BiggerPockets Real Estate Podcast - Real Estate Syndications 101: What To Know BEFORE You Invest

Episode Date: December 25, 2024

Want 100% passive income? As in no tenants, toilets, phone calls, or painting! You can get genuinely passive income through one type of investment—real estate syndications. Never heard of them before? You’re about to have your world flipped upside down because today, Jim Pfeifer, host of PassivePockets: The Passive Real Estate Investing Show, is on to walk you through real estate syndications, even if you’re a complete beginner! Joining Jim is a long-time syndication investor and former professional football player (seriously!) Devon Kennard. Before syndications, Devon bought single-family homes during his NFL career, but as his time got increasingly limited, he needed a passive way to invest. The obvious choice? Real estate syndications!  Jim and Devon deliver a masterclass on syndication investing, showing you how much money you’ll need, how to vet a syndication deal BEFORE you invest, the profits you could make, and red flags to watch out for. If passive income is your goal, syndications are for you; here’s everything a beginner needs to know! In This Episode We Cover: Real estate syndications explained and who should (and shouldn’t) invest in them The minimum investment amount for real estate syndications (lower than you’d think!) How to vet a syndicator (general partner) BEFORE you invest in their deal  Why many real estate investors ditch rentals for the passivity of syndications  Preferred returns, equity payouts, and other ways a syndication will make you money What Devon and Jim look for in a syndication before they invest any money  And So Much More! Links from the Show Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Ask Your Question on the BiggerPockets Forums BiggerPockets YouTube PassivePockets: The Passive Real Estate Investing Show Grab Devon’s Book, “Real Estate Side Hustle” Property Manager Finder The Ultimate Guide to Real Estate Syndication Connect with Devon Connect with Jim Connect with Dave Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1061 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey friends, happy holidays from everyone here at Bigger Pockets. I hope it's been a successful year for you and your investing and that you're looking forward to 2025. At Bigger Pockets, as we close out the year, we're republishing some of our favorite episodes from across the Bigger Pockets network on this feed, and today's show comes for our newest podcast, Passive Pockets. You've probably heard me talk a lot about a type of investing called syndications on this show. And I talk about them because I actively invest in them, and I personally think that they can be a great tool for some investors to diversify into different markets or different asset classes they couldn't otherwise access. And Passive Pockets, this new show is devoted almost entirely to syndication investing. And in that episode that we're going to play for you today, it features host Jim Pfeiffer and guest Devon Kinnard, both of whom you've probably heard on this podcast before. but in the episode, they're talking about syndication investing at a basic 101 level.

So if you're looking for passive ways to invest but you don't know where to start, this episode is a great overview. And if you like it and like the idea of investing in syndications, make sure to subscribe to Passive Pockets on YouTube where you can get even more in-depth syndication advice from Jim and his guests. For this show, we'll be back with new Real Estate podcast episodes in the new year. But for now, here's Passive Pockets. Hello, passive investors. If you're interested in real estate but have never considered syndication investing, we've made this episode just for you. We're starting at the beginning. It's the 101 on syndications and who should invest in them.

Hello and welcome to Passive Pocket's the Passive Real Estate Investing Show. I'm your host, Jim Pfeiffer. I'm joined today by Devon Kinnard, who invests in all types of deals but really specializes in passive strategies like syndications. Devon and I are going to explain what syndications are to find some of the terms you'll hear if you start exploring them and talk about the advantages and disadvantages of syndication investing at a high level. If you've never considered investing in a syndication, I think you'll learn a lot from this conversation. If you're an experienced investor, don't fret. There's plenty in this episode for you too, especially a phenomenal tip Devon shares with us about vetting the sponsor. Let's get into it with Devon.

Devon, thanks for joining the show. Let's get a brief history of you. and your investing journey to start out for those who might not have heard you on other Bigger Pockets podcast yet. My name is Devon Kinnard. I retired from the NFL at the beginning of 2023. So 2022 was my last season. So just about two years now. Started investing right after my rookie season in the NFL,

bought my first single family property. Recently published my book that's right behind me, real estate side hustle. But I kind of consider myself a professional passive investor. I, you know, every strategy I've considered investing in, I needed to do it in a passive way because I was busy trying to sack Tom Brady and Aaron Rogers not worried about real estate. So I started out with single family properties and I was buying

turnkey and then that turned into some value add stuff. But I wasn't scaling fast enough. So I started leaning heavily into syndications and I have a large portfolio of syndication investments. And most recently I got into private lending and I own my own private lending company. And I would say those are my three main buckets today. You know, my own personal portfolio of properties, a large section of portfolio of investments in syndications and then the lending. And they all kind of serve different purposes for me. You know, it's just something I've been building up over the last decade. That's awesome. So how did you find syndications? Because in this show, as you know, we're going to be talking about specifically syndications and kind of an introduction, 101 is to say,

about syndications. But how did you find them? I originally got into syndications because I met a financial advisor, which he's not really a, he's more like a consultant. All he did was underwrite syndications across the country like you know he kind of specialized in it so i got connected with him and learning about it and at the time when i was in the NFL a lot of people weren't investing in syndications or funds or anything like that so it kind of sounded untrue to me like oh this is too good to be true you're talking about 15 to 20 percent irrs and all this stuff but the more i kept learning about it the more it made sense to me and seemed like a better alternative than what i was doing and the exposure I knew a lot of my teammates were having in the stock market and then what I was trying to do

in single family properties. You know, I related to playing football. You know, if I showed you my playbook, it'll look like hieroglyphics to a lot of people. And that's how syndications could look. You hear terms like PPMs and subscription agreements and IR and cap rate. All you got to do is learn the basic terminologies. And then the game starts to slow down a little bit. And you start to be like, okay, I can, you know, I can wrap my head around what this is. And, you know, I hope we can help people with that today. That's a great way to frame it. So let's dig in, right? So you mentioned a fund and you mentioned syndication. Can you explain what those terms are? Yeah. So a syndication is essentially, it could be an individual or a group of people. So let's say, for example, case, it's me and you.

We're the general partners. And all that means is we're the people doing the work. We're finding the deal, raising the capital. We're deciding what the budget's going to be. We're putting the loan in our name or our company name. So we're really running the deal. But the deal is too large for us. to handle by ourselves. So we go to a lawyer and we create a syndication and get all the documents and we could get into the documents if you want. There's a couple of different documents you have to have. And then we go to investors, typically accredited investors and say, hey, look, we're investing in multifamily. This deal is 100 units and me and Jim can't afford to buy this deal by ourselves. So we're raising capital from people like yourself. Do you want to invest in this deal? When they say yes,

that's essentially locking into that they are the limited partners and we are the general partners and we control everything with the deal and the limited partners underwrite us so they look at us and say okay do i believe in devon and jim they look at the deal do i believe in the deal in the projections they're making and their plan and their business plan for it and if they do they they invest and we're kind of off and running so that's kind of the basics of what a syndication is And a fund is similar, but a little different in that we would be coming to them almost like a theory or an idea of the type of properties. Like, hey, we're going to buy 100 unit apartment complexes. I'm in Arizona.

So let's say in the Phoenix Arizona market, we want 90s built. And we're going to kind of have our like box of what we're telling them we're going to buy. But we don't have any properties yet. So as the limited partners in this case, don't really have the opportunity to invest the individual deal. So investing us in our buy box essentially is really important because then we raise that money and we can go and find two or three different 100 unit apartment complexes. So there's pluses and minuses. Some people like funds because it allows you to diversify a little bit between multiple

properties. Some people like syndications because they really get to underwrite that one deal and the investment is for that one property. So there's give or take from both, but they're similar with that little kind of difference. Okay. And you mentioned accredited investors. So I just want to pause real quick and say, an accredited investor is someone that, you know, makes $200,000 if they're filing single or $300,000 filing jointly or has a million

in assets outside of their, the home that they live in. And you mentioned most of these are targeted towards accredited. And that is completely true. The non-accredited have to work a lot harder to find deals and find deals that they can invest in because we're not going to get into the weeds on this, but there's deals that accredited investors can invest in, and there's deals that accredited and non-accredited can invest in. So you can be either, but it's a lot easier if you're accredited. You also mentioned documents.

So can you tell us just the basics? What documents are we looking at in a typical syndication, or should we look at? You can correct me if I'm wrong, but the three main documents I usually get as an LP is the operating agreement. So in the example where if me and you were the GPs, we would be creating an operating agreement with the lawyer, kind of outlining who's responsibility. what, how stuff's going to be divided between GPs and LPs, all of that kind of stuff. So there's the operating agreement, the subscription agreement, and then the private placement memorandum. So those are like kind of the three main documents that you're going to see. And then there's decks and pro formas and there's other information you can get.

But, you know, expect those three documents and really grow to understand and get comfortable in reviewing those documents. Yeah, absolutely. It's super important. And just for a little context, the operating agreement, this is an LLC. as Devon said, there's GPs and LPs, but we are all members of the LLC, which is a limited liability company, which is an actual company. So you are going into business. If you're an LP investing, you're going into business with these GPs. And Devon's going to talk a little

bit later about how to vet the operators, but we just want to make sure everyone understands. That's why you review all these documents, right? You're going into business with somebody. Absolutely. So let's talk about main advantages of investing in this syndication. You talked about, you know, you had some single family homes. You're maybe doing some. turnkey stuff and then you found syndications. What are the advantages? Why did you decide to invest in syndications rather than some of the other real estate opportunities? It's much easier to scale. So, you know, when I started buying off single family homes, I wanted to grow a portfolio large enough to reach some of the goals that I had. It was challenging to get there when I was so busy buying my own

properties. So syndications allows you to scale a lot faster in investments and reach certain financial, you know, goals you may have. And then the passivity level to where, Most of the work if you're investing in syndications is up front. You have to underwrite the operator, underwrite the deal, look at those three documents we just went over. Once you do that, it's pretty much just rinse and repeat in the sense of you're going to get monthly, quarterly, annually, depending on how, you know, the GPs give out information, but you review their statements and the reports that they give out. And that's really all you have to do. That passivity and then allowing you to scale is a big thing. And then the diversification. So, all right,

I started out buying single family homes in the Midwest. When I first started investing, I didn't necessarily want to buy in Arizona because I thought it was too expensive or New York or whatever. Well, if I'm not doing that myself, I can invest in a syndication that invest in those areas. There's single family syndications, multifamily office building. So there's all kinds of time. So you get to diversify an asset class and location. That's hard to do on your own. So I think that diversification piece is a big one. And then although you're doing this, you still get a lot of the benefits of buying a property on your own. You get to participate in depreciation and all of those type of things. You get K-1s that will show losses a lot of the times if the GPs are structuring

it that way. So yeah, there's a lot of advantages to investing in a syndication because of that. Yeah, that's well said. I think the diversification is one of the big ones like you. You know, I started in just buying my own properties, but then you're kind of committed to a local area and you're committed to residential, most likely, right? And you're committed to one operator, which is yourself. The way I look at it and a lot of when we talk in passive pockets is, you know, we're talking about diversifying by asset classes, you mentioned, because there's a lot of different asset classes by market and then also by operator. So you have different operators. And also by strategy. There's a lot of different ways to diversify. And it's a lot tougher to do

that, I think, when you're managing it yourself. And you also mentioned tax benefits. I don't know what your experience is, but my experience was there's, we don't want to get in the weeds too much on this episode, but there's a thing called cost segregation, which allows you to get something called bonus depreciation, which gives you more depreciation up front so you can use it faster. And it's a lot easier to do that through a syndication than a single family home. So my tax part of this, the tax benefits that I had were probably better in this syndication investing than in my single family and other investing. And as I always say, the taxes are probably the biggest eroder of your wealth.

So did you find that as well as far as the tax? situation was, were you getting better tax benefits and syndications than you were on your own stuff? Oh, yeah, absolutely. And it was kind of easier. You didn't have to go through a cost seg on your own and, you know, do all this stuff. You know, you're really just getting your K1 documents and getting on the same page with your accountant. So I feel like that's a huge, huge plus for sure. Yeah, and you mentioned a K1. And again, I'm trying to make this really basic. So I'm just going to say K1 is a tax document that you receive from an LLC when you invest in it come April 15th, hopefully by March 15th, actually, they send you a document that's a K-1. And that basically just shows you how much

you've invested with how much depreciation there is. So how much paper loss you can take and then how much money you made distributions or otherwise on the property. Devon, I don't know how you do it, but I just review it and then I toss it off to my accountant. Absolutely. And, you know, I kind of dumb it down with the K-1s too. Like almost any investment or if you're at your W-2 job, whatever, there's some kind of documents that you have to give to your accountant based on your salary or the investment. So the K-1 is just a document for the syndications. Like if you invest in a syndication or fund, you're going to get a K-1. That's the document you need to kind of track your investment accounting-wise. So sometimes people get overwhelmed because they haven't heard of that.

And it's like, oh, what's this new tax document? And it's, you know, it's no different than anything else you have to do for any other aspect when it comes to generating income or investments. but you'll get used to and comfortable with that as well. Yes, and so will you're accounted. So we're talking about syndication investing. Who might this strategy be appealing to? I think there's a few different types of people who get into this. I don't think, you know, it's super appealing to somebody, you know, young person who's

just getting their start and doesn't have any capital, right? But who is it appealing to? I think it's appealing to anyone with capital to invest that wants to make additional income passively and want some tax benefits. because there's a lot of different. There's syndications you can get into that are more cash flow heavy. There's syndications you can get to that hopefully are going to have 5x within, you know, five or 10 years. Like there's different strategies. So I think they can, you know, really appeal to just about anyone besides the person probably just starting out because you're essentially going to

invest your money. And in the most case, what I've seen is most syndications are anywhere from three to seven years. So let's say an average of five years. And, if you're trying to build wealth, that's a long time to just have money gone, not making anything on. But if you're someone who has some money that they can invest and, you know, reap the benefits along the way, but don't need that money back anytime soon, like I think a lot of different people fit in that category and there's great benefits there. When I look at it, I think there's a few different markets or types of people. There's people like you, right? You were a high wage earner who have cash and need to deploy it.

And also, you probably didn't have a whole lot of time when you were in the NFL. to do all this work to be an active investor. So passive was a great strategy. It's also for, you know, people who have maybe done the single family thing and bought 20, 30 properties and now they really like the real estate. But man, they don't like all the tenants and all the things you have to deal with as an owner of a property. So maybe they go on and become a passive investor. And I think there's some that might only have a couple of properties, but are building wealth and are like, wait a second, maybe I can do a little bit of both. So I think there's a lot of different types of people, this is for. And the thing I would like to communicate is it helps to have a lot of

capital, but you don't have to be wealthy. This is a great way to build wealth. And there are ways to get in it smaller dollar amounts, group investing and other things. But it is targeted to people who have capital, like you said, Devon. It's time for a break. And then we'll be back with more from Devon Conard on the Passive Pockets podcast. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand-new construction homes, 10% below market value,

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Right. Every investment strategy or type of investment has advantages, hopefully, but they all certainly have some disadvantages. So it's not always the right fit for every investor, but what are some downsides you see to syndication investing? I would say a couple. Number one is the illiquidity. So typically, you know, it's going to be like pulling teeth if you want to get your money out earlier. Some general partners or syndicators might let you out. But for the most part, when you invest, you got to assume that your money is going to be locked up until it is returned. They sell the property, refinance, what have you. So you're kind of stuck. It's locked up. Another disadvantage is that just you have to really trust the operator in their business model

and their decision making as things start to evolve and change. You have very little to no control over any decisions. So if you make the wrong decision, your money's locked up and you're just kind of sitting and waiting and hoping that they, you know, know how to solve problems and can make the deal profitable. So those are the two that stick out the most and can be detrimental is if you put $200,000 in and something happens in your life and you need that money back, you can't assume you're just going to be able to get it back. Now, if they're successful enough, they might let you out, you know, replace you

with another investor, but they by no means and any of the ones I'm in at least are guaranteeing that they will do that. And that's one of the things that it took me a while to figure out. Like I knew they were ill liquid, but I didn't really realize they were ill until I put, you know, a lot of capital in, and then the market changed, right? So deals weren't turning over because it was. You said average of five years, which is true. In the good times a few years ago, it was really more like three years, sometimes 18 months.

And so I was just assuming that would go on forever. And then I realized when the market changed, I had a bunch of capital tied up. And if I wanted to do anything, I didn't have any liquid capital. So that's something to think about. And I do want to add one more disadvantage or something to think about, I guess, less a disadvantage. And that's the K-1. We talked about it earlier. I don't know about you, Devon, but my last K-1 came in October, which was very disappointing. And I would tell people, if you're going to invest this way, it is likely that you might have to extend your tax returns and not file on April 15th, which doesn't cost you anything, and that's okay. But, you know, waiting until October, the last deadline's October 15th, that gets a little bit crazy. So when did you get your last K-1? I'm in the same boat. I probably got it at the very end of September. And I'm to the point. I have. I have over 40 syndication investments and I'm to the point where I feel like I'm filing taxes year

round because I just officially filed like we filed on October 15th for all of my stuff. I have a meeting with my accountants next month to talk about this year, 2024. So it's like, you know, you almost don't get a break. So I would say that's a disadvantage to where, you know, most people are like, oh, I can't wait until you from 15th, get this over with. Don't think about it for a while. I'm low-key thinking about taxes and accounting and filing and all that year round. So that's definitely a disadvantage. Okay. So all of this sounds pretty good, right? This syndication investing, even though we just went over the disadvantages, they're not anything that stops me. So when you're thinking about finding the syndication to invest in, what steps should you take? Talk about maybe the roles of the GPs and LPs to

start. And then we'll dig in after that. Understanding the roles of the GPs and the LPs and that the GPs are controlling the deal and what their responsibility is, how often they're going to be communicating with you. But it really comes down to being able to underwrite the GPs. Do you believe in their ability to execute their plan? Do you believe in their plan? Do you believe in their underwriting? And then does the actual deal make sense? And that's the magic sauce essentially because that's all you can control. Once you send them your money, you're pretty much stuck. So it's like all of your work has to be up front in understanding the GPs, their business model and their plan, and then the deal. Unfortunately, a lot of people are, you know, I say the tide's going back and you're starting

to see who's naked when it comes to general partners because over the last 10 years, you know, you could throw a dart at the wall and people are hitting in the sense of they're making money, they're looking good, they're looking like the smartest people in the world. But now over the last year, to that's starting to not be the case because interest rates and cap rate compression, which is pretty much. just like they were predicting that cap rates were going to go down and things were just going to be going great and it didn't play out that way so deals aren't working out. So now there's a lot of general partners who are in positions where they're asking their investors for more money. And this

isn't to scare any of the listeners, but there's a real side of this to where making sure you invest into the right deals with the right general partners, that's a really important component and something that I'm glad everyone listening has passive pockets now because when I was first taught this, I was starting to get pitched syndications. And if I didn't have a mentor and a consultant that was helping me understand how he was evaluating the deals, you know, when you look at those documents we discussed and the pro forma's and the underwriting, they make it look pretty. Like, they're hiring some top level people to put these presentations together to where you think you're about to make a million bucks and you're going to be the richest person in the world. So you have to kind of

to look behind the curtain and see what's really going on. Thanks for mentioning passive pockets because I think the number one thing that you need as a passive investor is a community. And again, I'm biased. I think passive pockets is the best community. But if it's not passive pockets, find another one because it's conversations with other LPs like Devon that really help you learn a lot. And then I also want to back up.

You mentioned cap rates. And this is one of the most confusing things to me and many investors. But when cap rates go down, right, that means values are going up. So if you're an owner of a property and you want to sell it, cap rates going down sounds like a bad thing, but it's actually a good thing for the seller. So just something to think about. And then you also mentioned you got to vet the operator. And we had a great session in Cancun at BPCon where you and I and Chris Lopez kind of talked about the things we most look in in an operator when we're trying to vet them.

So can you talk about some of the vetting you do for an operator? What questions you might ask and then what are the things that are most important to you? One thing I like looking out for right off the bat is I want to know what their track record is. You know, if they've only been in the game for a couple of years, if they're new, if they haven't had any deals fully mature yet, if every deal they've done has just been a home run because it's been in the last couple of years. That doesn't mean I won't invest, but that's cause for hesitation for me because how is that going to actually play out?

Have they gone through adversity? Have they navigated, you know, interest rates going up? How are they going to exit now that interest rates did go up and they were up for so long? and, you know, now they're starting to go down, but they're still higher than what they expected. So I'm really kind of paying attention to that and how that their current deals are going. So now if they're raising funds for their next syndication, well, how are the deals you have outstanding going? How are they performing? How have you performed over the last 10, 15, 20 years? I would love to see a general partner that's been in the game 20 to 30 years.

He's been to a multifamily in the Midwest for 20 years. He's navigated that space for a while. Things aren't great. He's acknowledging. that with his most recent stuff, but the sky isn't falling. They're going to get through it. That's the conversations that I'm loving right now and not the other way around to where, oh, they've been in business for five to ten years. They've had a couple of great exits, but the deals right now aren't going too well, but they're really confident in this next deal. So right off the bat, track record, but I had to kind of dive into track record a little bit because before you could just be like, what have they done the last couple years? And you got to kind of really dig a little

deeper now in that track record. How long have they really been doing it? What have their exits look like? And how are their current portfolio doing? So, you know, I would start there. And you mentioned track record. And this is something I've been going back and forth with because you have experience and you have track record. And you said it, you know, before a couple of years ago, everything just went up. So track records for everybody were great. And the experience didn't really matter because track records were fantastic. So now when I look at it, anybody that we're investing with now, that's been at least, you know, operating for the last couple of years, they have a track record through tough times. So is it going to be easier to vet operators now because they've been through

a tough time and you can see how they did? Or because they've been through this tough time, does that, does that mean that it's just easier to just say, no, no, no, I'm not going to invest with them. Have you thought about that at all? I think it's going to make it easier in the sense of I'm going to put a lot of honus on how they're handling the current market and how their portfolio is managing right now. Some of the best GPs that I know, you know, they weren't buying some deals

the last couple of years because they saw some of this coming or they were being overly conservative. So they're like licking their chops right now because they think more and more opportunities are going to be coming up because of distress situations from other general partners.

So when I'm hearing conversations like that and seeing a portfolio of, in track record from a GP, that is encouraging. And that's something that I'm going to consider. So I think that's a good. thing because now this troubling time, what happened for you between 2021 and 2024? Did you have any deals outstanding? What did that go like? What did that process? I'm going to be focused on that

because I want to know, did you prepare at all? And everyone was blindsided to a degree because interest rates went up. But at the end of the day, there's some people who are still in business and their deals are okay. And it's not as great as they thought, but they're okay. And they're going to, you know, we're going to get through this and we're excited. And there's some people who are holding on for dear life right now or they're kicking the can down the road, but they're going to lose all the investors money one way or another. Quite frankly, those are the deals I won't be investing in and the general partners I won't be working with in the future. And you mentioned, you know, getting through this time, one of the things that's most important to me when I vet an operator,

and all of these things are important, right? But communication. So I want to know how do you communicate once a deal is in place, right? And especially through the the downtimes. I want to know about things that are going poorly before they happen as they're happening, not right before you issue a capital call or something like that. So for me, communication is one of the most important things. And we talked about this when we did our session at BPCon. And, you know, we each had different things that were important to us. But when you're talking or Chris was talking, I was nodding my head the whole time. Like, yep, those are things that I look at too. So it's important to have a comprehensive idea of how to vet an operator. And that's one of the things, again,

mention it, but a community like passive pockets really helps with that. I'm a firm believer in list. So let's go down. We got track record. We got communication. But another one that's really important to me and that I like to look at is the team that you have in place. I love seeing a general partner who has a contractor, whether it's in-house, maybe they have their own contracting team or a third party that they've done the last six deals with. That is a lot better. And that's like goal to me in comparison to the general partner who's taking on a new contractor because the other contractors on another job with them. And so the deal that they're preaching to me is going to be a new contractor. I think limited partners forget this aspect that this is a real estate transaction. Real

work is being done. The team they have in place. So I'm always asking about their contractors, their property managers, the law team they have in place. Because if they've been in business and have a solid track record and they're using the same team that they typically use, that is encouraging to me. because it's like, all right, this deal is almost rinse and repeat. Same group you're used to, as opposed to a new contractor, are they going to stay on budget? Are they ethical? Are they going to stay on time? So you're adding in a factor.

And then on top of that with that relationship, I've also seen a lot of general partners who change lanes. And what I mean by changing lanes is if your thing has been multifamily properties, apartment buildings in the Midwest for the last 20 years, and all of a sudden you're doing industrial, you might be an extremely intelligent person and maybe you're going to kick butt in industrial, but at the end of the day, those are apples and oranges. It's a different asset class. It's a different investment. Maybe you're seeing great opportunity there, but I want to see you succeed in that for a while. So I think people kind of get convoluted by that.

Like, oh, he has 20 years of experience. No, does he have 20 years of experience in industrial doing what he's actually doing on that deal? And with that, the volume of deals. So because the last 10 years, it was good to be a general partner. There was some taking on multiple projects at once and taking down a lot, which they were using higher leverage than they should because they were doing multiple deals. And their attention is kind of spread out because they have three or four projects at once because they just think it's a great time to invest. Now that's troublesome. So, you know, those are some other things to break them down.

You got track record, communication, you have your team in place. and then are they changing lanes or staying in their lanes? So, you know, for those listening, write those four or five things down because that's things you could kind of just check off your list. And that's literally what I've kind of done with my checklist. That is great stuff. I wouldn't just write that stuff down. I would rewind and listen to that a couple of times because you nailed it, you know. And one of the things you mentioned the contractor or all the contractors, right, making sure or asking are they ones you've used before? I think that's just a great piece of advice because it really does tell you, okay, are they stable? Can they move forward? One thing we haven't

mentioned yet is skin in the game. It's nice to have the operator have some money in the deal, hopefully more than the fees they're collecting so they're interested in it. One other thing that I like is, you know, we talked about this. You are being part of their business, right? You are business partners. You're a limited partner and they're a general partner, but you're still a partner. And so one of things that's important to me, not only communication, but I want to like the person or at least not dislike them because you want to be able to have conversations as the deal goes through. You might be in business with them for seven or ten years if it goes long. So you want to be in business with people you like. So that's another one that's important to me. But again, I think this is a great

place to stop and rewind and just listen to some of the stuff Devon said because it was pure gold. So thank you for that. We have to pause for one final break. And then Devon and I are going to break down what to expect once you've decided to invest in a syndication. People love to call real estate passive income, which is interesting because most of the investors I know, are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases,

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amounts and maybe just some asset classes that you're invested. Because we talk a lot about multifamily, but there's other stuff out there too. I would say for the most part, I see a lot of deals that have a 50K minimum. Some will go lower, but I've found that to be kind of majority of the time, the minimum and a lot of the deals I'm in. Some are higher. You know, some might be a smaller deal and they have a good pool of investors that repeat with them a lot.

And I've seen some as high as like 100, 200. But I like the lower minimum. them. I've gotten into so many because I spread it out instead of like hyper focusing on one. And my mindset is a lot as the deals I'm in go full cycle, I'm going to kind of start to cherry pick the operators who communicated great, who pretty much met and exceeded that checklist we just went through. And it's like, you know what? I'm going to kind of double down on the top five percent and invest in more of their deals. So that's kind of my perspective and how I'm going to be approaching that moving forward for sure. And then what was your second question? Just asset classes you've invested in,

some examples other than multi-family. So multi-family is a big one, but I've varied. I've done some hotels in the Midwest. I've done some industrial. I've done some medical buildings. So I've found that medical buildings are very resilient and their tenants usually pay like a dentist, for instance. They don't want to move. They move in and they're consistent and resilience. So I've done some medical buildings in different markets, senior living centers. So I would say over the years I've kind of like hit a lot of different buckets. I just like finding experts in their little niches. And then when I could hear them kind of geek out about their niche and see their track record and going through the checklist, that excites me. There's just a ton of asset classes out there. You know, we have car washes,

RV parks, self-storage, mobile home parks, and all the ones that, that you mentioned. And there's also one I really like is triple net leases on commercial buildings, like a wall greens or an LA fitness, those kind of things, because those are just a lot of times just cash machines. But you can basically syndicate anything. And so one of the things that's hard for me is someone comes up with a new asset class that they've syndicated. And I have a hard time not chasing the shiny object. And so I try to learn patience. So that's just a personal thing. A lot of us are chasing shiny objects. So one thing I do for that is, you know, I put 95% of my stuff in the boring things that aren't interesting to anybody. And then I take about 5% and I go do something fun just so I have a little bit more

interest in it. Is that kind of your strategy as well? Yeah. There's a there's a there's always ones that, you know, are a little funner you think or you're optimistic on or what have you. But the boring stuff works. I'm a firm believer in that. Yeah, boring is good. Okay, so we've vetted the operator now. We've analyzed the deal. You figure out, hey, I have enough cash to invest in this syndication. What happens next? What type of communication should you expect? Are you going to get distributions? Talk about the process after you send the wire. If you've sent the wire, then you've obviously signed all the documents. You've came into agreement. You sent the wire. So from there, you should already have an idea of what their communication is going to be. Are they sending out

updates monthly, quarterly? Are you getting paid quarterly? So I would say the general standard of a syndication is a 70-30 split. So that means 70 to the LPs, 30% to the general partners. So LPs are getting 70% of that. And then an 8% preff is what I would say, industry standard. You've got to get an idea of if that's getting paid out kind of immediately or how soon or if that's on the back end. So some deals are cash flowing well enough to where in the near future, if not immediate, they're going to start paying out the preferred return of 8%. And they'll probably pay it out quarterly. That's what I've seen to be most common, unless it's a private debt fund and pays out more often. But most of the time, it's quarterly. So you should get a statement and then see that hit your

account. But some deals are large value add. They want to keep the capital. They don't want to disperse it. So you still got your 8% preferred return, but they're not going to pay it off till later. So there's some LPs who are new in the game who don't understand that aspect. And it's really important to understand if you're going to start to see cash flow and how soon or if it's going to be all in the back end. And you should already know that as well. And one of the most powerful things you said there is I asked you what type of communication should you expect to receive. And your answer was you should already know. And that's true.

That's part of the vetting process. That's why you should ask the operator, hey, send me some standards. documents. Do you send these out monthly? Do you send these out quarterly? Test them. Ask them these questions. So that was awesome. If an investment isn't performing as expected, are there some red flags that kind of indicate to you, hey, this might not be going? And if so, what can you do? First red flag. Well, one, hopefully they're a really good general partner and they're communicating all along to where if their reports are honest and true, it's not sudden because if cash is depleting, they should be reporting that in the monthly or quarterly statements or if there's an issue that came out of the blue,

they should be reporting that. So that's one. If they're really good at communicating, then there should be no surprises. But unfortunately, I've been in a situation where there was like all the reports seemed clean. Like, oh, you know, pretty much. And then out of nowhere, it's like capital call, which means they ran out of money. And if we want to keep this deal, they need more money from me. And it was out of the blue. I mean, the biggest red flag is when they're all of a sudden asking for money out of the blue, that means stuff's been going on behind the scenes that they haven't been communicating and it's gotten so bad that they've had no option but to immediately demand money from you. So things have gotten pretty bad if it gets to that point out of the blue. But hopefully they've been communicating and it's been leading up to that. I would say if it's an unethical general partner, if their

communication starts to lapse, the send out reports every month and all of a sudden you didn't get a report or every quarter and you didn't get a report. Unfortunately, from my perspective, Like, if you're just kind of turning along, there's not a whole lot else you can know. Be mindful of if the reports are coming when they're supposed to reading those reports, but you're not expected to call them every month. So if they're not being transparent, that's, I guess, one of the disadvantages is like, it can be sudden if they're not being transparent. Again, I hate to keep pounding on the same drum, but that's, if you're in a community, right,

you can share with others and talk to them and find out, hey, what's going on? And because other people have different information, it just helps, helps you feel better about, There isn't much you can do if an asset isn't performing, but everyone can talk to each other and say, okay, hey, what should we do? What questions can we ask? How can we put pressure on the operator? So there are some things you can do. I want to end this on a good note, not a bad note.

So let's talk about the exit. Let's say a syndication, they go sell it and they're making a bunch of money. And we mentioned preferred returns. So can you explain, you get your capital back and then you get the gains, you set a 70, 30 split. But can you also explain? the preferred return and how because you said in some deals they don't pay that out quarterly they pay it out at the end so that's a lot in there but can you kind of explain that process i'll go through a deal that i've done that went well and went kind of as it was supposed to so it was a deal where they actually

paid out the preferred return as they went so let's just say it was a hundred thousand dollars invested that means every year for five years i got eight thousand dollars two thousand dollars every quarter from that deal at the five year mark they didn't sell they refinanced but the value went up enough to where I got all of my capital back, but I was still in the deal for the same value. So all of a sudden, I got my capital back. I got $8,000 over five years. That's $40,000. I had to do the math in my head real quick. So I got $40,000 my capital back, but I'm still invested in the deal. You know, once they sold, I got another big pop. You know, that was really nice to be able to see, okay, they executed. I invested $100,000, got $40K over a five year period. And then at the exit, I got

another 50k, you know, or something like that. So that's an example of what that can look like and why when you're with a good GP, why that's beneficial. You know, so I'm in a deal for seven years and let's call it, I receive almost double my money in that time period and I had the tax benefits and I got my money back after five. Like there's a lot of positives in that kind of deal. Yeah, absolutely. And I'm going to try to do math on the fly here, but let's say, just to explain preferred return a little bit, let's say that they hadn't paid you that $8,000. that 8% every year, but they'd said 8% preferred return. Let's say they'd paid you $2,000 a year.

So then at the capital event, they would have paid you 2%. So that's 2% for five years, let's say, $10,000, right? But they owed you 40. So at that capital event, they have to catch you up. So they're going to pay you another $30,000 as the preferred return. Then you're going to get your capital back. So you still end up with that $140. You just didn't get it all along the way.

Is that accurate? Yeah, yeah. And that's a very realistic way it can play out too. Sometimes it's up front. Sometimes they hit some issues so they suspend distribution. And that doesn't necessarily mean your money is not going to be there. It's just, you know, we want to stock up on cash reserves. We're not going to do a capital call, but we need some extra cash. You're still going to get your preferred return, but it's going to be on the back end. So that's a normal structure as well. This has been fantastic. So much great information from you, Devon. What's the last word? What is something else you'd like to say to someone who's thinking, yeah, I've heard about these syndication things. Maybe I'll jump in. Do you have any,

like, last piece of advice for somebody? I'm truly not saying this because I'm talking to you and you ran left fields and now passive pockets, but getting around investors who are investing and shooting them the deal. They'll review it openly for the most part because it might be something they want to invest in or, you know, they're passionate about other LPs not getting into bad deals. So they'll tell you what they look for. And I highly, highly recommend everybody, interested in becoming an LP to start to build out your own checklist of things to look for on the GP, things to look for a deal, red flags in general. Like, you know, I have a one or two page sheet of just like notes of stuff to consider with any deal. So I have that. And I also like to

shoot it to other investors that I know are LPs, are someone I know who's very experienced. And you start to really understand what a good deal versus bad deal looks like. And all of a sudden, it becomes even more passive because you have this checklist that you've created and a couple of investors that you send stuff to to where you can kind of underwrite a deal in a couple of hours, to be honest, for the most part, you're going to have to dive in a little deeper on some of the numbers, but you can get pretty close to a final decision pretty quickly, and especially with the community like passive pockets leaning on other investors to help you. Yeah, well said. And lastly, you mentioned you have a new book out. So if you can give us just a quick idea of what the book's

about and how they can get it, maybe how people get in touch with you if you're available. Yeah, so my book is Real Estate Side Hustle. That's the cover right on the other side of me there. And it's essentially how busy professionals can invest in real estate passively. And I go over single family investing. I talk about turnkey. I talk about syndications. I talk about private lending and then triple net leases and how you can get into that because on the commercial side, that's a great way. So those are the four vehicles that I think is really effective for anyone interested in passively investing, but there's nothing more passive than syndication. Syndications is kind of the gold standard on the passive side, but I like to kind of give a broad spectrum of the

four different vehicles because some people might want to dabble in one or the other or maybe multiple. So for me, I have an experience in all four, and I put a lot of time and energy into building this out because I didn't find any other books that were really talking about, the busy professional. Talked a lot about having that checklist for syndications. I look at all my investing that way to where I can streamline it and make it passive because I know what I'm looking for. I have a buy box or a checklist that I base every decision off of. So I recommend people go check that out. It'll be a good jumpstart into passive investing. All these listeners will love the syndication chapters.

Absolutely. And you can get that book at biggerpockets.com slash side hustle. So Devon, again, thank you so much for coming on and sharing your wisdom. We appreciate you. Thanks for having me, Jim. Appreciate you. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer.

The show is produced by Ian K, copywriting is by Calicokech, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.w.w.w.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose.

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