In 2020, our team completed the syndication cycle for an 82-unit apartment complex in Jacksonville, Florida.
Despite being on the sponsorship team, it was still “passive” as far as the tax code was concerned, and I was eager to invest in another syndicate and use the losses to wipe out the capital gain – a tax strategy known as the “Lazy 1031 Exchange“
Choosing My Next Investment
However, I was not yet an accredited investor and my ability to invest with high-quality experienced sponsors was limited.
Fear of a market peak led me to pass on a 506(b) syndication, the “family and friends” route often chosen by new syndicators for capital raising. I doubted the market’s ability to rescue less experienced syndicators, as it had in the past decade.
Instead, I didn’t let the tax tail wag the dog, and sat patiently and bit the bullet come tax time.
By 2021, I achieved accredited investor status amid the investment frenzy’s potential peak.
Still concerned we were at the top of the market, I chose a multifamily and commercial real estate fund backed by a firm with 30+ years of experience that survived several market cycles.
While the projected returns still fell within my investment criteria, the fund was a bit more conservative than other opportunities, using a max loan-to-value ratio of only 65%, compared to the 75% or more used by many syndicators at the time.
Also important to note, this fund fixed interest for the term the fund anticipated holding the asset, mitigating interest rate risk.
Conservative Strategy: A Double-Edged Sword?
Lower leverage usually means lower expected returns. At this stage of my investing career, I questioned this conservative choice. Was I selling myself short? Should I have invested in a more aggressive opportunity, such as a single asset syndication (SSA) with more upside?
Well, I’m glad I didn’t because many of the sponsors who offered SSAs at the time used short-term bridge loans with floating interest rates. Unfortunately, the unexpected rapid increase in interest rates caused many to pause distributions and/or issue capital calls to cover the new debt service requirements after refinancing – or worse, some may not be able to make the debt service and be forced to forfeit the property…
We’ll see if it comes to that. But with banks not being in the business of owning and managing property, many expect loan modifications rather than foreclosures in most cases. However, it’s still less than a favorable situation to be in as an investor.
The fund I chose continues its distributions without capital calls, operating as anticipated.
Did my investment with a veteran sponsor taking a conservative debt approach pay off?
Time will tell, but as of today, it appears so.
Stay Ahead of the Curve
Interested in more insights like this? Join my private newsletter. You’ll get exclusive tips, market updates, and my personal investment strategies that I don’t share anywhere else.
Subscribe now and let’s navigate the complexities of real estate investment together. Your journey toward wiser investment decisions begins here.