from the job, which has been amazeballs. However, I only had just over $10k in cash set aside for real estate when I turned off the firehose of excess cash that was my job. Though my wife still works, and we therefore are still saving a bit, this is all directed at her 401k. This reduces our taxable income, which reduces taxes and healthcare costs. If she stopped contributing and took her entire income without any tax deferrals, we’d be breaking even or possibly even withdrawing from our stache. So that ain’t going to happen. The only way I can move the needle on the $10k in cash is by working for that money. I will likely do that, sooner than later. But not yet. I resigned myself to not investing in real estate until I have some sort of income again. ☹ No doubt, all this is good problem to have. Also it is nice having a decent chunk of cash sitting around when I don’t have a job. But then something happened.

I got yet another email from the syndicator. They were lowering the threshold to $10k for their next offering.

Fuck yeah! “This is it!” I thought. The email came on a Friday, and the deal was set to close within a week. I spent the rest of the weekend pouring over all of the associated documents. Like 60 pages of legal stuff, and at least that many about the actual investment. I read profiles on all the people involved, and googled the crap out of them so hopefully I wasn’t just taking their word on their track record. At one point, I locked myself in our bedroom while the kids ran around the house to pour through all the PDFs and slide decks. I talked to my wife on Sunday night about what I found. I was 90% sure I was going to buy in on Monday morning, and I wanted to make sure she was cool with it. Afterall, $10k is still a lot of money. She pointed out that it was a small percentage of our net worth, and said she trusted my judgement. I moved $10k from savings to checking that night, in preparation for the wire transfer on Monday. This was it. I was finally going to be a real estate investor.

That night I went for a walk. And I realized I had fucked up.

First off, there was the deal.

1. The reasons the syndicator gave as to why the investment was going to return as predicted were light in detail. It came down to “This seems like an area that’s going to get better” and “one of the guys heavily involved in this deal went to an Ivy league school, so he probably knows what’s up”.(paraphrasing a bit, if you couldn’t tell😉) . There was little data that actually backed up their assumptions.
2. The track record of the syndicator in their documentation was incomplete. They listed all the properties they’d bought in the past. But there was nothing about what they were sold for, rented for, or what return these properties produced.

Both of these items were weird. I’d read documents by the same syndicator about previous offerings, and they were way more complete. Had something changed? Perhaps, but I don’t know. Those issues weren’t my main reason for not doing the deal though. It came down to realizing my motivations for getting in the deal were flawed:

1. Price Drop: I wanted to get in this deal because they dropped the price down to $10K for the minimum amount needed to invest. They’d actually offered this deal for a couple of weeks at the standard $20k minimum, but then dropped it. In the past, they’d have an offering requiring the $20k, and then send out an email a few days later saying it was full. This one dragged on, the price dropped, and I got excited as I finally had the cash available to jump in. As I reflected on this during my walk, I realized I was being stupid. Instead of getting excited, I should have asked why this offering didn’t fill up like every previous one, and why they were now dropping the price. Were they trying to entice people to invest? Was this deal not filling up like others because other investors had seen issues with the deal too? Was there some other negative marker that I didn’t know about that other investors did? I don’t know, but I could guess that some of these factors played into the longer than normal offering period and the abnormal price drop. I realized I should have been cautious when I saw this instead of excited.
2. Scarcity: The marketing I got from the syndicator kept saying stuff like “Invest now, before this deal closes! Deal will likely close by the end of the week, get in now!” . And you know what? I was initially like “shit! I better get in now before I miss out on this amazing opportunity to finally get some motherfucking real estate!!”. Then I remembered that Influence book I’ve talked about before. This was some straight up scarcity marketing ploy, playing into the dreaded trap of FOMO. Marketing is just a normal part of our lives, and people will always try to influence us. But when much of my motivation to do something is because a marketing tactic is working on me, and not because of the objective value of the thing being shaken in my face, then hopefully I remember to take a step the fuck back.
3. Greed: The predicted return looked good. The IRR and cash on cash suggested that this deal would be better than VTSAX’s good years, and certainly wayyyyyyyyy better than what the market is getting right now. And all that possible money was enticing to me. I could buy a freaking Tesla when the capital was returned (you know, if the predicted numbers actually came through). Mmmmm money. But wait! What the fuck am I thinking? I then remembered-I’m already FI. I have a comfortable, albeit frugal life. Our needs are met, and I have fun outlets that are relatively inexpensive. Yet the allure of buying fancyer shit is always there. When I dialed back the greed and remembered that fancy ain’t going to make me happy, I realized that I was being motivated by the desire to jump on the hedonic treadmill. Which was being fed directly by my:
4. Ego: I also realized I was being driven to get into this deal because subconsciously I wanted to invest in real estate so I could say I was invested in real estate. Ok, what? You heard right; I wanted to be able to tell people that I was invested in real estate. And I wanted more money to demonstrate how rich I was. In reality, I would tell very few people I was invested in real estate, much less anything. Those few that I did tell could probably care less. And like that Morgan Housel guy said, even if I did buy a Tesla to flex my green, others wouldn’t be thinking about how awesome I am to be driving it. They’d just be thinking how awesome it would be if they had one so they could do their own flexing. I used to try to shove down things like this that my ego spouts off, and try to deny it. Then I recall something this Cory Muscara dude said:

My ego definitely tries to take the wheel, often in subtle ways that take me time to notice. This is ok, it’s a part of me, and usually if it’s speaking, it’s also pointing towards a part of me that wants attention. But that doesn’t mean I need to act on its request. Instead of shoving it down, I can ask what the fuck it wants. In this case, a part of me clearly feels insecure about living a lifestyle that though satisfying, makes me self conscious because I feel like it makes me look poor. And that part of me still desires approval from others.

Logically, I know this is futile. Having expensive crap to flaunt will impress no one, and even if it did, impressing people wouldn’t make me happier.

My ego is like that drunk friend that wants to keep doing shots even though he’s already pissed himself. Instead of getting annoyed and sucker punching him so I can just drag his stupid ass to a couch, I try to be less of a dick and redirect him by suggesting we go get some delicious 3am Waffle House.

Here I did that by thanking my ego for showing me that my motivations for investing in this offering were less than logical. I reminded myself(and my ego) that I have accomplished some stuff to be proud of. When I took a moment to remember this, it quelled the doucheyer side of me. And thanks to Cory up there, I took care to remember that my ego spouting off is ok; I’m human. With that done, I took some time to think through all of the reasons why impressing people is appealing to my ego. That would be a book in itself, and I think I’ve beaten this last point to death. Plus we’ve totally ventured into some woo woo touchy feely shit. Enough of that. Moving on….

After that walk and subsequent musings, it was clear that this was not the deal for me. I learned some stuff, which could be summed up as:

• Make investment decisions through the use of logic, not emotion.
• Taking some time before making such a decision can help me figure out when my emotions are trying to pass themselves off as rational thought. I’ll keep the habit of not rushing into anything, no matter how appealing it is.
• I’ve heard Brad over at ChooseFI talk about the value of an Investment Policy Statement (IPS) which you use to guide investment decisions. In this case I was able to reign myself in without such a process, but there’s no saying I’ll consistently do that in the future. Think it’s about time I write my IPS out, so I can refer to it when making such decisions, and reduce the possibility of making a rash investment.

There we go, quite a long meandering post about me not doing anything in the end! Talked about real estate, and how I still don’t have any. And how I caught myself from making an irrational decision. Plus we even have a plan on how to do more better next time! All in all, a good learning experience. If you see yourself a little in my flawed decision making process, that’s ok. Hopefully you can learn from my near-mistake, and try to adjust your own investment decision making process.

Do you invest in syndications, and if so, how do you evaluate them? Do you have an Investment Policy Statement? How did you flush it out, and how has it worked for you? I’d love to hear from you in the comments.