The rapid acceleration of interest rates over the past year is beginning to pressure real estate syndicators and those who invest with them.
Syndicators pool assets from multiple investors to purchase real estate portfolios, typically composed of multi-unit dwellings, like apartment complexes.
Typically, the syndicator invests little in the properties. Instead, syndicators earn fees from investors as high as 5% of an apartment building’s purchase price. In addition, they may also generate 2% to 3% from the building’s gross income. For this reason, syndicators can still profit even when their investment fails.
The same is not true for the syndicate’s investors, some of whom lose significant portions of their life savings.
Thousands of syndicators operate across the United States. In Texas, 61-year-old Jay Gajavelli’s company Applesway Investment Group held a portfolio at the end of 2022 that included over 7,000 units in Houston valued at over $500 million. This placed Gajavelli among the top landlords in the city.
Like other syndicators, Gajavelli attracted investors with promises of enticing returns.
“I never worry about [the] economy now,” Gajavelli said to investors in a webinar. “Even if [the] economy goes down, still I make money.”
However, the rapid interest rate tightening campaign initiated by the Federal Reserve has similarly driven up mortgage rates, squeezing Applesway’s portfolio. The loans taken out by the company were floating rates, meaning they are adjusted up and down from month to month, unlike fixed interest rates.
As a result, the floating rate loan payments rose faster than Gajavelli’s company could raise rents. This ultimately led to the foreclosure of four rental complexes, wiping out over 3,000 apartments from the company’s portfolio.
In 2012, Congress passed a law making it easier to market real estate investment opportunities online. This move was meant to improve access to financial opportunities for lower-income individuals, and it allowed syndicators like Gajavelli to reach larger audiences of potential investors.
Plano local Munzer Haque told The Wall Street Journal that he was Applesway’s largest individual investor in the four foreclosed apartment complexes and two other deals he believes are similarly problematic.
According to Haque, not only did he and his wife lose millions of dollars in the Applesway investment, but their children also lost money.
“When you trust the wrong person, that’s the highest risk,” said Haque, per the WSJ.
According to Colin Ralls, principal at Acora Asset Management, a Phoenix-based property manager, the COVID-19 pandemic and shutdowns kicked off a lucrative rental-market boom for syndicators and the investors who joined them.
“There was this huge mania where people wouldn’t even look at the unit,” said Ralls, per the WSJ.
With higher interest rates, some syndicators are now rushing to raise funds from new investors or liquidate properties before foreclosure hits.
“The bubble is going to start popping if these guys can’t get out of these deals in time,” warns Ralls.