Since March is International Women’s Month, I wanted to highlight a few remarkable women in the field of real estate, mortgage, and investing...
I recently had the privilege of working with one such woman, Vanessa Peters, MD. A physician by trade, Dr. Vanessa, or Dr. V as she is known by clients, patients, and friends, had a problem early in her career that’s common to many of us. She was making good money but on the familiar hamster wheel of working tirelessly, amassing debt, and keeping up with the Jones’, all for the theoretical goal of retiring decades down the road when she could finally enjoy it.
But when the housing market crashed and the last recession hit, much of her equity and retirement plan was wiped out, just like most Americans. She knew there must be a better way.
So, after several pet financial projects that found her taking out every book in the library and driving her family crazy, Dr. V eventually settled on commercial real estate investment, particularly through syndication. She found that it was an ideal investment to break the “golden handcuffs,” finally getting ahead and building significant wealth.
I actually had no idea what syndication in real estate was until I read Dr. V’s book, The Busy Professional’s Guide to Passive Real Estate Investments. (It was released just a few weeks ago and catapulted to the Amazon.com best-seller list, including an impressive #23 overall for real estate investing books.)
So, what’s the skinny on syndication?
Instead of purchasing a property as a single individual, like if you picked out a rental property and put money down, obtained a mortgage, found a renter, and hoped they paid on time and didn’t trash the place, syndication offers some inherent benefits and safeguards.
The individual investor still offers their deposit (typically, $50,000 or $100,000), but is essentially buying a share in a commercial property like an apartment building, as resources from all the investors are pooled.
From that point, on there is nothing for the individual investor (called Limited Partners) to do, as all aspects of finding, vetting, and closing the deal are handled by the General Partner, who has vast experience and a huge vested financial interest in the investment performing well. They’re also regulated by the SEC, so everything is disclosed, regulated, and transparent.
Likewise, all duties of property management, improvements, and financial considerations are handled by the General Partner according to the business plan they’ve set out – the Limited Partner just needs to cash checks.
The best strategy, according to Dr. V in her book, is to find a B property in an A neighborhood – an apartment complex with good “bones” that was built maybe a decade or two ago and just needs some upgrading. Those upgrades are part of the strategy, as new paint, carpets, appliances, countertops and tile, and more will allow you to raise the rents for happy tenants (while still staying competitive or even under market value).
Even a small bump in rents magnifies over the course of 20, 50, or 100 units, and you’re also vastly increasing the value of the property, according to standard commercial valuation methods.
They can also add other income streams like parking spaces for rent, laundry facilities, or storage, etc.
The way that these syndication investments work is that within a target period – usually five years – the Limited Partner will see their initial investment back PLUS profit AND substantial income from monthly rents.
At that point, the General Partner can sell the property or, if the market is in decline, just hold it for a few more years (still while making a profit on rents) and sell when conditions are more favorable.
There are also huge tax benefits to selling, similar to capital gains exclusions and 1031 exchange proceedings, but on a grander scale.
It’s no wonder why Dr. Vanessa is a big advocate of syndication, and she’s invested in over 2,500 units over 11 properties and 4 funds between commercial retail, apartment communities, self-storage and manufactured home parks over the last 11 years.
Of course, that’s just the 10,000-foot view, and there’s one HUGE caveat: you have to be an accredited investor to even have access to real estate syndication investments.
Much like stocks are regulated by the SEC, syndication comes with myriad regulations, and participants need to make north of $200,000 per year (or $300,000 for joint income) or have a $1,000,000 net worth (excluding their primary mortgage), as well as have an existing relationship with the syndication General Partner. (For that reason, this investment is popular with doctors - the circle Dr. V moves in.)
According to Dr. V, only about 6% of all Americans meet the criteria to be accredited investors, and that’s just a start of the exclusionism. If it seems like syndication is a rigged game where only wealthy people can even play (as a simple springboard to more wealth), you’re not wrong!
The best part of the syndication to me is that the downside is protected, so all decisions are made through an extremely conservative lens. The feasibility of the investment isn’t tied to the whims of the housing market or the overall health of the economy.
For that exact reason, Dr. V promotes not only investing in apartment syndication, but two niches that are fascinating to me: self storage units and mobile home parks.
These two segments of commercial real estate perform significantly better than most when the market is down or the economy is contracting, as people always need someplace cheaper to live and someplace to store their stuff. (The other segment I’d add to that list going forward is senior housing in different forms.)
In fact, take a look at the performance of these segments from 2007-2009, during the height of the last Great Recession:
Residential real estate -40% or so
S&P 500 -22.03%
Industrial real estate -18.31%
Office space -8.16%
Self Storage -3.8%
Manufactured Homes -0.47%
And those numbers just show how they perform when the bottom falls out of the market. But the upside will make you look twice.
In fact, from 1984 to 2018, the self storage sector produced annual average returns of 16.85%!
Here’s another illustration just to education purposes (I’m not financial planner nor syndication expert):
If you had $200,000 to invest in 1994 and put half in self storage units and the other in the S&P 500, by 2017, what would those two investments look like?
Your stocks in the S&P 500 would be up to $532,243.
The self storage REIT would be up to $4,026,413,
I can go on, but the point is that you should read the book, as Dr. V dispenses some life-changing insight even if you’re not an accredited investor or positioned to buy commercial real estate (yet).
(I’ll be first in line if they ever open a syndication fund where people can invest $17, an expired Starbucks gift card, and a pocket full of lint!)
But, seriously, I plan on having Dr. V as a guest on my humble podcast soon and ask her if she has any investment strategies or opportunities for the rest of us typical, non-accredited lay people.
Stay tuned and let me know what you think about Dr. Vanessa’s book!