Investing in real estate syndications: Is it right for you? [PODCAST]

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In this episode, we are joined by Harry Nima Zegarra, a critical care physician, as we dive into the world of real estate syndications. This type of group investment, where several people come together to acquire a large asset like an apartment complex, has gained popularity in recent years due to its attractive risk-return profile. Harry, as a physician, brings a unique perspective on the topic and shares his own experiences and insights. However, it’s important to note that real estate syndications are not the right choice for everyone. We discuss four reasons why someone may want to avoid investing in real estate syndications, including the fact that they are illiquid investments, the minimum investment is usually quite high, you have to give up control, and the business plans and concepts can be new for many people.

Harry Nima Zegarra is a critical care physician.

He shares his story and discusses his KevinMD article, “A case against real estate syndications.”

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Transcript

Kevin Pho: Hi, and welcome to the show. Rate and review at KevinMD.com/rate. Subscribe at KevinMD.com/podcast. Today on the show we have Harry Nima Zegarra. He’s a critical care physician, and we’re going to talk about his KevinMD article, “A case against real estate syndications.” Harry, welcome to the show.

Harry Nima Zegarra: Hey, thank you so much for having me here. OK, very excited.

Kevin Pho: So we’ll get to the article in a little bit, but please share with my audience your story and journey to where you are today.

Harry Nima Zegarra: Yes, absolutely. My wife and I are both physicians. We’re actually from South America, from Peru, so we did our medical education over there, our medical school, and then we came here about 15 years ago to continue our training. In my case it was internal medicine and then a fellowship, and in my wife’s case it was family medicine. Because of the nature of our training, I mean, we’re in different areas, and I started my career as a critical care doctor in South Texas.

Then about five years ago, we moved here to Dallas-Fort Worth, and we liked the area, and we just decided to stay here. That was almost around the same time when we decided to, what you may call, look outside Wall Street and start investing in real estate. That’s also part of the article that we’re going to talk about today. So we do residential and also commercial real estate.

Kevin Pho: Sure. So how did you get interested in that?

Harry Nima Zegarra: We have had an interest in that for a long time. Actually, myself, I’m first-generation college-educated, so my family didn’t have the opportunity initially to go to college or to have a higher education. So I witnessed them do different things in business, including real estate. You can imagine, in a third-world country like Peru, real estate is different from here. They already had the idea, so when we came here, I was already very primed and interested. It was just a matter of education and how to do things here in the U.S.

Kevin Pho: And where did you get your education on real estate? I talk to a lot of physicians who do a lot of real estate on the side, and I always like to hear their story about how they learned this, because obviously this isn’t something that’s being taught in medical school and residency. How did you learn?

Harry Nima Zegarra: Yes. The same way real estate is not taught, financial education is also not taught in medical schools. So it’s different and difficult for many of us to get started. I guess my path was similar to many doctors who started this. We were mainly doing podcasts, doing audiobooks, going to conferences, and going to local meetups. Again, I started doing that when we arrived here in Dallas-Fort Worth, and the reason was that, because of the training, we were moving every two or three years, so initially we felt it was not possible.

Kevin Pho: So when you say that you’re doing real estate as part of your professional career, in conjunction with what you do in critical care, what exactly do you do in real estate currently?

Harry Nima Zegarra: We have done two things. There is residential real estate, so we have properties here in the Dallas-Fort Worth area that we manage with a property manager. It’s buy-and-hold, long-term rentals. And in the last couple of years, we have been involved in commercial real estate, in apartment complex syndications.

Kevin Pho: And how much time does it take you per week, would you say, to manage your real estate properties?

Harry Nima Zegarra: We are grateful, again, that we have a good manager on the residential side. But still, I always heard that having rental properties is a passive investment. It is not, because there are many things involved, and even with a great property manager, you still need to, I mean, all the decisions, all the responsibilities, and all the liabilities are around you. Sometimes, when I hear people say that rental properties are a passive investment, I always think that either they’re lying or they haven’t been in this field enough to know better. But in our case, in my case specifically, I’m the most active in this field. I probably spend about 10 to 15 hours at least a week.

Kevin Pho: All right, so let’s talk about your KevinMD article, “A case against real estate syndications.” Now, before going to your article, for those who aren’t familiar with that term, what exactly is a real estate syndication?

Harry Nima Zegarra: Yes, and that’s an important topic, how we always get started, because we have heard from people who are investing in real estate, for example in single-family homes or fix-and-flips, who haven’t heard this term. Mainly, real estate syndications mean group investment. A group of people with a similar interest who want to buy a property or an asset, or anything in general, get together, and they pool the resources, and they buy these big assets, which otherwise they wouldn’t be able to buy.

Kevin Pho: All right. Now, how did your article come together?

Harry Nima Zegarra: As I was mentioning, in the last couple of years we have been passively and also actively investing in this field, in syndications. One of the important things when I talk with friends, with colleagues, and even with investors is that we need to be honest, and we need to be transparent about any investment. There’s no such thing as a perfect investment. So that’s how I came out with this topic, just to tell everyone the good things about syndications but also the other things that may make them decide it is not a good investment at that moment, or not at all.

Kevin Pho: So when it comes to real estate syndications particularly, tell us, what are some of the downsides to real estate syndications that you talk about in your article?

Harry Nima Zegarra: Some downsides, or some things that should make you consider delaying an investment. For example, the first point is that it’s an illiquid investment, which means that if you go into these kinds of projects, these syndications, you need to think about it as a project for the long term. They usually are five to six years. It’s not like, for example, stocks or REITs or mutual funds, where if you change your mind next week or next month, you can sell very easily. Even in real estate, for example, if you own a rental house and you decide to sell the house, if you decide that you don’t want that investment anymore, you can try to sell your house and get your money back in a couple of months, one, two, or three months.

In syndications it’s different, because your money is put together with other investors in this asset. So when you go into these kinds of projects, these kinds of investments, you need to think about that. It’s important because life happens and things happen. For example, you may need to buy a car next year, or you need to make a trip to your home country, or things like that. So that’s one of the important things.

The second thing is that, even for high earners, high-income professionals, or physicians, it’s a big investment. We’re talking in general about investments of $50,000 to $75,000 minimum. It’s a big investment, even for physicians. So you need to think about that. You need to be safe, for you and for your family, and to have the reserves, at least, as we always say, three to six months, and think about these things.

The next point is that, as its name says, it’s a passive investment. We always talk about how there’s no such thing as a 100 percent passive investment, because before you make the decision, before signing documents or sending your capital, you need to do your due diligence. You need to vet the sponsor, you need to review all the projections, all the presentation, and all of that. But once you do that, once you have decided and you have signed the contract, what we call the PPM, or private placement memorandum, and sent in your funds, then it becomes passive. That may be a good thing or a bad thing for many people. There are many people, especially us physicians, who prefer to have control over things. We’re controlling people. So it’s different from when you own a rental property. For example, you cannot make the decisions on how to screen tenants or when to do the renovations, or even when to sell or refinance a property. But if you think about it, on the flip side, it may be a good thing, because you are leaving this to a professional team, to someone who’s doing this every day, who does this as a full-time job and has been doing it for many years.

And the last thing, as we started the conversation, is that many people haven’t heard the term syndication. So even the word is just a scary thing. And syndications honestly have been around for a long time, for decades, actually. I was actually just reading a couple of days ago that the Empire State Building in New York was sold and bought in the ’60s through a syndication. So it’s a new term, it’s something that you need to learn, and what is important is that we tend to feel comfortable with, and in the end invest in, things that we’re familiar with. So if we’re not familiar with syndications, it’s going to be less likely that we’re going to be able to invest in them. It’s different from the stock market, for example. We hear about that every day in the media and all of that, and we receive emails about it, so we’re more familiar with it. But again, it’s just a matter of education.

Kevin Pho: So if I’m a clinician and I have some capital that I want to use to go into real estate, what other options are there other than syndications?

Harry Nima Zegarra: Yes, there are several, actually. And that’s why, as I was telling you, we love real estate, but it’s not the only option. We love syndications, but they’re not the only option. In real estate, for example, there are so many ways to invest. You can do fix-and-flips, you can do rental properties, you can buy land, and you can even do lending of your money, kind of similar to syndications, where you pool your capital or equity together with other investors. You can also, for example, invest in ATMs, in energy, in oil, and in mobile parks. So there are different ways.

But the most important thing, and sometimes it can be, I would say, overwhelming, because there are so many options, is that it’s just a matter of education, of trying to take your time to get educated and to know a little bit more about how this works. Once you have a little bit more certainty about the process and how it works, you can start talking with other people who have invested in them before you, and you can start talking with syndicators or operators to give you options. That’s mainly because what we mainly do is just invest in the stock market and in our 401(k)s, and we think that’s it. But there’s so much more out there.

Kevin Pho: Now, in terms of the returns, can you contrast the returns from a typical real estate syndication versus some of the other options that you mentioned?

Harry Nima Zegarra: Yes. Again, with real estate syndications, the way the structure is, it’s usually a project that is not short-term; it’s long-term, for five to six years. And there are two ways that you get the returns. One is through cash flow, and the other one is with the equity at the end of the project, when you sell the property. We could use another episode to discuss the structure, but with those together, what syndicators or operators aim to get as a return is about 15 to 20 percent a year. So over the life of five to six years, we aim to get returns from 80 to 100 percent.

Now, that changes, because in the last three to five years, as we say, it has been the golden age of real estate. We were seeing ridiculously high returns, and everyone was thinking that you can make those returns even in three years or less. That’s not necessarily the case; those are exceptions, actually. And that also changes when the market changes. We’re now in a downturn, and we’re about to go into a recession. So that’s why it’s also the responsibility of the operators or syndicators to tell their investors, or people who are interested in investing, and to make them aware of those things.

The other types are kind of similar. For example, we were talking about other types of investment like ATMs or mobile parks; the returns are kind of similar in some of them. For example, ATMs are more cash-flow heavy, and at the end, the equity when you sell the investment is not as high, but the return is kind of similar. And in mobile parks, the returns may be higher. But what we always need to think about is to weigh these things, returns versus the risk profile of your investment. So it’s important to have options, and it’s important to get educated about these things.

Kevin Pho: So when you say ATMs, what exactly do you mean by those?

Harry Nima Zegarra: The cash machines, where you put your debit card and you get the money. Yeah, you can invest in those. You can invest in those too, yes, and there are even funds for it.

Kevin Pho: OK. So I think one of the biggest downsides to syndications, to me, is your first point, that they’re illiquid. Your money is really tied up for four, five, six, seven years. Now, with these other direct investments, are you saying that your money is more liquid?

Harry Nima Zegarra: Yes. For example, we were talking about funds in ATMs, or syndications in mobile parks; they’re kind of similar. Every syndication is kind of similar. In theory, and legally, you could take your money out, but it’s very difficult, it takes time, and there are many fees involved, to the point that we always tell our investors that it’s preferred not to do it. In terms of funds, there are also funds for real estate, and there are also funds for ATMs and for oil and gas. There are different structures. There are some structures that are more strict, that mirror the syndication a little bit more, but there are other funds that are more open and more flexible, in which case you can also take your money out, not necessarily in a couple of days, but in a couple of weeks to a month.

Kevin Pho: Now, with new clinician real estate investors, I get the sense that syndications probably have the least amount of friction in terms of investing, right? You just give your money up front, they’ll take care of it, they’ll give you some cash-on-cash return, and then in, well, five, six years, hopefully you’ll get your capital back. Now, for these other investments that are more independent, these direct investments, how can one go about learning more about who’s reputable? Where does one even start in terms of looking for these real estate investments outside of syndications?

Harry Nima Zegarra: Yes, and I believe that’s one of the barriers, and why many of us are still hesitant to do these other types of investments. Honestly, it takes time. Honestly, it also takes a leap of faith. You still need to start talking with other investors like yourself or myself and see how their experience was with these other investments. And truth be told, honestly, not every investment is going to go the right way, even with our best intentions. As I was telling you, in terms of single-family homes, for example, there’s always going to be a problem, and there’s going to be a bad investment. But we need to see the communication that your sponsor or your operator has with you. The operators are the ones who respond to you, who explain to you, and, in case there’s a problem, who take the right steps to fix that problem and the steps to prevent that problem from repeating.

Kevin Pho: Now, how about some resources that you recommend for those clinicians interested in some of those investments that you’re talking about? What are some recommendations you have?

Harry Nima Zegarra: Yes. Again, the most important thing for anyone, and in my case also, was the part about education. There are so many free resources out there, on YouTube, in podcasts, BiggerPockets, different platforms where you can get educated. That’s the beauty of our age: There’s so much free information and free education, and there’s also education that’s not that expensive that we can take advantage of.

Kevin Pho: Now, how long did it take you to educate yourself before you began deploying capital and investing in real estate? How long did it take to educate yourself?

Harry Nima Zegarra: Yes. As I was telling you a second ago, I was in training and in different areas, so I was ready to get started, but because we were moving every couple of years, we couldn’t do it. But usually, when I have discussed it with other people who do this in residential as well as commercial, it’s usually a couple of months, three to six months, until they feel more comfortable, until they have talked with other people, until they have talked with sponsors or syndicators, to feel more comfortable about it.

Kevin Pho: We’re talking to Harry Nima Zegarra. He is a critical care physician. His KevinMD article is titled “A case against real estate syndications.” Harry, tell us some of your take-home messages that you want to leave with the KevinMD audience.

Harry Nima Zegarra: Again, there’s this need for us, especially since we spend so much time in medical school and in training, and then when we finish all our training, we’re not that literate in financial education and in ways of investing. So we need to try to educate ourselves, look outside the box, look outside Wall Street, and see that there are other options out there. It takes a little bit of effort at the beginning, but again, at the end, it’s worth it.

Kevin Pho: Harry, thank you so much for sharing your time and insight, and thanks again for being on the show.

Harry Nima Zegarra: Thank you, Kevin. It was a pleasure.

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