So you want to invest in real estate and all it has to offer: appreciation, cashflow, tax benefits. The simplest way is to invest passively in real estate syndications. With the right operator, you can leverage their decades of experience, deep knowledge, and grow wealth with very little effort.
But some effort is required up front, identifying the quality of the deal, the market and its operator.
How do you find this outstanding operator?
Here’s what to look for:
1. Experience!
When the market is hot, bootcamps and training programs flood the market with new syndicators. Nothing against bootcamps, but look for real life experience, ideally navigating a full economic cycle, including a downturn. If the economy goes into a recession, you want a sponsor who’s been there before, can protect your investment, and shepherd it through. DON’T BE THE GUINEA PIG! Ask to see past and completed deals.
2. What Is The Debt?
Financing or debt terms will reveal the operator’s tolerance for risk – with your money. Make sure their risk tolerance is aligned with your risk yours. Banks lend up to about 75% loan-to-value, the benchmark for acceptable risk. If your operator is at 90%, or even 100% loan-to-value, ask why they’re taking on that risk. Sometimes it indicates a less-than-stellar deal being engineered into a good one by loading on risk. Make sure you’re willing to accept that risk.
3. What’s the Value-Add Plan?
Value-add is one of the great advantages of multifamily. You can increase your investment performance with little risk by improving the property. Look at the value-add plan. Would you, as a renter, pay more for the planned improvements?
4. Deal Structure
How and when do you get paid, and how does the operator get paid? Typically, investors get a combination of cashflow plus equity, and the operator gets fees for the acquisition, asset management, and a minority percentage of equity growth, called a pref. There’s lotta ways this can be structured, but make sure the operator’s interest is aligned with yours, and they get paid only only when you get paid.
5. How Much Is the Sponsor Personally Investing?
This goes back to interests being aligned. Look for the sponsor to invest 10-20% of the equity. Lenders require this, you should, too. You want them to have skin in the game, sharing the risk. Good operators have profits and are eager to reinvest. If your sponsor is broke, might not be a great sign.
6. Two Numbers to Look At (in the underwriting):
- Projected rent growth
- Projected vacancy rate
Do a Google search, and compare their projections against rent growth and
vacancy rates in the market they are in. They should be the similar numbers.
Then look at repair and maintenance, make sure it includes a cushion and
accounts for inflation.
7. Is the Sponsor Reputable?
Most are, but it’s worth the quick Google search.If other investors have been burned, you’ll hear about it
8. Ask to See What Your Investment Will Look Like at Sale or Refinance
Operators will have projections to illustrate the expected returns. And finally...
9. Ask About a Failure, or deal that didn’t go well
We all make mistakes but look for honesty and transparency as you begin your journey together, and ask yourself, “do I know, like and trust them?”
If they pass this test, get on their investor list, vet deals, and start placing investments. It takes time to grow wealth, so get started! Hope this helps!
Mark