Making the decision to become a passive investor in real estate through syndications could be a smart choice for anyone with an interest in ownership of multifamily buildings without the desire to be directly involved in the day to day operation and management.
In choosing a real estate syndication, the first important factor is to find a proven, reliable syndicator. It may be helpful to think of the syndicator as a promoter, sponsor or operator of the investment for the pool of investors.
To help anyone in researching and vetting of any potential syndicator, here are some critical factors to investigate.
Understand the Strategy
The best sponsors have a set strategy for finding new properties and making investments. This strategy includes choosing properties based on cash flow potential, current and past occupancy levels, number of units in the building, asset class and a minimum transaction size.
The syndicator will also complete due diligence on the property to study the area for growth, employment, location and population trends.
This allows the investors to understand the specific investment criteria for the syndicator and make sure that it aligns with their goals, risk tolerance, etc.
Past History in Capital Raising
A good look at the track record of the syndicator is in order before making the decision to invest. This means information about past deals, the structure and fees for those investment opportunities and if the projected cash flow was actualized for the investors.
Can this sponsor obtain the necessary funds to make the investment? Does the individual or the company have a solid investor base who are onboard with the project?
This is where the details matter. Take the time to examine the portfolio for the syndicator and determine the math on the investments. This includes the type of multifamily properties purchased, the dates of the acquisition, the projected return and the actual return, if available. With newer purchases, the actual return may not be available, but a projected IRR (internal rate of return) should be provided.
The Expertise of the Firm
While the track record of capital raising combined with information on the current portfolio is an effective measure of the success of the syndicator, the expertise they bring to the deal is equally as important.
Top companies have top team players. This includes people with a significant investment in multifamily real estate as well as their own set of skills they bring to the table. This information should be readily available through their professional website. Whenever possible, plan to meet with a member of the team to have the opportunity to ask questions and ensure the partners know the SEC regulations and have the expertise to manage your investment dollars.