WS1586: Passively Investing in Syndications | Litan Yahav

EPISODE WS1586

 

[INTRODUCTION]

 

Litan Yahav (LY): Yeah, I always track IRR. I think that’s the most important metric that exists. Most people don’t really understand that metric, because it’s like the only metric that you compare apples to apples, taking the present and future value into account, taking cash flows into account, and comparing it. Because if I put $100,000 in the stock market, but $100,000 into a real estate investment, the only way to compare those two is using IRR.

 

Whitney Sewell (WS): This is your Daily Real Estate Syndication Show. I’m your host, Whitney Sewell. Well, recently, we have been trying to have more passive investors on the show. So if you’re listening, you’re one of our past investors or somebody else’s either way, I’d love to have you on the show and dive into the questions that you have. But also the questions that maybe you had when you started passive investing, maybe you know now, but you wish you had known years ago. I want to know those questions. I want to dive into those so we can help our passive investors and many other people as well. Our guest today has invested in over 30 syndications passively, he loves the passive side, right of investing in syndications. He did the active route for a while and learned that, hey, this is a lot of work ultimately. And so he found syndications and now he is just he’s dove in headfirst, his name is Litan Yahav. 

 

He’s a passive real estate private equity investor who has invested as an LP. I can say that more than 30 deals with various operators, he’s learned a lot of lessons that he’s going to share today. He has a passion for generating passive income through real estate, which led him to build a new startup. And it’s called Vyzer for and it’s for automating management control of these types of alternative investments, including other types of investments as well. So it’s kind of like a one stop shop to manage all your logins. And that can be kind of cumbersome. I experienced that myself, you know, as an investor with different operators who are using different portals and whatnot and tracking those things. Right? And so, you’re gonna learn a lot from Litan and, and just our conversation about starting investing and some things that were very important to him and what he learned, and what he does now to ensure he knows those things.

 

[INTERVIEW]

 

Litan, welcome to the show. Honored to dive into your experience in investing in syndications. It’s the side of the equation that I’m wanting to talk about more on the show. And so passive investors, you’re listening, I would love to have you as a guest, I would love to talk to you on the show so we can help other passive investors, of course, and I just answer questions right about this process. And so you can invest with more confidence, you know, as you meet operators, and as you look at deals, and we’re going to dive into some of that today. Litan, tell us a little bit more about your background in real estate. Why real estate? Why syndication? Let’s dive into some things you’ve learned?

 

LY: Yeah, well, first of all, thanks for having me. I’m super excited to be here talking with you about this, I have a personal passion for passive investing in syndications and have been doing an amazing job of conveying and teaching people about that. So to share a little background about me: I’m 40 years old, married, and I have three kids. Born in the States, I moved to Israel when I was a kid, but here most of my life, that’s where I’m at now, Israel, and it’s a form of the background. So in Israel, I was in the military, with the Navy for six years and with a school and founded a startup, about 11 or 12 years ago, and that went well, a very weird industry. We can dive into that if you want the diamond and jewelry industry. We did 3D imagery for diamonds. But anyway, we sold that company about eight years ago, made some money. And just for us, in Israel, we don’t really deal with the retirement side, because that’s pretty mandatory. So that’s equivalent to a 401(k) and Israel is mandatory, as opposed to the US. And so in Israel, every person who has some money aside goes and starts to invest, usually in real estate abroad. It sounds like a really common practice here to do that type of stuff. And because of that, there are a lot of operators and GPs in Israel that raise money in Israel for investing in real estate in the US and in Europe through these  operators, GPS as capital raisers or as the operators themselves. 

 

And so, eight years ago, we sold the company, we had some money. And so we went and tried multiple things at once. We went back to single family homes, me and my co-founder in Ohio, sort of like long term rentals, tried that out and simultaneously put some checks into some syndications. And it was like the single-family homes were just a lot of work like a headache, and the performance was really bad. And it was just like, anyway, a lot of work. And at the same time these syndications were generating ongoing cash flow, totally passive, nothing we needed to think about, no one we had to talk to about, it was all good. And the performance was more or less the same thing potentially as a single-family. And from that point, you said, we’re not doing single family homes at all anymore. We want to be passive and let’s find ways to generate enough income and returns on those passive investments. And so we just doubled down on syndications ever since. We only got rid of these single family homes like a year or two ago, it was a bad journey for us. I know that there’s a flip side to that. But anyway, that’s sort of how we got into real estate.

  

WS: Yeah, that’s so interesting. So I’ve had a number of people from Israel. You know, reach out, wanna partner or, you know, in different ways, says it’s neat to hear that. And so investing in your retirement, though, is mandatory, so that I can understand why there’s capital there that people are trying to raise, right to invest in these deals, when it’s mandatory that you’re doing that. How is that regulated?

  

LY: The mandatory side? Is it on investing towards your retirement, it’s that a 401(k) equivalent is mandatory by law. So for example, if I’m an employee, my employer has to open a 401(k) for me, and has to contribute money to that 401(k). And I have to contribute to my salary as well. There’s no choice by law. So when I mean, Israelis feel that they’re sort of set for retirement, it’s in that sense, you have 401(k), you’re gonna be alright, I have some money. Let’s go invest abroad. So that’s what a lot of Israelis do.

  

WS: Yeah. Now, that’s incredible. Well, you know, actually, you’re in the military, and then you, you founded a startup, and then had success, sold it. And then you figure out a way to invest this money, right? And thinking long term, obviously, for your family and, and maybe future family at the time? I don’t mean if it gets at that time or not, but yeah, it’s incredible. Right? Then you decided single-family homes were the path. And I think that’s so common, I talked to so many investors who have done a similar thing. In one form or another, they went out and bought a single family home or two or duplex. And then they learn ultimately, the hard way that hey, this is I don’t have the time to go find more of these, I don’t have the time to manage them properly. Do the renovations, like I was hoping or if you calculate their time more times than not, it does not pay them near as well, as you know, most syndications would, you know, give the listeners a little dive into like, how many deals have you invested in passively and, and what types of assets that type of thing?

  

LY: Yeah, so over the past eight years, we’ve done about 30 deals as LPs. I don’t really care much about the asset class, I care more about the operator and the GP that I and invest with it turned out, there’s a lot of multifamily value, add type deals, some ground up development deals, some storage unit deals, but again, what matters to me is that I invest with people that I trust. And that was sort of the biggest hurdle. I think when we think about active versus passive, the only thing that’s not passive, I guess investing as an LP is going through the work of finding people you can trust to invest with. That’s the process that I’ve been through over the past eight years, learned a lot of lessons through that process — things that I should have asked at the beginning, that I should have known for what my strategy was, would look like. And so I mean, we could dive into that as well, if you want.

  

WS: Of course, I want to dive into that. The fact that yeah, I just appreciate you highlighting that you don’t care about the asset class as much as you do trusting the operator. And I just stressed that all the time myself, I get asked all the time about what I should know about the asset or, you know, when investors are talking to their operators? If I knew about the market for these questions, I’d say there’s tons of questions, you know, you can list you know, hundreds of questions, right that maybe you could ask an operator, man, how much time have you spent getting to know them? Right? It’s like, everything can look so great on paper. But is this someone that I can trust, when things don’t go as expected? Right? And often in real estate, especially you doing as many single family homes, as you’ve done in your experience, even as an LP, you know, things often don’t go completely as expected in real estate. Right? But so I want to jump in there. What do you wish you had asked early on? Or, you know, let’s dive into some of the things that you know, now that, hey, you know, you wish that you had asked those operators upfront to have gotten to know them better, or, and let’s dive into some mistakes there or questions now that are like, You gotta know these things before you’re going to invest?

  

LY: I think, first of all, it’s like, we’re like, what’s the strategy? Sure, our strategy was to be as passive as possible. And so this fits our strategy, like a glove, to be an LP investor. And also sort of, we feel like we’re really good. Me and my co-founder are really good sort of judges of character. And so we’ve found that for us, investing with people that we can trust is the key. And initially, it was just like, people that we know, personally, that good friends of ours are good friends of good friends of ours, just because we get that sort of risk of them screwing us over out the door. I mean, the deals might not be the best, or the market might fall, but at least we’re not going to screw ourselves over. And then after sort of getting that out the door, now looking at the numbers and making sure that the numbers match my strategy. And over the years, sort of right, if I’m going to invest in multifamily value-added type deals, the expected returns from the numbers perspective cannot be the same as the ground up development, right? Because it’s high risk. And so the numbers are the return potential should reflect that. And so it’s really important for us to sort of identify the risk return variable and make sure it matches that strategy. 

 

And then sort of down the road so like one of the things that we dove into was more of a technical aspect of it, like what happened in a refinance event. And so like, it’s like one of those things where I don’t think anyone really asks that much when they go in the door. What will happen if there’s a refi event like what happens to my cash on cash, like my distribution. And I’ll give an example. So the first syndication I invested in eight years ago, or seven years ago, I think was we put $100,000 into a multifamily deal in Florida. And it was supposed to, you know, the plain vanilla 7% or 8%, pref. And then a 70-30 split all time was about five to seven years, it’s like, pretty straightforward. I think that’s like many of the deals, at least, they weren’t until now. That was sort of what it looked like in the year and a half into the deal. That was a refi event. And we got almost 70% back. So now instead of having $100,000, in the deal, I have $30,000. But now, for the past five or six years, my returns have only been on the $30,000 remaining. They don’t they haven’t sold the property. And so it’s like, Alright, I’m not saying it’s right or wrong, I just say if I would have asked, I would have known to plan accordingly. And I also learned that when I ask these questions, now, each operator has a different structure. How do they distribute these returns? When does it return a capital event? That’s like an example from a refinance standpoint. 

 

And then another example again, and this is for me, there’s no right or wrong here. But for us, it’s like, how big is this operator? Also, even more important, what is an operator? Because when we invest, it’s like, and this is okay. Again, there’s no right or wrong here. But I didn’t know that I was investing with a capital, and not the operator, or even the terminology-wise, what’s a sponsor with a syndicate? And what’s an operator? Those functions were not clear to us. And now I asked, and it’s okay. But if you’re the fundraiser, and not the actual operator, I want to know who the operator is, if we’re not going to tell you the operator is, I think we’re going to have a problem. And personally, for me, I feel like I have enough access to good operators, I prefer just to invest directly with the operator, not capital raising. And there’s some more stuff I can dive into. But that’s like, I think that the top the top subjects that the top questions that I’ll ask.

  

WS: Yeah, but as some great topics right there, what happens when there’s a refi? When there’s a capital coming back to the deal in some form, or fashion, like what happens? And I think you hit the nail on the head, there is ultimately is ii a return of my capital on my capital? You know, what is that? When I get it back, and then you mentioned, you know, my investing with a capital raiser versus the operator themselves. And there’s different trains of thought there for both sides of that story, you know, as well. I feel most want to partner directly with most operators, right? However, sometimes there’s relationships there where that quote, capital raiser or you know, you know, or hopefully, they’re almost like a fund manager at, you know, really, but there’s all kinds of legal ramifications around that. I would encourage you to explore, I’m no attorney, but we can dive into it at a later time. But sometimes that person is, you know, they’re doing some due diligence for their investors that maybe they couldn’t do on their own and whatnot. And that can be valuable as well, or there’s a relationship there. You’re trusting that individual to do that vetting for you have operators and whatnot. 

 

But I wanted to back up to the trust component again. And because it’s  so important to you, it’s so important to me, as well, as I invest with other operators. Also, you know, you said like, you know, investing with people you trust is key. And, you know, I just wanted you to dive in a little bit on how do you determine that? I know you said like, obviously, maybe it’s a friend that you already trust, you know, a friend of a friend or but maybe it’s somebody who knows, what does that look like to develop that trust? You know, somebody like yourself is a very experienced investor, you know, 30+ syndications. I mean, that’s, you know, there’s not many that have invested in that many. So, you know, how do you go about determining that level of trust with somebody before making that first investment?

  

LY: So that was a great question. We asked ourselves a few years ago, because, you know, our first like, inform us was only with people we know. And then I was like, how do we expand that? How do we find more people we can trust? And again, it’s bringing those personal relationships with new people. And so one of the ways obviously, is, you know, let’s expand our knowledge base and consume as much information as possible through podcasts through online forums. I joined a few mastermind groups. And one of us I don’t know if you probably know GoBundance. So I mean, I joined GoBundance, and I mess with some guys and go into any of these mastermind groups it creates, especially the one that you pay to be part of creates a threshold for good people usually. And so that’s sort of like, one of the ways I found. Another thing is like these events that you go to and meet people face-to face. 

 

I actually had an operator reach out to me on LinkedIn, like a cold message on LinkedIn. I don’t usually want to prove like LinkedIn unless I know the person if I do, I want to hop on a zoom call and get to know them so that we can help each other down the road if it works. And this guy reached out to me and I just gave him a chance. Right and, and I’ve had a bunch of zoom calls, I’ve seen a bunch of events, and we’ve gotten to know each other pretty well. And I feel like there’s a level of trust, which I would never have imagined would make any sense. There’s just one random guy who reached out to me on LinkedIn right? So I’m not saying this is foolproof. 

 

Also, I have another sort of lesson but sort of approach for me in investing as I don’t like investing with the big guys. I don’t like getting a deal every other week, or every other month. I like it when there’s a deal like a few deals a year that means that it’s not a huge operation. That means they don’t have hundreds and hundreds of LPs that they need to provide deal flow to. I mean, at the end of the day, it’s a numbers game. They might be great operators, but the more deals you do, one of them is going to fail if it’s just like the way of statistics, right. And so I prefer to be in the, with the smaller operators, even, maybe the less experienced ones, but at least they’re gonna go all in and do whatever it takes to make sure that I make my money and for sure, not losing. And usually the terms are better as well, in terms of waterfalls, and splits and all that type of stuff. But anyway, that’s a new sign.

  

WS: Now, that’s some good points there too. And thinking about larger operators versus smaller, and you’ve mentioned maybe have less experience, you know, as well, potentially, but they have less operators that they’re servicing and, and there’s not a demand to do maybe another deal, you know, every month, you know, like you mentioned or, or even more often. So now that’s interesting, even the example of the guy reaching out, you know, through LinkedIn as well, just cold but then over time, you know, you build that trust, right, you’re getting to know that individual, and you’re giving them a chance to do that. So you mentioned, you know, we talked about, you know, what happens to the capital when there’s refinanced those things, isn’t even the capital raiser versus operator knowing that ahead of time, and then what else? What else? Do you ask now that you wish you had known then? Or it’s like, man, I’ve got to know these things, either about the operator or or, you know, do outside of the risk-return? You know, like we talked about making sure that matches are level of risk and meeting your personal strategy. What else do you mean, you gotta know these things?

  

LY: Well, I think now moving forward, because the past few years have been amazing, right across the board. And now we’re like, interest rates are going up, the market is going to be affected by that. If it hasn’t already, the world is going to look differently. And so when I talk with operators, now, it’s like I have to do it, I have to see I have to look different, it’s a lot harder to find good deals, it’s a lot harder to raise capital. And during that whole process. Also, it’s important to understand that operators, especially the smaller GPs, their cash flow is in closing the deal. And at the end, and so ongoing, if they don’t close deals many times, it’ll be hard for them to have any type of cash flow from their business. And so they either had a different business as well generating cash flow or did something else. And so something that, again, it’s not right or wrong, and just like you have to understand these things is important. 

 

That’s why what I’ve been seeing lately is a lot of operators have been moving from single deals, and the reason that that’s happening is twofold, right? One is because it’s really hard to find deals, and operators prefer not to whatnot, not to have to lose a deal because he couldn’t raise the capital. And so they’re gonna go and raise a fund. So they have capital available to close a deal. But ’till and I think this is also important understanding is Oh, it’s okay. But it’s a foreigner standard with a fund model, operators get cash flow, even before an exit, or before they reach the first hurdle. Because these funds usually have a management fee, and a carry, which is basically the split. And so it’s not obviously that it varies extremely, but that’s like the simplest form of it and supporting us to understand those two aspects of a single deal versus having fun. Not right or wrong, just gonna have to understand that I think deals are gonna look really different if you get in the future, especially from refi. And performance standpoint.

  

WS: Yeah, speak to your, your preference, or your thoughts on investing in a single asset fund, your deal versus a multi-asset fund, you know, like you’re talking about, or do you consider multi asset funds as well? You know, and why are you more strict on single asset funds?

  

LY: It’s all about the numbers, it’s just like looking at an underlying asset, I don’t really care as long as the numbers match what I’m looking for, and I’m looking for higher risk higher returns not extremely high, but I want to be in the double digits, like mid double digits are between like around 50% and 80% IRR is what I usually look for in a deal. And again, it’s usually funds or longer term, if it’s a shorter-term deal or fund that wants to perform with the returns, usually to be higher, but it really depends. And again, like I said, at the beginning, I put more focus on who I’m investing with, as opposed to the structure of the deal.

 

WS: Yeah, when you rely on the trust factor, which I think you should a lot I mean, you got to know that first thing that that multi-asset fund, specifically, if you don’t know the deals that they’re buying, yet, there’s a massive level of trust there, right, like you’ve mentioned, and so what about actually changing gears just a little bit and some of the same type of questions or thoughts, but if you’ve invested in 30+ syndications now, obviously, the the market, economic climate is changing , has changed, and probably going to continue to change. What do you predict? Or what do you expect over the next 12 to 18 months? And how does that affect, you know, the way you’re passively investing right now?

 

LY: So first of all, just to know, like, on that moving forward, so for me, because I was such a passive addict over the years, will you accumulate this amount of I think once we read like five or 10 syndications, like I get emails from operators, again, good problems to have. I want to remember how much I invested. And is this distribution matching what I expected it to be, and I’ll have multiple investors logged into portals and stuff like that. And so that just became a headache for us and our spreadsheets just began to break, and we ended up like building a new startup just to do that, like our whole new looking forward. It’s like I want to keep streamlining the passive investing, add into that every type of other asset class, which in that sort of mix of investments, that’s what we’re doing on a new startup. 

 

But moving forward, I think that we’re going to see a lot of these operators closing shop. I think those that were super successful or new to the game in the past few years might have difficulties because the models don’t work as they used to. So it’s, and that will affect a lot, right, that will affect the market that will affect investors appetite, I think sort of the zero-risk returns now that you’re getting like even cash deposits, savings accounts, stuff like that, is also like, why would I want to invest anywhere if I can get four or 5%, zero-risk return? Right? Again, it’s just like that’ll definitely affect the market. I think that I mean, inflation has not sort of stopped as they expected. And I do predict that interest rates will continue to rise. So I just think it’s really diligent. 

 

But with that said, I think, even though interest rates are high, the abnormal is not the rates. Now, the abnormalities would happen during the past 10 years, that rate was zero. And so people may forget that, like 30 years ago, their interest rates were in the double digits, and still people bought, invested in real estate and made a fortune. So it’s okay. It’s okay to invest with high rates, like, what’s the worst case, worst case, the rates go up, and you’re still good, because you have a fixed rate or something like that. They go down, you just refinance. And so it’s not the end of the world. But I do think that there’s going to be a lot of deals in the market, you want to find operators and know how to identify those deals. And the numbers need to be more conservative, I think, as opposed to what they were in the past few years. 

 

WS: What do you like to see or, you know, as far as ensuring that the operator you’re investing with is prepared for a downturn? You know, so it does get worse in some way? Or maybe there’s, you know, unexpected ballers that go out of property that you know, that weren’t very old, or whatever may be, how do you ensure that they’re prepared for something like that, that’s unexpected.

  

LY: Listen. So there’s one thing I want to emphasize, I am not a real estate expert, I’m a passive investing expert, I don’t really look at the sort of that type of stuff I do from speaking with a lot of operators, it’s like one is making sure the LTVs make sense. So the loan to asset value makes sense. I think now moving forward, that’ll be more sort of lower, so you’ll have less loan to value, I think it just makes it a safer deal. Second is not taking into account sort of in the business model rent increases as much as they used to in the past, or price increases as much as they used to in the past. So this is like looking at the more conservative numbers, as opposed to that used to be in the past years.

  

WS: Are there any metrics that you’re tracking, say, your current project or anything? I open up to any personal metrics that you track on a daily basis, but even as an LP on the business side, anything you track or that you’re watching very closely? I know that a lot of times these have a life of, you know, like you said, three to five years or longer, but what are you tracking in the meantime?

  

LY: Yeah, I always track IRR. I think that’s the most important metric that exists. Most people don’t really understand that metric. Because it’s like the only metric that you compare apples to apples, taking present and future value into account, taking cash flows into account comparison, because if I put $100,000 in the stock market, put $100,000 into a real estate investment, the only way to compare those two is using IRR. And that’s even sort of in the platform we’ve built that’s like the key metric to comparing performance of different types of asset different types of asset classes. But the only thing you need to take into account when you do IRR is it depends on cash flow. And so the problem with that sometimes is if I have a position, let’s say a real estate syndication, the position might be worth $100,000. But I haven’t received that cash. And so if I want to calculate the IRR compared to a position in the S&P 500, and take into account that the cash that I have now is basically could be distributed today. And then you can compare apples to apples. So anyway, that wouldn’t make me too technical. But that’s sort of the way I look at sort of metrics for the performance.

 

WS: Yeah, no, I love that. I appreciate you going technical and diving in there to see how you look at that. What is the number one thing that you would say has contributed to your success?

  

LY: Finding good people to invest with and stay on top of my investments. I hear so many people just like, lose track, and decide to just ignore the stuff they get. And they’re just like, not aware of anything. So I think sort of being on top of everything, and finding good people.

 

WS: Yeah, such an important part. What about how you like to give back?

 

LY: So I’m a tech founder, right? So in our world of tech entrepreneurship, it’s always like helping younger entrepreneurs in their journey of building a company in a startup or whatever. That’s number one. But number two, and more relevant to our conversation is I also love helping out LPs, sort of just thinking about processes and identifying goals. And I also think like the whole start our new startup advisors exactly that as well. It’s like giving back to the community like we’re trying to help people understand where other investors are investing what syndications they’re investing in just to create more transparency in our industry of private investments. I’m happy to speak about an email conversation or talk with anyone who’s interested in talking about it.

 

WS: Yeah, that’s awesome. I’m grateful for your time today, just giving back talking through 30 investments, you know, some some big ticket questions that were important to you that you wish you had known back then. I know many people who have said the same thing about some of the things you mentioned. And then I know there’s a number of things you mentioned today that they haven’t thought of yet, and they’re going to think about it now. I’m grateful for your time. Tell the listeners how they can get in touch with you and learn more about you.

  

LY: Yeah, so I’m pretty active on LinkedIn and Twitter where you can reach out on our website Vyzer.co. Or you can just drop me an email the [email protected]. Facebook as well. Anyway, I’m pretty active, responsive and available.

[END OF INTERVIEW]

[OUTRO]

 Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don’t forget to like and subscribe. I hope you’re telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to LifeBridgeCapital.com and start investing today.

[END]