What is the core philosophy of real estate syndication? What are the critical factors in choosing a good real estate sponsor? What makes a real estate investment sound versus feel like gambling? What are the most important skills for investors in syndication? Trinity (Trent) Herrera, Commercial Director and Real Estate Consultant at Black Tie Real Estate, shares his knowledge.
Tell us a little bit about yourself.
I’m the Commercial Director for Black Tie Real Estate in Fort Worth, Texas, but I also work extensively in California, Texas, and many other states. I’ve worked in the syndication and family office real estate industries for seven years. I’ve transacted nearly a billion dollars of real estate acquisitions and dispositions, including some highly creative deals. I currently work in group equity, private equity, and traditional real estate investments. I specialize in underwriting and value-add deals, providing consultative advice.
Let’s start with syndication foundations. What are the pros and cons of using our money when we can versus other people’s money?
The foundational part is probably the least understood and possibly the worst approached part of a syndication, and that’s from the investor side, but sometimes from the sponsor side, too. What makes a good syndication foundation? I have this term I like to use, which is our PM instead of OPM. Finding the right sponsor is hugely important, as is securing the right deal, and then understanding the underwriting. What you have is easily 75% of a real estate investment. If you can understand that, then 75% of the work is already done.
On the syndication side, our PM versus OPM is very important to me. It’s the foundation of everything I’ve done over the last decade in real estate. Whenever you’re practicing real estate as a licensed agent, you have a fiduciary responsibility to your clients, and sometimes, in syndication, those lines can get blurry and scary. Finding the right sponsor aligns with that. You want to find a sponsor who’s looking at the money that’s being invested as our money. It’s not other people’s money. I think that’s a really disingenuous term that is easy to use. Perhaps, we’re talking to a business partner and saying it, but I don’t like the word OPM at all. It’s distant. I have a personal relationship with almost all of my investors and clients, and so it’s our money. It’s your money that you’re giving me, and then I use it to make good, sound business decisions for us. Then, we all profit in the end. That’s my number one foundational tip. You want to find a sponsor who’s viewing it as our PM, because that’s a culture. Our money is collaborative. It’s a professional way of looking at it. I think it’s so scummy and skeezy feeling when you’re talking to someone, and they’re excited, and you say, “How are you going to close the deal? Oh, OPM, I’m going to use other people’s money to close this deal. Hey, I’m going to get this return.” It feels selfish.
This collaboration is highly important, and that leads to choosing the right sponsor. Every sponsor is going to be so different. Each one of us thinks differently. My weaknesses and strengths are different than yours or anyone in our circle. And I think that the unspoken agreement between all of us is that we celebrate that and respect each other, and then we help each other with our weaknesses, and support each other’s strengths. Every single one of us, if it were only us, would do a real estate deal completely differently. Finding the right sponsor who aligns with your goals and specializes in what you want and has had success in what you want to have success in is so important. And it’s understated, because as I talk to people in the real estate industry, most of us start single-family purchases, maybe we’re flipping. Then, we branch out and buy multiple units of a quadplex or a multi-family is our first step. Still, we usually hear about multi-family syndications pretty early on in the process of real estate investing. And those are not for everybody. That appetite is going to be different from somebody who has an appetite for value-added industrial, and then there will be investors who don’t know the difference between the two. I think that’s what we do a lot. We work with people to clarify what their appetite is, what they are looking for, and what they are comfortable with.
How do you know that they care about your money? Because to me, the investor’s money is more important than my own money. I’m risking my money a little bit more in some deals. How do you get that out of a new sponsor that you are getting in contact with?
It’s one of the million-dollar questions, and it’s hard. I think that you and I, and others in our group, have been hoodwinked before. We’ve looked at deals that, on the surface, look great, and the sponsor looked great, and everything was above board. The yield was what we wanted, and it was our appetite. And something happens. And to some degree, I think that you can never 100% insulate yourself from a bad egg, but there are signs. We have this term in the industry, commission breath, that’s always a number one red flag. Someone with a servant mindset, someone who is a holder of money and builder of wealth, is not going to have commission breath at all. There’s no sizzle in that industry of building generational wealth. The sizzle is that we’re going to build generational wealth using math and fundamentals. But when there’s too much sizzle, that’s a red flag.
The biggest single indicator is the math, the story, and the history track record. When you have a target of an asset type or class that you’re comfortable with, and when you have a track record, when you have some under your belt, it’s easier to see when something doesn’t look or feel the way it should in that industry. I suppose I will answer that by saying the single biggest defense is sophistication and experience, and maybe even leveraging your friends. There have certainly been friends who have saved me from bad investments, just from a second look and talking through a deal.
We’re talking about the foundation of what makes a syndication or an investment successful; underwriting is no joke. It’s 75% of what makes a syndication work. It can’t be overstated how vital understanding underwriting is, not just as a real estate practitioner, but as an investor. My best clients, my best investors, all understand underwriting. If they don’t, they’ve hired me to help them understand it and to walk them through it so that they can see what I’m seeing. There are many ways that you can look at a property wrong. I also believe that not only one person should look at a property. There should be a multitude of people and aspects when looking at a property, opining and giving valid, good criticism and feedback.
My number one tip when it comes to foundations is to dive into underwriting and do your best to understand each deal. It takes years, and even then, there are still deals that you see and you struggle. Sometimes, you see an underwriting sheet and everything just goes white. That’s the single biggest thing that will mitigate all of your risk, every risk factor. You’ll understand your yield better; you’ll understand more. You’ll be less likely to be surprised. And the underwriting in the math is where you’ll see if the deal is truly viable for you or not. This aligns with the risk management side and accreditation.
Each one of us has a very different life. We all live such different lives, and we all have different amounts of kids, cars, mortgages, and investments. So we all have these tolerances, and knowing what those are for you through the eyes of someone like you or I who has been doing this for a long time, is important. It helps you understand the level you should be playing at. How much is too big for you? How are you accredited? What is your accreditation level? Those things are all guardrails in place to help each investor make good decisions. Each style of offering that is done is styled differently to either accept less of a wealthy and sophisticated base or not. Through your underwriting and through your understanding of your life and your position, you know not to bite off more than you can chew, and only invest money that you can tolerate losing.
Real estate investing is not gambling, but if at any point it feels like gambling, you are now gambling. If you continue investing in real estate after the point that it starts to feel like gambling, that is a call that only you can make, but you should at least know you’re gambling at this point. My goal that I work toward is to remove the sense of gambling. And I think that’s what a good syndicator does, that whenever you say value add, that does sometimes mean a level of risk, i.e., we’re taking a bit of a gamble. If this happens, and if this happens, then we’ll get this. The trick is making sure that the “ifs” work with your risk tolerance, accreditation, goals, and sponsor. You have good feelings with them, and you’re happy with how they’re treating your money. And so if you feel good enough, and it doesn’t feel like a gamble. You can understand it like your high school math teacher would understand it, and also your five-year-old would understand it. If you still feel good about it, it’s probably a good investment, or at least something worth digging into. That sort of summarizes my take on the foundation. It’s practical. It’s based on the right sponsor, the right deal, good underwriting, working within your lane, and making sure your sponsor is looking at your money like it’s our money.
On the underwriting aspect, coming from a passive investor mindset, I have, as an operator, found mistakes in people’s underwriting. These people have been underwriting for years, deals on top of deals, and I hate spreadsheets. You should always have two people underwrite your deal, from an operator’s perspective, to make sure that the numbers match or are very close. However, from the investor’s perspective, they don’t typically get those 600-line, 10-tabs-deep Excel spreadsheets. How would they underwrite that themselves?
If you’re at that level, you need that walk-through. I have had those calls hundreds of times in my career. I like that opportunity because it’s a chance for me to talk with you, get to know you, and show you what I do every day. It’s a chance to build trust. For me, that conversation is always welcome. I want to do it over a Zoom call or in person. I want to show you the rationale. And nine times out of ten, what happens is we’re both excited about the deal at the end of the call. Sometimes we’re not, and that’s okay, because now they understand it, and they just made an educated choice and walk away because they weren’t comfortable. I respect that. However, nine out of ten people who get their questions answered and are comfortable with this deal will appreciate the effort. And once you do that once with somebody, those people don’t often come back for a third, fourth, fifth, and sixth deep dive you go into that takes an hour and might get a little repetitive. That’s part of building the relationship with your sponsor, too: having an accessible sponsor, one who will take the time to help you understand and show you the behind-the-scenes aspects. All of those are good things.
At our level, there is no way we can have a call with each investor for an hour to go into the underwriting in detail. The investors could ask, “How many people have you guys underwritten this with?” Could that be a way to mitigate that?
Yes. Those were deals where it’s a smaller, more intimate group of people. In some deals, you have 500 investors, and there are layers of trust that have to be built. In some cases, the underwriting is going to be confidential. You can’t release all the underwriting, or it would be too laborious for a tradesperson to understand and ingest.
There are levels of trust. I also work hard to make sure that I’m as transparent and forthcoming with all data as possible. Most syndicators, especially ones worth their salt, genuinely, deeply want you to understand how and why this works. And we all get a sense for underwriting, but if you’re feeling uneasy or you have questions, reach out to the sponsor. And even if you can’t do a long call, sometimes an email to your sponsor, a quick chat, or raising some valid questions is all you need. It’s always good to start a conversation.
Trinity Herrera
Black Tie Real Estate
trinity@blacktie-re.com