Client Syndication Case Study
So the best way for me to start this is to describe one of the clients that I’m currently working with who’s been working with me for a couple of years now.
When I first started working with him, he had already participated in two high-end syndications. So the experience that he had was that he got together with a group of people who were also part friends, part acquaintances and each of those members of the team brought a different skill set to the table.
So one guy was an architect, another guy was a designer, another guy was great at branding and another one was an accountant. For all intents and purposes, they brought to the table what would be perceived as an ‘A team’ for the creation of really successful syndication.
Ultimately, what happened on both projects is the wheels turned really slowly, as is often the case and they found themselves in a situation where three years down the track, two years down the track, four years down the track, they were finally in a position where they had a finished product. They’d all contributed fairly significant amounts of cash and capital and they’ve structured it properly as a joint venture so there would have been costs associated with setting up entities and things like that. At the end of the day, when they went to value and in one case, sell the product, a couple of them in that team were busy congratulating themselves on the money that they’ve made.
But meanwhile, my client who had in the meantime gone off and educated himself on how to think like a professional investor, started to recognise that there was a massive opportunity cost of being involved in that style of syndication, not to mention, the incredible amounts of risk and stress and sleep at night factor.
So just if I back it up a little bit, one of the things to really remember about that style of syndication is that it is a very active strategy. For those of you guys who have done any kind of development, you would understand that it looks really easy from the outside. The profits are big, it certainly looks very glamorous, and the end product looks amazing.
But there is a lot of pain associated with spinning all the plates associated with running a development side. When we’re talking about syndication, to some degree, that becomes even more convoluted and complicated by the fact that you’ve got all these different personalities with different expectations and different styles of talking.
It can be a real cocktail for high stress and ultimately, what my client discovered was that for the money that had been invested, which let’s say was a couple of hundred thousand dollars per deal, the profit made when averaged over that three-year period or that four-year period or that two-year period was actually a pretty pathetic return.
What I think a lot of experienced investors and even I’ve had this experience have realised, is if you differentiate between the profit they would have made on the site with no development and contrast that to what they made with the development, in some cases, the difference can be negligible so it’s really important that you recognise the erosion of your return when you’re looking at a multiple year project.
Again, it’s really important to measure the opportunity cost of dollars locked into a particular development, unless, of course, your game plan is to just develop and hold those sites and wear any kind of timeline loss during the process of construction. So an example of that might be eight mates get together, they build eight townhouses, they keep one each and effectively they’ve bought at a wholesale price.
So that’s the sexy glamorous view of how to make money on syndications. I guess the upshot of it is this particular cohort decided that they wanted to rinse and repeat on that particular project or that strategy and fortunately for my client, he came to his own conclusion of the true cost or opportunity cost of putting money into those projects, both in terms of emotional headspace, as well as, what else could he have done with that money.
The ‘Typical’ Syndication Experience
I’ll give you an example of my own experience here many years ago. I’m going to say, not quite 20 but about 18 years ago, we purchased a project in Melbourne that was zoned for a duplex. Two high high-end houses are what we ended up with, but in the time between when we bought the land and then the time that we completed the development, the whole thing took us, I’m going to say about four years. It was expensive, we had headaches, and we had problems with the builders.
I remember at one point, I was flying to Melbourne every week because there was some problem or another. I got very familiar with driving the stretch of road from the airport to where our site was and it was really stressful. I remember at the time I had two young children so it was just this cocktail of high stress. Now everyone that I shared my numbers with, and I’m going to say we made about half a million dollars profit on that project.
They were blown away, they said like “Wow, that’s fantastic! You had such a great result!” and I can tell you now, it didn’t feel great at the time. I remember the builder went bankrupt just a little bit before completion and thankfully only a little bit more before completion. But the pain of trying to manage the remainder of that project and we were stretched to the absolute limit. We were totally redlining our finances to even do that project. It was incredibly stressful.
But when I look at if we’d simply bought the existing property with the crappy house on it, quite rightly, we wouldn’t have made it. In fact, it would have cost us money in cash-flow terms to just keep it for that four-year block. But the difference between the profit that we would have made had we just kept it and done nothing to it, versus going through all of that pain to develop it was negligible. I mean, the profit was in the land. The development itself didn’t actually create that much more profit. So I’m digressing because I’m talking about syndications.
But that is the experience of a lot of syndications. You’ve got challenges because more people have more emotion. Generally, most members of syndication want to be active or are active and for those investors that do it on a passive basis, they butt up against those usual issues. It just takes a long time to do things, takes a long time to draft plans, get into council, get approval, get the finance, do any pre-sales, and the list goes on and on.
So that is really what most people think of when they think of syndications, that is not at all what I am trying to describe when I talk about syndications, the way I like to do them now.
The True Definition of a Syndication
If we imagine that one end of the spectrum was the syndication style that I’ve just described, at the other end of the spectrum, what I’m really referencing is syndication where you are 100% passive. Now when I say passive, what I’m saying is you are not responsible for any decision making whatsoever in the management of the project.
Now some people might freak out and go, “Well, wow, that’s a complete loss of control”. But I’ll tell you in general, why there are ways to mitigate a lot of that and put yourself at the chair of the table in terms of your capacity to control or to be protected.
Imagine you are putting instead of several hundred thousand dollars into a single deal or syndication, which is often what’s required because they’re looking for large amounts of capital. What if you could only put in like $50,000 dollars or something small and then you could spread that across multiple projects?
Then let’s imagine that the person whose syndication you’re joining is an excellent communicator, keeps you abreast of everything that’s going on with the project has done it, has been experienced in that particular style of syndication for 20 plus 30 plus years, who has a detailed project plan laid out for you, unit by unit, before you even commit the funds, who never ever does ground-up construction, which is where a lot of risks exists around property development, that has a way of structuring the deal so that you know from day one that there’s a certain level of cash flow that you’re going to earn, and all you do is watch the money drop into the bank account quarter by quarter or however often it gets distributed. That is my definition of a super exciting, sexy syndication. And what I love from the safety perspective is I, as an investor, am in the first position, meaning I have a piece of ownership of that particular investment or the corporation that is going to buy that asset.
Understanding the Nuances of Syndications
So I really want to encourage you to start with any investment strategy. Start to tease out the different flavours because I think it’s really easy for wealth professionals to put a label on something and give it this all-encompassing description, this all-encompassing risk profile, and they’re not really looking at the nuances of how is the deal structured.
What is your downside protection? What are the exit strategies? How will the project be managed? Who is managing the project? What kind of team do they have in place? The list goes on and on and on and we’re sort of circling back now to this idea of having investing rules.
But the idea that I’m trying to really convey is syndications can take lots of different shapes, lots of different flavours and your job as an investor is to come up with your investing rules and then decide which end of the spectrum you want to sit. There’s no right or wrong.
The active strategy of being a participant in development or syndication of any variety, whether it’s commercial property or renos or whatever is about understanding your risk, understanding the downside protection, understanding what is the opportunity cost of you having your money in that deal, and the likely profit versus any other investment that you might be able to take on.
The Big Problems with Syndications
A lot of the big problems with syndications that I hear clients coming on down over is the lack of liquidity. Often on these deals once you’re in, you’re in and you cannot get out until that product is sold, whereas other syndications, more like the ones that I do, have a very clear timeline and you know exactly when you can get in and when you can get out.
So look, I think I’ve kind of really described maybe the old view of what syndications are, and maybe a newer, fresher, more dynamic view. As I said, it’s not that there’s any right or wrong, it’s more just it’s really important as an investor that you understand those different flavours.
Where I would finish this particular podcast is I’ve told you a bit about the what, the who is it for. I’ve stressed a lot that there are three parts to the game when it comes to wealth building and I think syndications form part of that group of strategies that is more suitable to people who are further along on their investment journey, meaning they already have a reasonable capital base behind them.
Who Are You Aligning With?
If you are starting from ground zero, unless you have a business, which is a cash cow, this might not be the right place to start.
How do you find these deals? This is probably the hardest question of all. There are plenty of syndicated deals out there, like thousands of syndicated deals. The bigger, most important issue or risk for anyone as an investor is who are you aligning with. Who are you going to form a relationship with, build know, like and trust, do your due diligence, and apply your investing rules so that you feel in alignment with the people that you’re working with? That is the big risk. So in terms of how you find these deals, finding the deals is not the challenge. Finding the right people who are ethically sound, who have that track record, and who have really transparent processes is the game here, not how do you find the deals. The more you start to learn about these alternative strategies, the more discerning you are able to get with the questions that you have.
When Should You Use Syndications as an Investment Strategy?
When should you use syndications as an investment strategy? As I mentioned already, once you get to that place where you are looking for cash flow or a certain profit outcome or a certain tax outcome, that is when you can start to use syndications as a way of increasing the velocity of your money.
Final Thoughts
By all means, if you have more questions about syndications, how they’re structured, and how they work, please send them through to me. You can certainly email me at salena@www.www.inkosiwealth.com otherwise, you can find me on socials.
But it’s certainly my intention to really just blow open people’s perception of how to be successful investors. I really feel this podcast is for people who want to be self-made, who aren’t looking for handouts, and who can’t rely on an inheritance.
So if these topics or others appeal to you and you want to go deeper, please let me know. But in the meantime, I hope you found the topic of housing syndication investments should be done useful, and I look forward to catching up with you next time. Take care.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom. Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
