Join us in this episode of Property Investory as we delve into syndications. We’ll hear about how they work, the advantages that come with them, how they allow people to participate in elusive real estate without the day-to-day management worries, what to look out for when joining one, and so much more!

Timestamps:
01:10 | The Power of Participation
04:30 | Forced Appreciation
07:42 | Note Your Exits
10:50 | Review Risk Returns
14:27 | No Stone Unturned
18:27 | A Georgian Peach of a Property
19:59 | Crunching Those Numbers
24:42 | Yield Drag
26:41 | Every Deal— And Dealmaker— is Different
28:48 | Prepare to Wait
32:00 | The Best of Both Worlds

Resources and Links:

Transcript:
Salena Kulkarni:

[00:23:51] It's not so much that you step back and you don't participate, but you have to really... this is where you have to have done your due diligence on the person selling the deal. And they have skin in the game too. So they have money on the table. So it's in their best interest to make sure that it's a win win for everyone.

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode we’re speaking with Amazon bestselling author, chartered accountant, and founder of the Freedom Warrior program, Salena Kulkarni. Our topic is syndications. We will be discussing the perks that come with them, how to pick the right one for you, how to invest into these, and she’ll be sharing her risk strategy, and much more!

Tyrone Shum: 

Kulkarni begins by giving an insight into her background with syndication, and how she comes across these types of deals.

Salena Kulkarni:   

[00:00:15] Syndications is something that I've known of and known about for years. Obviously, starting as an accountant, you heard it used as commonplace language and definitely around the topic of real estate. But it always seemed really elusive. I never knew how to quite access the deals. And then the guys that had the deals, you didn't really know them. 

[00:00:37] And so syndications, from my point of view, is a fabulous way to participate in real estate, where you can not only get access to exceptional deals— but as a collective, you can command all sorts of economies of scale. And the idea with syndications is you're focused on a single asset. And so there's a group of investors that come together and pool their money to try and get a bigger return in a shorter space of time.

Tyrone Shum:   

[00:01:10] I've actually heard of them for quite some time now, actually, and I haven't personally delved into any of these and being part of one of these, but it sounds like a great opportunity to get in. Because if you've just got a small amount, but then there's a greater leverage in terms of getting a property with a group of investors as well, there's actually a greater upside. So what has been your experience since investing into these yourself?

Salena Kulkarni:   

[00:01:33] Syndications is a really interesting strategy. And one of the great perks, I feel, is that you've got the ability to have direct security and access to leverage. But often these are deals that number one, they only come across your table, if you are part of a very small network of known reliable dealmakers. So as an average investor, you or I probably wouldn't even see these deals. Often they're transacted off market. 

[00:02:09] And so for me, it's a great way to participate in very lucrative, elusive real estate deals as a passenger. And you don't have to worry about the day to day management of the project, you don't have to worry about managing any tenants. And at the same time, you get to participate in what would otherwise be a return that is the playground of the ultra wealthy.

Tyrone Shum:   

[00:02:38] I like the sound of that. So you've got a syndication that you've been involved in with over 100 odd units here, which sounds amazing. It seems like it's a great deal here. Tell us a little bit of the background behind that one.

Salena Kulkarni:   

[00:02:53] For me with any real estate deal, but particularly with things like syndications, I think the most important decision to make before you even go in is who's the sponsor of the deal? Who's running the deal? Do you know, like, and trust them? Have they got a proven track record? How do they manage? How do they communicate? So this particular deal that we're looking at here is someone that I've known for a while, has a stellar reputation and only works with investors within a referred small private circle. And because of his reputation in his world, he has access to opportunities which generally don't even hit the market. 

[00:03:45] And so what I love is that there's an opportunity to learn, to participate, and to be witness to how the project is managed. And generally speaking, typically, these projects run from anywhere from two to four years, depending on what the outcome of the project is. But in this case, we're not talking about a ground up construction project, we're talking about the purchase of 112 units, built in the ‘60s, already at 92% occupancy, but purchased well below market value because of the fact that it was just a bit tired and poorly managed. 

[00:04:30] So the thing that I love about the syndication strategy, the way that I do it, is I'm not looking to take on a whole lot of risk. And so you're going into the project and it's already cash flowing, that's the first part. So there's already a cash return to investors straight away. And then it's very clearly laid out in great detail in the documentation that comes with the deal, what the plan is in terms of how they're going to create forced appreciation in that project.

[00:05:00] So for example, if the project is purchased for $4 million, and they can see that the rents are below market value, they can see that the purchase price is well below market value and that they can create anywhere from $2 [million] to $4 million in forced appreciation, not capital growth and waiting for the market to go up. But in today's terms, they can create that, then there's so many different ways to look at it. But really what that does is it de-risks it. So there's syndications and there’s syndications. Most of the syndications we're used to in Australia are really about ground up construction type projects, and my experience is they can be incredibly lucrative. But from a risk point of view, if you put syndications on a risk spectrum, the sort of ones that I prefer, sit sort of further down the lower risk end of the spectrum.

Tyrone Shum:   

[00:05:53] It's interesting to hear that and I think it's really important that you've actually shared with us the differences between how these types of projects, for example, the development project, where you go from ground up to investing into an existing one, and the risks behind that. I probably want to explore that a little bit more in detail to understand and explain to the listeners as well, the risks involved. I myself am very conservative as well, and I don't usually like to take a lot of risk as well. But everyone has a different level of risk. How would you describe this to say, investors and even myself, the level of risk that you determine in these types of projects?

Salena Kulkarni:   

[00:06:32] Yeah, it's a really good question, and probably one that has lots of layers to it. But I'm a huge advocate of being good at doing due diligence in general, as an investor. And I've got my own little five star system that I've created in terms of how I analyse deals. But ultimately, you know, what I've come to realise is that in our market— and it's definitely how I've created the bulk of my wealth— I've relied heavily on a rising market. And that's great on one hand, because it means there's no barriers to anyone being able to build wealth. It doesn't matter who you are, you can get in and you can use typical traditional property to ratchet up your net worth. But when it comes to these sorts of deals, where I'm trying to create not only cash flow, but a reasonably good capital return as well, risk is all about the sorts of things that I sort of already mentioned, but like, who's running the deal? What's their track record? What have they done when things go wrong? 

[00:07:42] One of the things that's really important to me on a syndicated deal, is they need to have multiple exit strategies. So say, for example, there are less experienced syndicators out there who will kind of just be hanging their hat on one way of getting out— we're going to buy for this, we're going to sell for that. And it's going to happen at this point in time to this type of buyer. But the more sophisticated experienced syndicate operators will have multiple, get out of the deal type scenarios. And depending on the deal, they'll have all of that laid out for you. And they're exactly the sorts of questions that you should be asking as an investor. What if this goes wrong? What if we have another shutdown with COVID? All those sorts of questions, you want to be asking those pointy questions up front. 

[00:08:34] But from my point of view, what I like about this particular deal that we're looking at is I have purchased units effectively in a trust. So I have direct ownership of my share of the assets. I'm getting a cash flow return from day one. So there's no messing around. Before I even commit the money to the project, I know exactly what the profit and loss for the apartment complex right now looks like. I can see that they've done detailed costings unit by unit, I know exactly what they're going to do. It's all pretty cosmetic stuff. There's nothing structural, I can see comparative sales for what this is going to be worth in today's market, whether the market goes up, great, I don't care, like, I just know. 

[00:09:25] And the thing is, when it comes to good real estate deals, and these guys— like this particular deal, one of the things I love about this operator is he knows to always leave profit in the deal for the next buyer. So let's say for example, in this deal that the end value of the deal— if they renovated every single unit and did it to the highest degree— was $8 million— they know to not take it up to that. They will bring it up to say $6 million, because if you take it all the way up to $8 million, there's no juice in the deal for the next person. So, all of those little tactical nuances and the way they think about how to structure these deals, they actually matter greatly. 

[00:10:13] Most people will want to squeeze out all the profit for themselves, and then just sell the asset at retail price. Whereas these guys, they get that they're trying to leave some money on the table. So there's so many layers to this, but I think that risk is about understanding what is your worst case scenario? What is your best case scenario? Can I live with that? Do I like how the deal is going to be run? What sort of communication am I going to get as an investor? What if everything turns to custard? What are my options?

Tyrone Shum:   

[00:10:50] It's so important to look at that. And I totally agree, it's any investment that we go into, we’ve got to make sure that there's plenty of exit strategies. Not just one or two, minimum three or four, just in case things do go south. And if that's the case, then at least there's so many different ways we can actually back out. Because if you're not prepared for any of these— touch wood, none of that does happen— but if it does happen, like, the pandemic just hits us or strikes us for whatever reason, at least we're well prepared and have already thought this out carefully. Because otherwise, when you're scrambling, usually a lot of mistakes happen as well, too. 

[00:11:22] What's really interesting that you mentioned was leaving a little bit on the table. Because we're not dealing with just selling a home where there's attracting a home buyer who's emotional. Obviously, with that market, in the residential market, you're buying maybe a $1 million home and you've renovated, it's worth $1.5 million, for example— those kind of buyers, you're attracting for emotional perspective, and they're going to be buying to live in for the rest of your life kind of thing. With these kinds of things this is a commercial transaction. So I can understand why you'd want to live for the next investor or the next business personal developer who wants to go in there and have a little bit of additional gain at the end of it. But then if that is the case, then does that mean part of the deal when you actually go into it, you don't get as maximum return as possible? Does that mean also affects the return on investment as well?

Salena Kulkarni:   

[00:12:12] Yeah, look, that is absolutely the case. If you could ride the deal all the way through to the finish line, you're obviously going to get a higher return. But I think the risk return balance constantly needs to be reviewed. For me, personally, I would be happier with a larger pool of potential buyers selling at a discounted rate than trying to squeeze out another 2 [or] 3 [or] 4 percent return, but end up in a situation where my potential pool of purchases are small. 

[00:12:45] And these guys that I work with, in my opinion, they are world class investors. These are people who... there wouldn't be too many people within each of their niches that would do a better job than them. And so they're smart, they've been doing this for 30 [or] 40 years. They recognise that greed is a terrible emotion to have around investing, as is fear. A lot of them will position their deals so that they are leaving profit in it for the next [person]. Whether we're talking about syndications or other types of deals. If you, say, for example, sell an asset at 80% or 90% of its market value, then you're going to have way more people interested in buying it, than if you try and price at at top dollar. For example, when we sell our homes, we always want top dollar. But when you're thinking about the way that professional investors think, it's about de risking, how do you reduce the risk on a deal?

Coming up after the break, we discuss the behind-the-scenes work that goes into syndications...

[00:15:05] He will often look at a property and then spend a full month sending his entire team in to look under every nook and cranny before they make any cuts. The point I'm trying to make is before I even get to look at it, there's often six to 12 months of work that's gone into bringing that deal to the table. 

She shares the international location she loves so much she bought into it...

[00:19:31] It's just a very easy place to live. I really like it. So it's not ideal, but part of my thinking is ‘Would I live there? What sort of people want to live there? Are they a problematic tenant, or are they someone who's just, you know, are they families, are they reasonable people? Are they going to pay their rent?’ Those sorts of things.

She divulges more into the differences between the Australian and US markets and what she currently needs from deals.

[00:32:56] If you compare this project with purchasing real estate in the Australian market, it's kind of like comparing apples and oranges. The reason I go into this deal is I've got enough capital. More capital isn't going to change my life. What I need is cash flow. 

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Tyrone Shum:   

Kulkarni shares further details on her 112 unit syndication, starting with how she found out about the deal. 

Salena Kulkarni:  

[00:14:27] My trusted advisor or my deal maker that brought this to the table, basically has a very long, long built network of real estate agents, funders, finances. A lot of deals will come to him through the banks. Basically, the banks see that there's a property that's in distress, and they will just take the deal to him to say will you take this on. Other times, there's so many different avenues. His due diligence process is considerable. 

[00:15:05] He will often look at a property and then spend a full month sending his entire team in to look under every nook and cranny before they make any cuts. The point I'm trying to make is before I even get to look at it, there's often six to 12 months of work that's gone into bringing that deal to the table. There is literally no stone unturned, they look at plumbing, they look at electrical, they quantify every single material that's going to be needed for every single unit. And they map out comprehensive— basically a business plan on how this is going to be managed. 

[00:15:49] So with this particular property, I have a feeling it came through a bank— this one I did a little while ago that came through a bank. And so it never went to market. And this particular trusted advisor is a known closer, like reliable, ethical, all of that sort of stuff. And has done a very good job in converting this from a fairly rundown, underutilised building to increasing rents across the board. It's fully optimised and sold at a premium.

Tyrone Shum:   

[00:16:26] So basically, you go in as a syndication as a group. So for example, to purchase 112 units, and the exit strategy sounds like was to, once it's finished its renovations and so forth, leaving a little bit on table was to sell it back into the market, again, with an uplifted value.

Salena Kulkarni:   

[00:16:42] Yeah, that's obviously the preferred strategy. But working with these guys, depending on the deal, there's often other strategies that are sort of put in parallel— as you know, here's Plan A, Plan B, Plan C, Plan D. But effectively, the way that the plan gets rolled out, you kind of leave it to them day to day to work out if you're going to renovate unit one or unit 112 first, I don't care. The tenants are giving you grief about the rental increases, they manage that from an aesthetic point of view, they've already worked out colour combinations materials, they're buying in bulk, you're getting the economies of scale there. But I genuinely love being witness to the process. It's not that I have any interest whatsoever in ever running one of these projects, I can't imagine anything worse. 

[00:17:44] But I love that I've got that buffet of deal flow. So say for example, even with this one guy on this particular deal, once the project comes to an end, if I wanted to take my original capital and roll it back into another deal, there's usually within three to four weeks and another deal to roll that money into if I wanted to. But that's the sort of calibre of person that we're dealing with. Half a dozen deals on the go, multiple teams running each project, plenty of resources and capital to make sure the deal works properly.

Tyrone Shum:   

[00:18:27] And these are not small deals. I mean, what kind of numbers are we talking about behind that? For 112 units? I'm thinking in Australia terms, but is this actually in Australia?

Salena Kulkarni:  

[00:18:37] This one's actually in Atlanta, which for those people who don't know, is sort of part of the Midwest belt of the [United] States. And part of the reason I really like that as a geography is it is really boring, plain and vanilla. They're the sorts of places that you and I could live. They're not slums, but nor are they the blue chip, high end of the market. These are basically working class areas, highly sought after, high rental demand, lots of energy gone into ‘where is this located? Why will this be a success? What's driving jobs growth, population growth?’ All that sort of economic and macro data that you would want when you get involved in these sorts of projects. 

[00:19:27] But I've been to Atlanta several times, and it's just a very easy place to live. I really like it. So it's not ideal, but part of my thinking is ‘Would I live there? What sort of people want to live there? Are they a problematic tenant, or are they someone who's just, you know, are they families, are they reasonable people? Are they going to pay their rent?’ Those sorts of things.

Tyrone Shum:  

[00:19:59] And it's really, really good that you mentioned that. That's the thing with investing, we’ve got to take the emotion out of it. And at the end of day, if the numbers stack up, then obviously the cosmetics and the looks and stuff like that come at a later stage. Especially when you're dealing with a very professional group of people, they will already know what to do. So we need to know about those details to be involved in it. But as long as the numbers stack up, I think that's probably the key aspect that I took away from that one that you've just mentioned. Can we unpack as well, then the numbers behind it? Why was it such a good investment for you?

Salena Kulkarni:  

[00:20:30] The numbers at a macro level—this was an asset that was getting purchased well below market value. There was bank leverage that was going to be applied to it, there was a limited amount of capital that was being raised by investors, I think that was about $2 million, the rest was all bank finance. And through that use of leverage it was a pretty low loan to value ratio. They were going to create some forced appreciation and then resell within three years. 

[00:20:58] The thing that excited me the most about this deal, and most of the syndications that I personally invest in, is the fact that they are cash flowing from day one. So before they do anything to this, this property was generating a 7% cash flow return for me. So I think there's a bit of faffing about in the first couple of months, while they get in and get the deal under management, but from about the second or third month, I'm getting a cash flow based on existing conditions without anything being touched. By the time they get to the second and third year, they may have put up some rents, they may have improved the building. 

[00:21:41] But I know that my starting point is that 7%. Now, some deal makers will allow you to participate in the increased rental yields that they create, and others basically just cap it and just say, well, it's gonna be this amount for the term of the thing. The other component to the deal— so there's always two parts for the sort of syndications that I like— is the cash flow part, and then there's the capital part. So in this particular deal, it was a 7% cash flow from day one, and then another five to 7% capital on the back end. Massive depreciation benefits, which are allowed to get passed on. And I think in the deal I'm showing you here, if you invested $200,000, you were getting 7% preferred return, and a $91,000 depreciation right off in the first year, which is just nutty. 

[00:22:40] And I can't even tell you now, but the loopholes in that market are just outrageous. So on $200,000 invested, you got $91,000 write off in year one. So let's say you've got a whole bunch of other investments that are happening. One of the reasons people like these deals is because you just basically end up paying virtually no tax. But I like the idea that you get cash flow, and you get that appreciation kicker at the end. So the deal that I've most recently done, similar sort of thing, was an 8% cash flow. And as the rents improved, that was going to probably creep up to a 10% cash return per annum. And then there was an additional eight to 10% capital kicker at the end of the deal. And that was a slightly longer syndication, it was a three to four year time frame estimate. 

[00:23:35] And I think— here's the thing— you really have to trust the person who's running the deal, because you have to trust their judgement on when is the right time to sell and who's the right person to sell to. It's not so much that you step back and you don't participate, but you have to really... this is where you have to have done your due diligence on the person selling the deal. And they have skin in the game too. So they have money on the table. So it's in their best interest to make sure that it's a win win for everyone.

Tyrone Shum:   

[00:24:11] Wow. It's amazing to be able to hear that. And it sounds like a fantastic opportunity. Because… I just want to double check, is that the 10%. net? So it’s not gross, everything's all taken out of it already?

Salena Kulkarni:   

[00:24:24] After expenses, after taxes, blah, blah, blah, it's 10% net.

Tyrone Shum:   

[00:24:30] Wow. So you can imagine compounding that every year. You receive that 10% income every year and you just reinvest it again and again, every year or even every month you're receiving it.

Salena Kulkarni:   

[00:24:42] The thing that I kind of think about in my world is this concept of yield drag. So if you get offered a really high rate of return, you get your money back and then you think ‘Oh God, what am I going to do next?’ And then there's a block of time where your money is not working for you. When you work that out over time, it can end up actually reducing your rate of return considerably. And I've seen this with a lot of investors that I've worked with, they go into a local syndication here in Australia, they get offered what seems like a really good rate of return on their money. But then when it gets averaged out over a two year, three year timeline, because you the DA gets stuck in council or whatever, the drag on that return ends up being quite considerable. 

[00:25:31] So the whole idea is, ‘How do you keep your money working for you consistently?’. And so, in my world, the idea of getting an eight to 10% net return, you can do that easily all day long. To strive for some of those higher returns, yes, you can do it. But you often end up in situations where you end up with a yield drag. So I love that I can just consistently build predictable income, and participate on the upside, when there's a great deal without having to worry. I like the idea of not having to turn my money over all the time. I like the idea of having some short term deals, some long term deals, some midterm deals. So syndication for me is maybe like a medium term deal of three to five years. But I like that I don't have to worry about it. It's set and forget.

Tyrone Shum:  

[00:26:41] Do you know roughly what is going to be the actual final outcome in terms of capital growth on this particular?

Salena Kulkarni:   

[00:26:47] The way that a good syndicator will structure a deal is they will give you what they call a ‘pref’, a preferred return. So say, for example, in this particular deal, there's a 7% preferred return. What that means is every year, before anybody else gets paid, before the deal maker gets paid, you as the investor will earn 7%. So that gives you a little bit of downside protection in terms of your return. 

[00:27:17] Usually beyond that, the terms of how the profits and capital and income will be shared are all detailed in the offer memorandum upfront. So from an investor point of view, what that does is it gives you peace of mind that you know more or less what you're going to get upfront. So depending on how profitable the deal is, you might get a seven plus five, so a 7% cash flow plus a 5% cap per annum. So that's a 12% return per annum. Other deals, it might be an eight plus eight. But every deal is different. Every dealmaker is different. 

[00:28:01] Sometimes given the fact that people can't get a great return in the banks right now, there's a lot of capital out there looking for a home. And so good deal makers have the luxury of being able to dictate terms. The better ones will make it favourable to the investor from a protection point of view. For example, in this deal, this is the culmination of 40 years of building the team, the network, and so forth. So, depending on who they are, you're not always going to have a variable outcome if there's huge upside. And you, as an investor, you've just got to decide whether you can live with that or not.

Tyrone Shum:   

[00:28:48] Absolutely. I'm going to throw something in the works here, just to make it a little bit more interesting. Let's say we compare this to say, an Australian investment. So let's say we go and buy properties over a three year period. I guess what I'm really curious is, why would this one be a more ideal investment compared to going and just buying a property in Australia at this point in time?

Salena Kulkarni:   

[00:29:21] That's actually an excellent question. And I want to kind of give that a good answer. So forgive me if I'm a bit meandering, but there's no right or wrong with investing. There's only kind of a reference to opportunity cost goals and preferences. So there's no question, no question at all that in a good, strong, stable market, Australian real estate will beat— in terms of a return on investment— will beat most other markets hands down. 

[00:29:53] And so from the viewpoint of... when you start off as an investor, you have to build capital. Unless you've got some massive inheritance sitting behind you. The goal has to be ‘How do I convert my surplus income into wealth?’ And there's no question that investing in Australian real estate is the pathway. You're not going to get the same degree of leverage, or ratcheting up of net worth in any other asset class, including shares. And I can say that because I've been an avid share trader, on and off at times, and I'm wholly [a] property girl now. 

[00:30:33] So you need to use Australian property to get yourself going into build capital. So if you're an investor who's just starting out, you have to start there. The sorts of deals that we are talking about, they're not going to actually help you grow your wealth. However, my argument is that what Australian real estate is terrible for is cash flow. And so the question you have to ask yourself is, if you stick with the traditional model of wealth building, which, let's say it's 30 years. Over 30 years, you build a portfolio of assets, like I think you just said, three or seven years, like that's too short a time frame, you can't achieve crazy amounts of wealth in that. 

[00:31:19] Let’s say, 30 years, you do all the right things and you build a small portfolio, maybe you get somewhere between four and 15 properties, then really, you've got to make a decision— am I prepared to wait for 30 years for that portfolio to be throwing off the sort of cash flow that is meaningful to me that I could live off? Or do I want to get to the point where I've got a bit of capital to play with, and then just take a small percentage of it, and put it into these sorts of deals? Like the deals that you and I love, Tyrone, and we can talk about that another time— and just use that to immediately catapult the income side of it. 

[00:32:00] So I'm not actually an advocate of all one or all the other. What I'm an advocate of is blending the best of both worlds to get the best result with the least amount of risk in the shortest period of time. And I think unfortunately, in our market, the majority of wealth professionals are really biased towards different strategies and different investments. And I think if you are someone who's smart, and you really have ambitions to get where you want to go sooner rather than later— maybe there's other things you want to do in life other than work or run a business— then I think you have to consider ‘How do I blend the best of everything to get the best result?’

[00:32:50] And so that's why if you're comparing this project— so we're going full circle now— if you compare this project with purchasing real estate in the Australian market, it's kind of like comparing apples and oranges. The reason I go into this deal is I've got enough capital. More capital isn't going to change my life. What I need is cash flow. So I'm trying to take a small percentage of my capital here, and I still have my portfolio here. But how can I deploy some of my capital into these sorts of deals, so that I can 5x my income?

Thank you to Salena Kulkarni from Freedom Warrior, our guest on this episode of Property Investory.