Several days ago, The Wall Street Journal published an article about real estate syndicator Applesway Investment Group (owned by real estate entrepreneur Jay Gajveli) losing more than 3,000 apartments in four rental complexes that went into foreclosure. They went.
What caused one of the biggest commercial real estate busts since the 2008 financial crisis? In essence, Gajveli’s company organized floating interest rate loans where payments ballooned. Inflation brought in higher expenditure, but rental revenue could not make up the difference. Thus, the bills became overdue, eventually leading to foreclosure of these properties. Thousands of individual investors who want to generate passive income (without landlord) are now left empty handed.
Should individual investors be worried about a possible housing collapse?
Between 2020 and 2022, syndicators raised a staggering $115 billion. Also, according to Financial Samurai, there were over 300,000 investors who participated in the syndication in 2021.
As much as I would like to believe that this is a one-time scenario, I am leaning towards it could have a ripple effect that could ripple across the industry.
Assuming that other major syndicators take out loans with variable rates (without interest rate caps), they will feel the financial pressure of increased payments. This is due to the Federal Reserve aggressively raising interest rates for the 10th consecutive time from March 2022. And syndicators won’t be able to avoid renewing at higher rates in the near future.
Beyond that, there are a variety of factors where things can go down. For example, the business model may be vulnerable due to poor asset management, underestimation of operating expenses, and lack of rental income to sustain them. It won’t be nearly as devastating as the housing market crash in 2008, but I wouldn’t be surprised if we see a handful of syndicators go belly up this year.
What should be done to protect small investors?
I personally believe that all of this could have been prevented if government—at both the state and federal levels—took more responsibility for protecting individual investors.
I will give Congress the benefit of the doubt that they had good intentions in passing the JOBS Act in 2012 to allow syndicators to advertise real estate investment opportunities online. This made it more accessible to American households to invest. On the surface, it seemed like a great idea. In fact, cracks in the system have led to this disastrous result.
This is a complex problem that will not be solved overnight. However, there should be accountability for all the stakeholders involved. For one, I believe that syndicators should take responsibility for their investors by being transparent about their financial performance. Reporting regularly to all your investors will help build trust between both parties.
In addition, more legal protection should be provided to individual investors. If I were in his place, I would want to know how my investments are doing and I would not be blindsided until it is too late.
Besides, shouldn’t syndicators have skin in the game? If they are asking investors to shell out big money, shouldn’t they do the same?
These victims are hardworking citizens trying to live out their “American dream”. Thousands of lives (possibly more) are now in jeopardy because of this flawed system. This is a hard lesson for small investors who must rebuild their financial nest.
How can you protect yourself as an individual investor?
If you want to be a passive investor with a syndicator, here are some ways to be active and protect yourself.
- network with other investors To find a reputable real estate syndicator who can prove they have a successful track record. The BiggerPockets forums are a great place to start.
- research and company vet To make sure they are reliable.
- understand your risk tolerance before you hand over large sums of money. With real estate, there are always risks involved.
- don’t put all your eggs in one basket—or maybe the bag is left in your hand.
- If it sounds too good to be true, it probably is. Don’t succumb to FOMO. A company should not guarantee or over promise unrealistic returns in a short time frame.
Hopefully, with these tips in mind, you can make an educated decision about which real estate investment is right for you. Again, we cannot predict what the outcome of this event will be. It can be separated. But I maintain that if foreclosures can happen for one syndicator (and unless others are more diligent), we may be seeing more on the horizon.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
