March 1, 2022
My name is Perry Zheng and I am the founder and CEO of Cash Flow Portal. I created Cash Flow Portal to help people achieve financial freedom through real estate investing.
A bit about me: I started my real estate investing journey about 7 years ago, when I bought a condo in San Francisco while working as a software engineer. I then bought seven house-hacking single families in the Bay Area and Seattle over the next few years. Having maxed out my single family quota, I went into multifamily. I syndicated my first multifamily deal in 2019, a 172-unit apartment complex in Dallas, TX. That deal is now being sold and will generate 100%+ return for investors in 2.5 years. Now I have syndicated a total of 850 units and have been a passive investor in more than 3,000 units.
Out of all forms of real estate investing, I truly believe real estate syndication is the most accessible, easiest to start, and has the highest upside for those getting started.
Real estate syndication is the process of pooling money together to buy a larger real estate project than a single individual can buy on their own. It consists of two groups — one group is the general partners or syndicators or sponsors, who do all the work. The other group is the limited partners or passive investors, who simply invest money and enjoy the upside.
The heart of real estate syndication is the quality of the syndicators. The competence, passion, and integrity of the syndicators determine the success of the deal. A great syndicator can turn a mediocre deal into a good one, and a good deal into a spectacular one. Real estate is not a creative industry — the jockey is 100x more important than the horse. So then how do you find the best jockeys in the real estate syndication industry?
For the rest of this article, I’ll explain the barriers of real estate syndication, what the benefits are, how they are different, and why it is important.
This is probably the biggest barrier. You haven’t heard of real estate syndication mostly because 95% of them are done through 506(b) offerings. Under SEC regulation 506(b), the investor must have a pre-existing substantive relationship with the syndicator. That’s why it’s often referred to as a “friends and family raise.” These days, investors meet syndicators through conferences, mentorship groups, and their local meet-ups, where they develop such relationships. 506(b) only started in 2013, and wasn’t recognized by the SEC until 2015 – it is only a 7 year-old industry.
One note — to invest in real estate syndication, we assume you are relatively well off. If you are investing $50K, it should not be the last $50K you have saved. All real estate syndication investors we know are relatively well educated and have additional money to invest.
Every industry has its own language, and real estate syndication is no different. It does take some time to familiarize yourself with the jargon syndicators use. I would say it takes about 30 minutes to learn the basics and 2 hours to learn the advanced stuff.
Consider this: 56% of the US population invests in stocks — but what percentage of them know what EBITDA is and how it relates to the share price? I would say less than 1%. I would venture to say that you have more transparency investing in a real estate syndication than investing in stocks.
In that respect, spending 2 hours learning the jargon of real estate syndication is time well spent – it will build tremendous financial literacy for the rest of your life.
The last barrier is the amount of work. Here comes the caveat: in order to meet syndicators, passive investors need to put in time networking, learning, and evaluating.
If that sounds like too much work for passive investors, consider the alternative: it is an equal if not greater amount of work to find, network, and make offers on residential properties across the US — not to mention the hassle of managing and maintaining the properties yourself.
Finally, my meta point is this: returns are directly proportional to the amount of work one puts in. Real estate syndication simply shifts the work from maintenance to evaluation, and it has the highest return for your time per unit time spent.
The difference is that once you invest in a syndicator’s deal, there is nothing required of you afterwards — so you do the work upfront, and there is no maintenance after that.
In the same way that not everyone can start Tesla or Apple, not everyone can run a large company. It takes certain economies of scale to save on costs, operations, and personnel. Real estate syndicators take all the management and ongoing operations of the real estate projects off your hands, so you do not need to make daily operating decisions. The decision you make is purely business oriented, and that is selecting the best jockeys to perform these tasks.
Real estate is highly local and fragmented. I have always wanted to invest in an Airbnb in Austin, but I do not have the resources, time, or network to know what property to buy, let alone find an Airbnb operator to manage it.
You could argue that real estate firms can take that task. However, I would not trust a real estate firm in New York City to think they understand much about the Austin market. It takes an Austin operator to fully understand the nuances of that market.
Individual real estate syndication compares to REITs (real estate investment trusts) as hedge funds compare to mutual funds – syndicated deals tend to have lower fees and less bureaucracy, and generally higher returns, than REITs. Another advantage of syndication is that returns are not correlated to the stock market. Because REITs are publicly traded, they are highly correlated with the overall market, and can experience large drops in value — even when the value of the properties they own has remained steady or increased.
It may be an understatement to say syndications produce higher than average returns, because in my experience I have seen spectacular returns. For example, I invested $50K in a real estate syndication deal in Minneapolis. They raised $500K for a 48-unit apartment complex. 3 years later my $50K turned into $150K – 3x what I put in. The amount of time I spent in those 3 years: less than 2 hours reading their monthly emails / checking my bank statements.
I made that investment because I saw something in the sponsors, Dan Brisse and Mike Roeder. They are articulate, passionate, and just plain go-getters. I wish there was more money in the universe that could belong to them so they could put it to good use.
Most of my friends are highly successful tech workers in Seattle and the Bay Area. They save up $200K to buy a $800K rental property in Seattle. I can almost guarantee that $200K will have a better return on investment elsewhere with a good operator. People only buy in Seattle and the Bay Area because they are safe markets and it’s really, really difficult to develop expertise in other markets.
Real estate syndication is commoditizing and democratizing real estate investing. Why not let the people who are passionate about it do all the work, while you enjoy spending time with family and doing the things you are good at? Let the best capital allocators do the work, and you enjoy the benefits. It shifts the attention from doing all the work yourself, to finding the best allocators who can do work on your behalf.
How is this different from large real estate firms? Large real estate firms make money mostly from raising a lot of capital, and they are generally bureaucratic organizations. They are like the McDonalds of the world. It is a well oiled machine, and the returns are stabilized and relatively low. Real estate syndications, on the other hand, are like boutique restaurants, that could have way tastier menu options and have a story behind it. True, it may not have the consistency of McDonalds, and you have to put in some effort to find it.
What I can say is for every large real estate firm you can think of, I can name 10 syndicators who specialize in their own local markets, work hard to find great deals, attend conferences, constantly learn, and perfect their craft to get the best returns possible for their passive investors. I am one of them and I know hundreds of people like them.
That’s why we created Cash Flow Portal. It provides access to people who want to know the best operators in the markets they want to invest in. Access is something technology can unlock, which is why we created a marketplace for investors like you to meet sponsors all across the US.
Happy to chat as well! In typical fashion, the best way to get in touch with me is to add me here. 🙂