00:03:08 – Salena’s Syndication Investment Case Study

00:07:16 – Determining Risk Levels in Syndication Investments

00:12:16 – The Kind of Returns from Syndication Investments

00:14:44 – The Story Behind Salena’s Syndication Investment

00:18:26 – Salena’s Atlanta Investment

00:20:16 – The Numbers Behind Salena’s Investments

00:25:57 – How Syndication Deals Are Structured to Protect Investors

00:27:53 – Comparing US Syndication Investment VS Australian Investment

00:32:02 – Outro

Q: What has your experience been since investing in syndications?

• Syndications are a pretty interesting strategy because one of the most significant perks is that you can have direct security and access to leverage.
• But, more often than not, these deals only come across your table if you’re part of a small network of established, reliable dealmakers. So, as an average investor, it’s unlikely that you would see these deals often.
• They are transacted off the market, so, for me, it’s a great way to participate in elusive and lucrative real estate deals as a passenger. You don’t have to worry about the day-to-day management of the property, and you don’t have to manage any tenants. But, you get to participate in a return that’s typically only found in the playground of the ultra-wealthy.

Q: Can you tell us about the current syndication investment that you’re involved in?

• With any real estate deal, specifically with syndications, the most important consideration before you delve into the deal is establishing who is sponsoring the deal.
• You need to be looking into who is running the deal and whether they have a proven track record. You also need to establish how they manage their deals and how they communicate.
• With the deal that I’m currently involved in, the sponsor is someone I’ve known for a while, has a stellar reputation and only works with investors within a small referred private circle.
• And because of his reputation, he has access to opportunities that generally don’t even hit the market. So, what I love is that there’s an opportunity to learn, participate, and witness how the project is managed.
• Typically, these projects run anywhere from two to four years, depending on the project’s outcome. But in this case, we’re not talking about a ground-up construction project. We’re talking about purchasing 112 units built in the 1960s, already at 92% occupancy. It was purchased well below market value because it was poorly managed.
• So, the thing that I love about this syndication strategy is that I’m taking on a project that already has cash flowing.
• The deal is also clearly laid out in great detail in terms of how they will create forced appreciation in the project.
• Most of the syndications that we’re used to in Australia are ground-up construction projects. They’re incredibly lucrative deals, but they’re quite high on the risk spectrum from a risk point of view. The sort of syndications I prefer sits further down the lower end of the risk spectrum.

Q: How do you determine the risk levels in syndication investments?

• In general, I’m a huge advocate of being good at doing due diligence. I have my own five-star system that I’ve created in terms of how I analyse deals.
• When it comes to risk in syndication deals, I look at those important considerations I mentioned earlier: who is running the deal and what is their track record?
• One of the things that is pretty important to me on a syndicated deal is having multiple exit strategies.
• Depending on the deal, you’ll need to have all sorts of exit scenarios laid out. You can’t just hang your hat on buying it for X amount and selling it for Y amount at a particular point of time to a specific buyer. For example, what if something goes wrong? Or, what if there’s another lockdown? Then that one specific exit strategy won’t necessarily get you out of the deal as planned.
• I like the particular deal I’m involved in because I have direct ownership of my share of the asset, and I have cash flowing from the project. What’s more, I know exactly what the profit and loss for the apartment complex looks like, and I can see that they’ve done detailed costs unit by unit.
• I love this operator because he knows to always leave profit in the deal for the next buyer. For example, if the end value of this deal is $8 million, they’ll bring it up to around $6 million so that there’s juice in the deal for the next person. Most people will want to squeeze out all of the profit for themselves and then just sell the asset at retail price. In comparison, these guys try to leave some money on the table.
• So, there are quite a few layers to risk in syndication deals. But essentially, risk is understanding the best and worst-case scenario and understanding exactly how the deal is going to run and what your exit options are.

Q: How does it impact your return on investment when the deal makers leave some money on the table for the next investor?

• If you can ride the deal through to the finish line, you’re obviously going to get a higher return. Having said that, I think the risk-return balance constantly needs to be reviewed.
• For me personally, I would be happier with a larger pool of potential buyers who are buying at the discounted rate than trying to squeeze out another 2% to 4% return where my potential pool of purchasers is small.
• The guys that I work with are world-class investors, in my opinion, at least. They’ve been doing this for 30 to 40 years and recognise that greed is a terrible emotion to have around investing. Many of them will position their deals to leave profit regardless of the type of investment – they don’t just use it as a strategy with syndications.
• If you, for example, sell an asset at 80% or 90% of its market value, then you’re going to have way more people interested in buying it than if you try and sell it at top dollar – it’s a de-risking strategy.
• Professional investors will always think differently to people who want to sell their homes at top dollar, for example. They will always look for ways to reduce the risk on the deal – so it’s a completely different mindset.

Q: Can we delve deeper into the story behind the 112-unit syndicate investment you’re involved in? Why was the vendor wanting to sell, and how did you find out about the deal?

• My trusted advisor (or deal maker) who ended up bringing this to the table has a massive network of real estate agents, funders and financiers.
• Many of the deals will come to him through the banks. They see that there’s a property in distress, and they essentially just take the deal to him.
• They are also quite a few more different avenues for accessing the deals that he does.
• His due diligence process is considerable, so he’ll often look at a property and then spend a full month sending his entire team to look under every nook and cranny before they make any consideration.
• So, before I even get to look at it, there’s often 6 to 12 months of work that’s gone into bringing the deal to the table. There’s no stone unturned. They look at the plumbing and the electrical. They quantify how much material will be needed for every unit, and they map out a comprehensive business plan on how it’s going to be managed.
• I have a feeling that this particular deal came through a bank account.
• So the preferred strategy is that you go in as a group, purchase the 112 units and then once the renovations are finished, you leave a bit on the table, and the rest you sell back into the market.
• But, depending on the deal, there are often other strategies that are put in parallel. In other words, here is plan A, plan B and plan C.
• I don’t have any interest in ever running one of these projects. But I genuinely love being witness to the process. For example, by the time I come in, they’ve already worked out, from an aesthetics point of view, the different colour combinations and materials they’re going to buy in bulk.
• And once the project comes to an end, if I wanted to take my original capital and roll it back into another deal, there’s usually another deal within three to four weeks – that’s the calibre of investor I’m dealing with.

Q: Is this syndication deal in Australia? Or is it overseas?

• This one is actually in Atlanta, which is part of the midwest belt of the USA.
• Part of the reason I like that as a geography is that it’s pretty plain, boring and vanilla. They are the sorts of places where you and I could live – they’re not slums, but they’re also not the blue-chip high end of the market.
• These are basically working-class areas and are highly sought after. So, there’s high rental demand.
• I’ve been to Atlanta several times, and it’s just a very easy place to live. When I looked into the deal, part of my thinking was whether I would live there and what sorts of people would want to live there. Are they going to be problematic tenants? Or are they reasonable people who are going to pay their rent?

Q: Can we unpack the numbers behind this deal? Why was it such a good investment for you?

• At a macro level, this was an asset that was getting purchased well below market value. Bank leverage was going to be applied to it, and there was also a limited amount of capital, probably around $2 million, being raised by investors. The rest was all bank finance, and with the leverage, it was a pretty low loan to value rate.
• The idea was to create forced appreciation and resell within three years.
• The thing that most excited me about the deal and most of the other syndications I invest in is the fact that there was cash flow from day one. So before they did anything to the property, it was generating a 7% cash flow return for me.
• By the time they get to the second and third year, they may have improved the building and put up some rents, so my return may be higher, but I know that my starting point is 7%.
• Now, some dealmakers will allow you to participate in the increased rental yield, while others will cap it and tell you the amount of return you’ll get for the investment term.
• The other component of the deal is the capital part. So, in this particular deal, it was a 7% cash flow from day one and then another 5% to 7% capital on the back end. There were also massive depreciation benefits that were passed on. For example, if you invested $200,000, you got a 7% preferred return, and a $91,000 depreciation write off in the first year!
• So, that’s a big reason why people like these deals: you basically end up paying no tax. But I like the idea that you can get cash flow, and you get an appreciation kicker at the end.
• Another deal that I recently got involved in was similar: 8% cash flow, and as the rents increased, it probably crept up to around 10% cash return per annum. And then, there was an additional 8% to 10% capital kicker at the end of the deal.
• Here’s the thing though, you have to trust the person who is running the deal because they’ll be the judge of when the right time to sell is and who the right person is to sell it to. So, you have to really do your due diligence on the person selling the deal and make sure that they’ve got skin in the game, too, so that it’s in their best interest that it’s a win-win for everyone.

Q: Is your capital outcome predicted with these types of deals? Do you know what’s going to be at the end of it?

• A good syndicator will give you a preferred return from the get-go. So, say, for example, in this particular deal, there’s a 7% preferred return. What that means is, every year before anybody else, including the dealmaker, gets paid, you as the investor will earn 7%
• Usually, beyond that, the terms of how the profits, capital and income will be shared are all detailed in the offering memorandum upfront. So, from an investor point of view, what that does is give you peace of mind because you’ll know more or less what you’re going to get upfront.
• Depending on how profitable the deal is, you might get a 7% cash flow plus 5% capital per annum which is essentially a 12% return each year. Other deals might give you 8% plus 8% – every deal is different.
• Given that people can get a great return in the banks right now, there’s a lot of capital out there looking for a home. And so, good deal makers have the luxury of being able to dictate terms. The better ones will make it favourable to the investor from a protection point of view.
• With this deal, this is the culmination of 40 years of building the team and network. So, depending on who the dealmakers are, you’re not always going to have a variable outcome. If there’s a significant upside to the deal, then you’ll just have to decide whether you can live with that or not.

Q: Why would this syndicate investment be more ideal than buying a property in Australia at this point in time?

• There’s no right or wrong with investing; there’s only a reference to opportunity, cost, goals and preferences.
• So, there’s no question at all that in a good, strong and stable market, Australian real estate will beat most other markets hands down in terms of the return on investment.
• From my viewpoint, when you start as an investor, you have to build capital unless you’ve got some massive inheritance sitting behind you. And there’s no doubt that investing in Australian real estate is a good pathway to converting surplus income into wealth. You’re not going to get the same degree of leverage in any other asset class, including shares.
• So, you need to use Australian property to get yourself going and building capital.
• However, my argument is that the Australian real estate market is terrible for cash flow. So you need to ask yourself whether you’re prepared to wait 30 plus years for your portfolio to be giving you meaningful cash flow that you can live off of.
• You could do that. Or you could get to the point where you have a bit of capital to play with, and you take a small percentage of that and put it into these types of syndication deals and immediately catapult the income side of it.
• So, I’m an advocate of blending the best of both these worlds to get the best result with the least amount of risk in the shortest period of time.
• Unfortunately, in our market, the majority of wealthy professionals are biased towards certain strategies and investment. But if you’re smart and have ambitions to get where you want to go sooner rather than later, you have to consider how to blend the best of everything to get the best result.
• I got into this syndication deal because I have enough capital – more capital isn’t going to change my life. What I need is cash flow. So, I have a small percentage of my portfolio that can 5X my income and the rest of it here in Australia.

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