How I Started Investing in Multifamily Syndications, Part 4: Bad News in the Midwest
First-time investor Jeff Hamann finds what looks like the perfect multifamily opportunity, but then it all falls apart thanks to a last-minute surprise.
I’m writing this episode on an airplane. Not the usual setting to get my creative juices flowing, but my son’s sitting next to me watching the Mario Brothers movie for the…fourth (? Maybe fifth?) time, and I figured I may as well do something productive with the time and (relative) peace and quiet I’ve got between Chicago and Amsterdam.
Quick Recap: Tax Trouble
Last time, I spoke with a CPA who has extensive experience handling syndications (shoot me an email if you’d like a recommendation), and he walked me through the upsides and downsides of making a first-time investment so late in the year.
Basically, thanks to the additional tax complications, it would’ve been a lot of extra expense (e.g., me paying him to file my taxes with a K-1) for just a couple weeks of potential upside in December.
Onward to a Midwestern Mixed-Use Project
Anyway, a lot’s happened since then.
For one thing, I started talking with a syndicator raising capital for a ground-up mixed-use development in a high-growth (and stable) Midwestern market. It looked like a great deal, so I did my due diligence. Looked at construction activity, recent sales comps, population growth, absorption, you name it. Everything checked out.
And then I just so happened to be in the same metro area visiting my brother for New Years. On January 1, I decided to drive out to the construction site to check the location out for myself.
Great area, amazing position in the submarket, lots of potential — really, it hit on every level for me. Even a great local coffee shop open on New Years Day to provide me with much-needed espresso (this may be more of a me thing than a multifamily indicator, though).
Getting in on the Deal
So, I scheduled a call with the syndicator to talk details and how I could get in on the deal. He had sent out an email to his network in late December saying that a minimum investment of $25,000 was fine for this deal, and it was open to non-accredited investors (that’s me!), so everything looked great.
The call started off well.
The syndicator really is a stand-up guy with a great deal of experience, exclusively in this market, and that speaks volumes to me — especially as this nameless metro is one I’ve known is ripe for investment, even now.
I asked him about the rest of the team working on the development, and I got a very clear picture that this was a great opportunity — partially because of the team but also because of a sizable grant the town was providing to move the project forward.
Of course, there’s no such thing as a sure thing in real estate, but it really did seem to cover what I was looking for, and I was more than comfortable with the risks.
Then, Bad News
Unfortunately, that’s when the bad news came.
Yes, the syndicator said, the deal was open to non-accredited investors. And, again, yes, an investment of $25,000 was absolutely fine.
But I still wouldn’t be able to participate in this specific deal.
Why not?
Well, it comes down to how non-accredited investors can participate in syndications at a broader level.
The SEC has rules in place to limit non-accredited participation in 506(b) deals. This means that no more than 35 non-accredited investors can take part, and that the syndicators need to have an existing relationship with them before they sign on. (Educational side note: Other syndication deals organized under Rule 506(c) don’t allow any non-accredited investors to participate.)
While the deal had slots open for my participation, my syndicator was uncomfortable with the fact that, technically, he had started raising capital for this project before we connected. From his perspective, that could mean trouble for him, should the SEC come a-knocking.
The previous syndicator I nearly moved forward with had no such reservations, and they had a great deal more experience, so I don’t necessarily think this was a dealbreaker…but then, as my CPA told me a few weeks ago, the liability for allowing improper investments falls on the syndicator, not on me as an investor. I suppose I can understand the hesitancy.
Shame, though. It looked like a damn good deal.
I’m keeping in touch with this syndicator— it’s always good to keep building that network — but this deal ended up being a no go.
Lessons Learned
That’s the thing about finding a good deal.
Yeah, you might find something that ticks all the boxes. It can be very low risk. But there’s always the chance of something coming up, even after you’ve done your diligence, and knocking it off the rails.
Still, I learned that even if it was a perfect deal for me, there’ll be others. It was out of my hands, and there wasn’t anything I could do about it.
That doesn’t mean I’ll stop looking. Sure, I have the right to be a little annoyed and disappointed. After all, I did my homework, I envisioned investing in the development, and I was all set to pull the trigger.
I wouldn’t call it a loss, though. On the contrary, think about what I gained:
- I gained more experience in looking at deals.
- I added a syndicator to my network, and we’ll talk future deals.
- I learned a bit about how public funds can make a unique development a great opportunity.
In the end, I won’t get a nice financial return from this project. But to say I got no return of any kind simply isn’t true.
All this is just preparing me even more for the next few deals I look at — so I can move forward with greater confidence and know exactly what I’m getting into.
So, that’s all for the moment, but I’ll be back to shopping for new investment opportunities next week, once I’m through round two of holiday jet lag.