In this video, Chris Lee and Brian Davis of Spark Rental discuss getting started with real estate syndication. Brian provides his knowledge regarding what syndication is, who it would work for, and how you can get started.
Topics in this video include:
- Brian Davis’ real estate journey [0:21]
- Real estate syndication [4:40]
- Real estate investing club [7:56]
- Syndication vs REITs [9:30]
- What types of people would syndication work best for? [12:57]
- Getting started with syndication [14:48]
Transcript
Chris Lee: Hi there. Welcome to Landlord Guru’s podcast. Today I have a special guest, Brian Davis from Spark Rental. Brian is a real estate investor. He’s been doing this for many years. He’s involved in real estate investing and, specifically, syndications. So, why don’t we just start. Welcome Brian, thanks for joining us.
Also Read: Unlocking the Benefits of Real Estate Syndication: An Overview
Brian Davis: Chris, thank you so much for having me.
CL: Yeah, why don’t we start off, Brian, just tell us about your real estate journey, your background, your history, what you’ve been doing, and how you’ve gotten to where you are.
BD: Sure. So, you know, I graduated college in 2003, to really date myself here. But you know, like most college graduates, I had zero idea what I wanted to do with my life. I mean, none, I was a psych major and a criminal justice major. So I just started interviewing my friend’s parents, trying to get a sense of what people did in the real world, as it were.
And, one of my stepdad’s friends was an owner in a subprime mortgage lending company, which, back in 2003 was all the rage, if you recall. He offered me a job, or really an internship actually. I didn’t know what else to do with my life, so I took it. It turned out that they didn’t need another loan officer, they had plenty of loan officers. What they really wanted was, he and the other owner of the company, on the side of that nationwide lending business that they owned, they lent hard money loans on the side, with their own personal money and with some of their friends and family members’ money.
So what they really needed was someone to handle those hard money loans. And these are, of course, short-term, purchase rehab loans to flippers or, you know, people who reified using the BRRRR method. So I got a very early and intensive education on how that works.
CL: He’s starting it off right with the big stuff.
BD: Yeah. But that gave me great exposure to buying and renovating properties, you know, coming at it from the lending side. It’s early to mid-aughts, I’m watching all these investors just make money hand over fist flipping houses, buying rental properties. I’m like, you know, I’m smarter than these guys, I can do this. So I probably went out and invested all of my money in rental properties, at the worst time in human history, right? So, you know, I’m buying properties in like 2006, 2007, early 2008. And I was too stupid to go out and get a mentor or a coach or a senior partner or anybody to teach me, you know, what the hell I was doing.
So I just made every mistake you could possibly make and had bad luck on top of the stupid mistakes that I made. 2008 came, you know, there’s no plot twist here. You know what happens. Totally lost my shirt on all those properties. On top of that, my day job income as an account executive for hard money loans, that dried up too, because no one was doing those loans anymore and no one was flipping houses anymore.
So, you know, I had to totally go out and start from scratch. That’s how I got into the online industry for real estate investors online, got hired by a company that serviced landlords, actually selling legal forms for landlords. So that gave me an education on online marketing and SEO and pay-per-click ads, but all of that experience that I had with real estate investing and landlording, even though that was costly for me at the time, that experience did help me land that job. And I went on to continue real estate investing afterward, rather than just fleeing for the hillside.
CL: Yeah, it takes some fortitude to go through all that.
BD: Or stubbornness, I don’t know, one or the other.
A lot of people did leave real estate after 2008, right? But at that point, those losses are just losses. To me, I considered them tuition, right? I mean, they were the cost of education. So I could then go out and maybe make not so many stupid mistakes moving forward.
CL: Right.
BD: That’s the way that I looked at those losses. Yes, they were painful. Yes, they were expensive, but I learned from them. You as an audience member, you can learn those lessons the easy way, from other people’s mistakes. I had to learn them the hard way.
CL: The hard way with your own money.
BD: Yeah, losing my own money instead of learning from someone else who lost their money. But, you know, that’s all cyclical, right? I mean, today, I like investing my money with other investors who lived through 2008 as an investor, right? Like people who did maybe lose some money in 2008, because they’re not going to make those same mistakes again.
Whereas, green investors, who just started investing over the last decade, up until the last year, everything’s been rosy in real estate for more than a decade now. You know, those people who hadn’t lived through downturns, haven’t lived through financial crises, they’re just not going to be aware of some of those risks like someone who was there in 2000, right?
CL: That’s a good point, right? I don’t know if it’s Mike Tyson or somebody who said, “Everyone’s got a plan until you get punched in the nose.” And it sounds like you have taken that and have come out the other side of it and are still doing it. And now you’ve got some lessons to pass on and to know for yourself.
So I understand you’ve continued with the real estate investing. You’ve stuck with it. For a lot of us, myself included, investing knowledge or investing experiences, we’ve talked before about kind of accidental landlords.
People have gotten into it sort of accidentally because they’ve owned a property and they’ve moved, and now they’re renting it out, or they’ve had family members pass on properties to them. Or, you know, buy one property and rent it out, that kind of thing. It’s very, I guess, in personal experience, it’s just very limited.
And we know there’s other stuff out there, other types of investments out there, but just don’t have that experience or knowledge with that. So what other types of investments have you been doing? And what else is out there for people like us?
BD: Yeah. So, I got sick of being a landlord a few years back. I live overseas and trying to, not even manage properties from overseas, but even just managing the manager from overseas. And just some of the headaches that come along with it, I didn’t want to do it anymore. So, I got rid of my properties, but I still love real estate, right?
I still believe in real estate as an investment vehicle, a path to wealth, a path to financial independence. So I now invest solely in passive real estate investments. I do some investing in real estate crowdfunding platforms. There are a few that I particularly like, and we can talk about those if you want. But, my main real estate investing strategy right now is syndications.
So for any audience members who aren’t familiar with real estate syndications, these are passive investments where you invest in some large commercial property project, often an apartment building or, you know, multifamily complex. You have a lead investor called the general partner or GP, they go out, they find a 10 million deal or whatever. Maybe they borrow 7 million of that, and maybe they have 1 million of their own money. That still leaves them $2 million shy, right? So they go out and they raise money from passive investors like you and me, to gain fractional ownership in that big apartment complex.
So you get to take advantage of these larger property types. Some of the advantages that come with those, such as having 200 units, instead of just one, if one unit becomes vacant, you can be in trouble. if one unit out of 200 is vacant, that’s just part of the math, right? It’s just part of the average.
As a passive investor, you still get all of the same benefits as you would as a landlord or direct investor. You get the tax benefits, you get cash flow in the form of distributions, and you get a share of the profits when the property sells. So you get all the same benefits, but you don’t have the headaches of being a landlord.
CL: True. So it sounds like it really is a true passive investment. You know, they talk about real estate investing being passive, even being a landlord and it being passive investment. When, from my experience, it is not passive. You’re out there all the time managing everything. It’s not passive, but this truly is passive where once you have kind of chosen to make that investment, you sit back and somebody else takes care of everything. And, what, you get a check every month? Is it as easy as that?
BD: Yeah, more or less. It is completely passive. The cost that you pay for that is that you surrender control, right? As a landlord, you can sell the property whenever you want. It doesn’t mean you want to, right. As a landlord, when you buy any property, whether it’s a home or an investment property, you basically take an upfront loss in the form of closing costs, right?
It takes at least a few years in most cases to recover that loss in the form of appreciation. Then, of course, you’ll take another hit when you sell the property, you know, in the seller’s round of closing costs. So, again, real estate is still illiquid, even if you own it directly, but with real estate syndications, you have no control over when that property sells or refinances. You have to surrender that control. But, the flip side is you don’t get those 2 a.m. phone calls from tenants complaining that the toilet is clogged, right?
Also Read: Is Rental Property a Good Investment?
CL: Exactly.
BD: The other big downside to real estate syndications is the high minimum investment. It’s typically 50 to 100 grand as a minimum investment, which sounds very high and it is. But, if you’re going out and buying a rental property, you’re probably looking at a similar cash investment between the down payment, closing costs, cash reserves, and any upfront repairs you need to make. So, comparable high minimum investment. Now the way that we skirt that, the way we get around that, is we formed a real estate investing club and our members pool their money together to invest in these.
So instead of 50 or 100 grand per person, investing is 5 grand per person, pooling all funds together to invest in new syndication projects each month.
CL: Oh, I see. So you may have several projects going on at the same time, potentially.
BD: Yeah. So most real estate syndications are medium to long-term investments. Two to seven years is kind of typical for these. We have many of these going on at the same time, and we’ll have many more going. Every month we propose a new deal in the club. Anyone who wants to participate in it, can. People don’t have to participate in any of these. So they start stacking up over time.
And instead of having all of your money, you know, 50 or 100 grand in a single property, you can spread five grand here, five grand there, spread it across. You don’t have to lay awake at night chewing on your fingernails, worrying about how that one property is performing. It just becomes an average of, you know, all of the different numbers on the page, right?
CL: You can diversify into different regions, geographically, different types of property, whether that’s a single-family property or a multifamily property. I guess any number of ways to diversify with those types of projects, I suppose.
BD: Yeah. Diversification is actually one of our core missions and values with this club. We try to invest in as many different markets as possible, different cities, different states, and try to invest with as many different sponsors or GPs as possible. We try to invest in as many different types of real estate as possible. So multifamily is sort of the bread and butter of real estate syndications, but you can do syndications where any property type could be. Mobile home parks, could be self-storage facilities, could be industrial real estate, could be retail. We’ve done an industrial property. We’ve done a retail property. It could be assisted living facilities or combinations of these.
CL: Okay. That’s fascinating. You mentioned you’ve done some crowdfunding platforms before, what’s the difference between syndication versus investing through a crowdfunding platform or investing through a REIT, for instance?
BD: Sure. So, publicly-traded REITs, you can invest through your brokerage account. They’re basically stocks that meet certain criteria set out by the SEC. They have, I think it’s 75% of their assets have to be either real estate or debt secured by real estate, to qualify as a REIT, among some other qualifications that they have to meet. They have to pass out at least 90% of their profits every year back to investors in the form of distributions.
REITs are great for a couple of things. They’re great because you can invest with small amounts, right? You can invest for just the price of a single share and they’re great for liquidity. You can sell at any time. The flip side of that liquidity is that it also comes with volatility, right?
So because people can buy and sell at a moment’s notice, share prices, gyrate up and down, just like stocks. To me, REITs actually defeat the entire purpose of diversification away from stocks because they have way too close of a correlation with the stock market at large. We ran some of those numbers and put some of those correlation numbers in a blog post we wrote a little while back.
REITs basically share a similar correlation to the broader stock market, as several other sectors of the economy. So, you’re not really getting any diversification benefit by investing in REITs.
CL: It seems like it sort of defeats the purpose of being able to go to sleep at night and not worrying about anything. You’re going to look at those prices on a daily basis maybe and freak out or whatever.
BD: Yeah. I don’t like public REITs. It doesn’t mean that there’s anything wrong with them or that you shouldn’t invest in them. I don’t personally invest in them. Or at least, not much. I think there’s a little bit of my portfolio in them, but, real estate crowdfunding is different.
Instead of investing through your brokerage account, you go directly to the company that is investing in real estate or investing in debt secured by real estate and you buy investments directly from that company. Which, on the plus side, they don’t have nearly the volatility as publicly traded REITs and there’s much less correlation with the stock market.
So you do get that true diversification benefit there. The downside of that is of course, that liquidity that we were talking about earlier. A lot of real estate crowdfunding platforms don’t let you pull out your money within the first three, four, or five years. Or if they do let you pull it out in less then five years, they hit you with a penalty. There are a few exceptions to that, but as a general rule, these are long-term investments without much liquidity.
Some of the platforms do let you invest with very small amounts. Fundrise lets you invest with 10 bucks. Groundfloor lets you invest with 10 bucks. Groundfloor is actually one of my favorite of these platforms, they’re pretty unique. You can pick and choose individual hard money loans to fund with as little as 10 bucks per loan. So you can spread your money among all these different loans, to different flippers or real estate investors around the country and it just becomes an average of how those loans perform.
They’ve actually been remarkably consistent over time, paying around 10% average annual returns, since they launched about a decade ago. So yeah, they’re a good one. If you do want liquidity with a real estate crowdfunding platform, there’s one called Concreit. Like REIT, so it’s clever in quotes. They also have loans secured by properties. And these are again, hard money loans. But rather than investing in individual loans, like you do with Groundfloor, Concreit just pulls them all together and you can pull your money out at any time.
There’s no penalty to your principal, although if you put out within a year, I think they do ding your dividends by 20% for that year. Do your own research and due diligence, of course, audience members
CL: Yes, that’s correct.
BD: Yeah, that one is one of the few that offers liquidity, if that is important to you.
CL: Got it. After taking all this in and we decide we wanna get into syndication, you know, I guess who is it good for? And then how do we get started?
Yeah. So syndications are great for people who have busy lives, they work a full-time job. They have family, busy social lives, and hobbies, people who don’t want to go out and build all the skills that they need to be a successful real estate investor. Chris, as you know, real estate investing is really, it’s a side hustle, for the average person, if you’re going out and buying properties, renovating them, even buying rental properties, even if you buy turnkey properties.
Like you said a few minutes ago, it’s still not that passive. Yeah, it’s like a side hustle, right? Not everyone wants to have a side hustle in real estate, but they still want those benefits, the tax benefits, the cash flow, the appreciation. Syndications are great for that type of person. Someone who wants to diversify their portfolio to include real estate, and not just REITS. Like we talked about, not great diversification benefit.
But they don’t want to become a landlord, don’t want to go out and learn how to find deals, how to negotiate and manage contractors, how to manage tenants and rental properties. So it’s a great fit for people like that.
It helps to have a higher income because like we talked about, the minimum investment for these is typically 50 to 100 grand if you don’t invest in a real estate investment club, like ours. And even if you do invest in a club like ours, 5 grand is a lot less than 50 or 100 grand. It’s still not chump change, right? So, having a stronger income certainly helps. So that’s sort of the ideal person, a working professional who’s busy. Perfect person to invest in syndications.
CL: Yeah and that makes sense. You know, and what we do talk about, a lot of what Eli and I talk about is how to do it yourself and how to use certain tools that can make it easier. But yes, you’re right. There are still a lot of people out there who just, don’t want to or don’t have the time to be able to devote to that. Syndication sounds like a great idea.
You talk about the minimum investment, even if it is just 5,000. Be prepared to kind of have it set aside and not accessible for a little while, I imagine as well. That may be a barrier for some, I suppose, but all that being said, if they want to do this, how do they find a club like you’re mentioning, or do they just do it themselves? What’s the best way to get started?
BD: Yeah. Well, I mean, we’d love to have you in our club, first of all, sparkrental.com. You’ll see right there on the menu bar, our co-investing club.
We don’t take a cut of any of these investments. We charge a flat membership fee and that’s our only source of revenue for these. So, not only do we not take a cut of any of these investments, we actually invest our own personal money in every one of these deals every month. Feel free to join us there.
You can also form your own investing club with your friends and family, right? You might have some family members or some friends who are interested in investing like this, you can get together and just do that privately. I don’t know of any other clubs that work exactly like ours does.
There really is no one else who’s doing exactly what we’re doing, which is great on the one hand. It also means that you’re kind of on your own if you want to go do this yourself.
CL: Right. You need to be able to find deals and analyze the deals and find ways to find other investors as well, I guess.
BD: Yeah. You raised a good point there about finding sponsors and finding deals. One of the tricky things is that the SEC rules around syndications, there are two ways that sponsors can go. They can either only accept funds from accredited investors. So wealthier investors, people with a net worth over a million bucks or an income over 200 grand if you’re single, 300 grand if you’re a married couple.
Either they can only accept funds from accredited investors, in which case they are allowed to publicly advertise their investments, or they can accept some non-accredited investors, so middle-class people, everyday people who maybe don’t meet that million dollar net worth or the high-income threshold. Those sponsors, you know, the GPs who do accept nonaccredited investors, they can’t advertise those deals, by SEC regulations.
That makes it really hard to find those sponsors or to find those deals. By law, those sponsors have to have a preexisting relationship with you as an investor in order to accept your money. So that’s one of the challenges here is just finding GPs who can accept your money if you’re a non-accredited investor.
It’s certainly possible. You can do it. You can go out there on social media sites and ask around, you can go on, real estate investing forums, ask around, you can listen to podcasts, like this one. You’ll probably, hear some real estate syndicators, some sponsors, but it just makes it harder for non-accredited investors to find those people since they’re not allowed to advertise to us.
CL: True. Okay. Well, that makes sense. That’s fascinating. I mean, I think this whole real estate syndication opens the doors for a lot of people to get involved in real estate and to expand their portfolios and to just stay involved and weather the ups and downs.
So thank you so much, Brian, for sharing all this information with us. We will put links to Brian’s real estate investing club, in the description below. So check it out. Brian, thank you very much.
BD: Chris, thank you so much for having me. This was a blast.
CL: Have a great day, everyone. If you have any questions, send them in the comments and we’ll see if we can get Brian back out there to answer at another time. Bye, everyone.
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