In 2016 I focused a lot of my time, education and practical experience with multi-family syndication. I hired a coach to go deep into understanding proper underwriting, study of markets and learning the overall ins and out of syndication. Leveraging the experience and attractive deals of the sponsor I was working with, I grew a network of accredited investors that were eager to review the next opportunity. The bulk of my investor base were busy professionals that were either new to syndication or at least appreciated that real estate was an attractive asset class to invest in. The many benefits I outlined in a blog I posted on why I like investing in apartments.
Bottom-line, most loved the passive nature and exposure to an asset class that would distribute a check monthly or quarterly. They started seeing how creating income streams could supplement or eventually replace one or both spouse’s income creating more choices in their lives.
As this investor base started to invest in more deals, it dawned on me that at some point they might be over concentrated in one type of real estate asset class, one or few geographic areas and one sponsor. As a person with an undergraduate degree in financial planning, I understood the diversification concept well at a young age. As I got into the real estate game, a whole new world of opportunities opened up. I started bumping into folks at multifamily meetings here in Austin that were involved in not only apartments, but looked at anything multi such as self-storage and mobile home parks. Many were talking up how the cash flow opportunities were even better if you knew what you were doing in these more niche areas. They liked the trends that they were riding such as the increasing need for affordability and the fact that we just don’t like discarding with our stuff, buying more stuff in good times and storing more stuff during downturns. See my blog article on:
I attended a real estate investing conference recently that was opened up to a lot of disciplines and had experts speaking about even more alternative real estate niches such as office, retail and those that even specialized further into medical offices. I was also running into different philosophies that syndicators were based in that could be characterized as much more conservative in how they underwrote and structured their deals to more aggressive methods. At this conference, I met a very interesting person named Jeremy Roll of Roll Investments. Jeremy is a very bright and learned person in syndication. He has his MBA from Wharton and worked in the corporate world before leaving to pursue investing full time in primarily syndications. He co-founded FIBI (For Investors, By Investors) in California which is one of the largest non-profit investors associations for sharing information on investment opportunities in this area. He is also an advisor for Realty Mogul, a crowd funding site. I spent some time talking to Jeremy and learned a lot on how he views real estate syndication from an investors standpoint.
Jeremy is very conservative by nature. He told me that he had a framework around diversification by niche, region and sponsor. He would be careful about vetting sponsors and that he would not share or discuss new deals w/FIBI members until he had done one deal himself with a new sponsor to test the waters so to speak. He had disciplines in place to not over concentrate in one niche, sponsor or region. He also looks at cycles to help him determine entry and exit points. He became so learned that he would often help sponsors re-write their PPMs (Private Placement Memorandums) and investor marketing materials, even re-structure deals better for the investor. I’ve maintained contact with Jeremy after the conference and learned some things from him that I think are important to take away as an investor. Some things I agree with Jeremy on and some things we have different philosophies such as he does not like pure value add deals (only value “light” ones). I scratch my head on that one because that is all we do today with the sponsor I work with in apartment value add thinking what other way is there. For Jeremy, he would have invested in apartments up till about 2013 in very light value add or attractively priced deals but not today. He only very selectively is buying in MF apartments today.
What I like about his philosophy are a few things that I think are most important.
1. Niche diversification – One should be cognizant of diversification in your real estate portfolio. Learn other areas like apartments, self-storage and mobile home parks. Understand asset cycles and trends. Some areas like office may not do so well in a down economy where more stable assets like apartments, self-storage and mobile homes may hold up ok.
2. Geographic diversification – I like Texas but having all of the apartments, self-storage and mobile home parks in Texas exposes me to regional risks such as economic. Perhaps looking for some alternative plays in another region like the southeast would be a good thing.
3. Sponsor diversification – Vet sponsors carefully and don’t stay married to a sponsor forever. I’m not in full agreement w/Jeremy on this but I do see his point. Like 1% chance the sponsor turns bad boy or girl. I think this is my least concern if you have a good one but ensure they are growing their depth with key management for continuity and that they are staying true to their philosophy and model which should be conservative and tested. I wrote another blog (special report on this – link below).