A few months back, I published a post describing nine disadvantages to investing in real estate syndications and funds on my company blog page. I was happily surprised at the reaction, so I decided to do Part II. This time I decided to share this with my BiggerPockets community instead of my company blog, so here goes…
Real estate syndications and funds have grown significantly in popularity over the past decade. The JOBS Act of 2013, the ubiquity of social media, and the rising tide of real estate values have set the stage. It’s resulted in a whole lot of investors making a whole lot of money.
And it’s also created an opportunity for newbies and great promoters to pose as great syndicators/operators while enjoying the rising tide. But we all know what happens when the tide goes out. Warren Buffett tells us we’ll see who’s skinny dipping.
I’m writing to help you avoid being a victim of a skinny dipper’s blunders. And to help you make sure you know what you’re getting into. It’s a long-term commitment, and I want to be sure you count the costs before writing a check. So let’s take a look at seven more downsides to taking this plunge.
Before I do, here is a list of the risks and downsides I covered in my company blog post:
- Overheated market: Commercial real estate is at an all-time high.
- Syndicators make money even if investors don’t: Just like stockbrokers make fees.
- Over-alignment: It is hard to explain here… but it is possible to discourage the syndicator and motivate them to walk away when things get tough.
- Loss of control: Are you a control freak? Don’t send your money to a real estate syndicator or fund manager.
- Dilution from over-raising: Some operators raise capital to pay investor returns for a while. This can bite investors in multiple ways if things go south.
- A rising tide makes even newrus look good: Newrus = new investors calling themselves gurus. They look great right now. But watch out.
- Risky debt: Leverage can accelerate…