Why might it be a bad idea?
Just because you can write a check to invest in the deal you were just sent doesn’t mean you should.
These are just my thoughts but I believe there are a few reasons, (outside of the obvious ones: it doesn’t fit your investment criteria or you don’t get the warm fuzzies about the sponsor themselves), that maybe you shouldn’t invest.
- Do you have an appropriate personal or family emergency fund?
If the investment you are considering will take all of the cash you have you are playing a very reckless game with your families finances. Please have a minimum 6-12 months of living expenses set aside first.
- If you count on and really need to see that quarterly or monthly distribution check in the mail like clockwork for your financial world not to flip upside down, you probably shouldn’t invest
- Will you be ok, both emotionally and financially, if there is an interruption in your expected distributions?
Approach investing from the position that you don’t need to see fruits of the investment for the next couple years minimum.
A Little More Color
When you invest in a deal you will typically see regular distribution checks and oftentimes those checks will grow over time. You do however need to understand that things can and will come up. If you can’t handle the thought of not receiving that regular check in your account without emotionally melting down or panicking because you weren’t prepared financially I believe you should reconsider whether or not you should invest.
You must realize and remember that these types of deals are highly illiquid and may be very difficult to get your money back out before the property sells.
What happens when the next Black Swan event hits, people won’t typically see it coming until it’s too late. COVID-19 should have taught us all a very big lesson; things beyond our control can and will happen again. You need to make sure that you are prepared both emotionally and financially to weather the next storm when it does hit.
Multifamily is one of the safer investments that you can put your money in but things still happen. When you invest in a syndication what you are actually doing is buying a piece of a living, breathing business and just like any other business, you will have ebbs and flows on your way to your projected returns.
Something to understand
When you invest in a syndication the main responsibility of the deal sponsor is to protect the investment and the company you invested in over any one individual investor. While you may really need that distribution, if the sponsor feels that the prudent thing to do is to withhold that distribution they are carrying out their responsibilities appropriately.
One Man’s Final Thoughts and Key Takeaways
These have been trying times for both deal sponsors and passive investors. As investors we need to keep our heads about us and stay disciplined and remember what Warren Buffett said:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”
You only truly lose if you sell into a bad market out of need or fear. We need to give ourselves the cushion and runway that may be needed to ride out a rough market. There may even be an opportunity during the lean times as many investors that weren’t prepared with adequate reserves may be looking to offload good assets at even better prices.
If we aren’t prepared ourselves we may find that we are on the wrong side of the opportunity scale, please don’t let that happen to you.
These are just my thoughts and everyone has to decide for themselves what they are and are not comfortable with and be real about how they will react if things aren’t always the rainbows and lollipops they may have expected.
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Known in the real estate world as the Apt-Guy℠, Bruce Petersen is a serial syndicator who started with a 48-unit building and has now syndicated over 1,100 units. As the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce is a #1 Best Selling Author and has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce also mentors people on how to invest in apartment complexes.