Passive Syndication Investing: Finding Opportunities and Evaluating Risks with Sam Giordano

So can you tell us about what you started investing in and this indication, space and things that you did since then, what you look for and how you started to, select a narrow down the sponsors and investments and everything that you. 

Yeah, no, absolutely.

I’d be happy to. So the way I approached it is that when I first started learning about real estate syndications, you have traditional syndication models where they tend to have a higher minimum investment. And then you have crowdfunding. Where the minimum was lower. But maybe there may be sponsors that are just getting started or trying to reach out to a bigger audience.

And so in the traditional syndication model, since the minimums are so high, No, I took it really seriously to the point where I promised myself that I would give myself a full year before I invested in any syndication, even if I felt prepared to do it. So I started to absorb as many podcasts, including your own as many books.

I started to become active on real estate forms and bigger pockets and different real and reading different blogs, just to try to absorb as much information as I can. And basically over that time, using it as a cheat sheet, I, every, all the information I learned from books, I would make notes and eventually come up with criteria that I wanted to see in different syndications that I would want, that I was evaluating.

No, whether I want to look at it a little further or whether I was going to invest in it in the future. And that allowed me to give me a structure that I’m going to base my evaluation on syndications on. And, the main things that we look at are, it’s not a novel thing, basically the sponsor, the market and the deal, and in that.

And the sponsor is no doubt, the most important part of it. So it’s really a key to establish a relationship with a sponsor, even if, even in certain offerings, if it’s not required, I think it’s extremely important. And then you then can evaluate the market and evaluate the deal. And during that first year, I came up with a number of different criteria that allowed me to figure out what I wanted in syndication.

And then the sheet is like a living sheet where it changes over time. It changes with economic conditions. It changes with my experience and in different syndications. 

So as you’re, when you think about building a relationship with a sponsor, even if you don’t have to, for the particular deal and how it’s structured.

What do you think about that relationship? You’re not, going out on dates and stuff, but what do you want to learn from them? What do you want to get out of them? And are you in any way thinking about the impression that you want to make upon them? It’s who’s selling who, what here, how does it work for you?

The so when I, the interesting thing about this is when I came up with the criteria. The hardest part is the sponsor is the most difficult way to the most difficult criteria to objectify, but it’s the most important. And I would say the biggest thing is doing just with what we’re doing right now, talking to the person, getting a feel for who they are, getting a feel to how they respond to your questions.

Given an idea as to when they talk about their business, what do they highlight? What do they, what’s the first thing they want to talk about with you? Is it about, what makes them different? Is it about selling you something and you get a feel for people and it’s really, there’s no easy way to say how to do that?

Just other than just talking to people and taking the time to do that because. Your intuition is often one of the most accurate things that you have to evaluate relationships with. And sometimes you’ll get off the phone and you’ll be like, I never want to invest in that guy. Or sometimes you’re like, I’m going to write the check tomorrow.

And this guy seems like a great guy. And but it’s just a matter of getting the feel and then, you want it. Some of the things that you can objectify, how’s the track record been? How many full cycle deals do you have? When did you start your syndication or how long have you been involved in syndication, specifically syndications.

Some people say they’ve been involved in real estate for 10 years, but they may have been like a real estate agent. Seven of those 10, and then it’s not quite just involved in the syndication in your team. Are there multiple members? Is there a succession plan? So there are certain criteria that you can objectify, but in, in that first conversation, in that, in those conversations, I try not to get too technical because some of those questions I can just ask over email, but I really just try to get to know them.

And I think that the feeling you get from the sponsor is probably the most important thing. 

Okay. Is there any? Is there like a red flag that comes to mind where that, you get off the phone and then maybe it’s a gut feeling that you say I’m not interested in that person, but if you’re on the call and there’s something that they say an answer to a question or anything that comes to mind where you’re like immediately you’re out?

Yeah. So you’re right. The gut feels part of it is the most important. I think there’s, say somebody is a new sponsor or they’re brand new. There are some new sponsors that are really very good and do things the right way. And those kinds of things, it wouldn’t necessarily be a red flag, but it would just be something that I would take a mental calculation as to do.

I want to take that risk with this sponsor, even though I know he hasn’t been through a lot of full cycle deals, maybe there’s somebody on the team that has a lot more experience. Am I confident enough in this person? And does he seem like he really knows what he’s doing, that I’m willing to take that risk?

So I think the experience factor is one thing that can be, it’s not so much a red flag, but can be something that gives me pause, but it’s not to the point where I would say I’m never going to invest with that guy but you’re right. There’s a certain gut feeling that you get after the conversation that there are times I get.

I’ve, I’ve talked to a lot of sponsors over the years and there are times where I get off the phone. I really don’t think I ever want to invest with that guy. And so I think that’s the most, but it’s not, it’s hard to quantify that feeling and it’s just a matter of, and there are times that feeling may be wrong.

Maybe they’re a great sponsor and it’s just the way they come across. But you have to trust your gut and I’m willing to take that risk. There are enough, good sponsors out there that I’m willing to take that risk where I have to. Be faithful in that. Otherwise, if you invest with someone like that and it doesn’t go the way you want, and you say, man, I should have trusted 

That’s right.

So we have now the sponsor. Now I want to make sure we cover the market and the deal, some aspects that you look for. I want to make sure we leave plenty of time to discuss, the tool. Cause this led to this. Isn’t just for the listeners out there. This isn’t just about things that you look for.

You saw. An opportunity. You had a lot of folks ask you questions about investing in these types of deals. So you created a really awesome tool for folks out there that we’re obviously going to get to, but first want to touch on the market and deal with things that you think. 

Sure. Yeah. So in the market, there are thankfully quantitative variables that you can look at in the market in terms of just looking, the basic, the big valuables you would look at would be things like population growth, job growth.

What is the averaging com in those areas? And a lot of this data is like publicly available data, like on city data and other websites that we referenced. So it’s not like a lot of this stuff is hard to find. You can go with the suite of things like that. CoStar and stuff offer.

That’s extremely expensive to get some of this market data. But so I would say population growth, job growth You know whether or not there’s a net migration to that area. Like a lot of people are moving to that sort of south Southern Sunbelt area. And the main markets are in like Phoenix, the Texas markets, the Atlanta markets, the Florida markets, there’s other opportunities in other areas, the Midwest.

In Boise or Idaho where you want to look where people are moving, where there may be some favorable tax situations in those areas where there is some space to be had. I tend to look for nowadays in the sort of, not in the Metro sort of city areas, more so in the suburbs to where there maybe there is a little more space.

It’s not so congested. The city, the population of the city we’ll come back. But I think right now over the next couple of years, I think it’s still something that I’m not currently looking to invest in. So these criteria change. It goes where the economics are but those are some of the variables that we look at when we’re evaluating a market.

And what the average income is compared to the rent, the average rent is for an ad for that area or that particular property. Those are some of the variables that I would look at in the market. I would say. 

Great. So I’m glad you mentioned one in particular. I think that it doesn’t come up in that list often enough.

And in my opinion, this is the actual tax situation in the state. Folks just understand where you’re getting into before you do it. It’s I’m not saying what you should do one way or the other, but know what you’re stepping into before you do it, you don’t want to make that. 

Absolutely. And there are certain states.

One of the things I didn’t mention, like certain states that are more landlord friendly and right now with eviction moratoriums and things like that without getting political, like you have to look at it from a landlord standpoint, like where’s going to be the opportunity or the risk if you’re going to be investing in certain states.

So that has to be one of the criteria you look at. And one of the criteria I do look at is this a landlord-friendly state? And so you have to keep up on, on those differences, as things change in those arenas which states offer more landlord friendly environment that may be. A better opportunity to enact the business plan of the investment you’re making.

So when it comes to you go from the market now to the deal when it comes to deal, are you just looking at, they’re projecting this cash on cash return and this IRR, so that fits my goals, or are you going deeper than that? And looking at the business plan and if so, what are you looking at? 

Yeah, so it’s interesting to like when I first started looking at real estate syndication, I thought the deal was the most important part.

Like I’m like, all right, what’s this return? What’s the, is there a preferred return? And it’s not as if it’s not significant, there are important things and things you do want to look at in the deal. But I think it’s definitely less important than it is in some of the other variables, but it is one of the more quantitative areas to look at.

There are some people that want a preferred return to where the limited partner gets a certain amount before the general partner does. There are some people that look at particular split structures, do they want. Structures where there’s one split or is there a ladder of splits or waterfall ladder per se?

When they look at the limited partner structure, do they want a limited partnership that they’re investing in have two different classes, like a class, a that maybe has a set higher return, but they don’t participate in the upside where the class B a then participates in the upside, but maybe has a little bit less of a return?

So some of the basic return metrics you can look at are with that. The stuff we look at is what’s the expense ratios of the property. What’s the rent growth of the property. What is the going in cap rate versus the exit cap rate of the property? We partition out the IRR. So we look for deals in which the cash flow from the.

Is greater than 25%, whereas as opposed to the sale or refinance in terms of the projections of the performance of the deal. So we try to get a little deeper than just the basic return metrics, although we are definitely looking at that there are some other things that are, I would say are more important in terms of looking at the deal itself and just the return metrics.