Syndication is an effective way for real estate investors to combine their financial and intellectual resources and channel those funds into profitable real estate ventures. One of the main reasons investors participate in real estate syndication (crowdfunding) is to gain access to capital flow. Not every investor has the extra time to examine and underwrite thousands of properties to find the one worth pursuing.
Syndication gives investors the chance to invest in real estate without the additional stressors often associated with property management. It also provides them with the opportunity to invest in larger or more exclusive properties with better credit and higher yields. Often, these types of investment properties are hard to acquire independently - which is what makes investing in syndications as more viable option.
Behind these business ventures is a robust team of real estate professionals who possess the knowledge, the experience, and the foresight needed to deliver high returns and produce a working model for financial success.
Ultimately, the syndication sponsor (lead investor) is responsible for finding, acquiring, managing, and selling the real estate deal in question. The sponsors are the decision makers—the ones who negotiate prices for assets, discover the best way to build value, appropriate capital structure, and steer the project in the right direction when things go awry. Syndicates rely on a team of people to make the right decision to increase the cash-on-cash return.
This requires a skill set similar in nature to a conductor of an orchestra, managing the multiple players and coordinating the various routines to make a successful transaction a reality. At some point in the process, the sponsor acts as a sales rep, a marketing guru, a buyer’s advocate, a business analyst, and an expert negotiator, just to name a few. Finding a real estate professional that can handle this day-to-day management and responsibility can be difficult to find.
Finding a good sponsor who operates under this paradigm is critical to success in the real estate industry. That’s why it is paramount that you do your due diligence and ask the right questions early on. That way, you can avoid potential business pitfalls and ensure that the sponsor’s investment strategy aligns with your personal risk profile.
Much like a job interview or first date, open-ended questions are ideal as they force the sponsor to choose their words more carefully instead of offering up answers that seem scripted or rehearsed. The questions we’ve included below should help give you an accurate picture of a sponsor’s approach, principles, and potential performance. Remember— you are looking for a good partner in addition to a good steward of your capital.
Questions to Ask Potential Syndication Sponsors
Background and Experience in the Field
In order to maximize the success of your potential cash flow, it’s critical that you gain some insight into the sponsor’s track record.
- How long have they been investing in real estate?
- Have they done deals like this before?
- How did they those deals perform?
- What were their professional hits and misses?
Location, Location, Location
With buyers, location is one of the most important pieces of investing criteria. In addition to price, location is often a make-it-or-break-it factor for a specific listing.
- Where are the properties located?
- Are they clustered for convenience?
- Will these listings have opportunities for growth in the future?
Sponsor Has Skin in the Game
When an investor has a legitimate financial stake in the transaction, it's much more likely the transaction will be successful because of the capital they have invested within the syndication.
- Has the sponsor personally invested any of their own capital?
- If so, how much?
- What do they stand to gain from project’s success?
The attraction and pull of a guarantee can still heavily influence a buyer’s decision and some investors are quick to use them as an attractive selling tool.
- What guarantees are they offering?
- Is there an exit strategy in place in case the market changes?
Sponsoring Other Investments
Too many investments can create more risk instead of adding diversification to an investor's portfolio. There’s a delicate balance that must be struck between diversifying your portfolio and effectively managing your investments, real estate or otherwise.
- Are other deals being offered?
- If so, how many?
- Will they be over-committed?
- How will a new investment affect your overall portfolio strategy?
How to Structure Deals
There’s no one-size-fits-all approach to structuring deals, so it’s best to gain an adequate understanding of the terms and conditions sooner rather than later.
- What type of investment structure? Equity vs. debt?
- When and how are investment proceeds split?
Smart investors usually minimize as much risk as possible when scoping out potential investments. Therefore, a business entity that offers some type of liability shield is preferable.
- What legal structure is being used?
At the end of the day, these questions can go a long way when it comes to equipping you with the information needed to adequately gauge a syndication sponsor’s trustworthiness and credibility. In addition to the answers they give, keep an eye out for other cues that may indicate whether or not they’re the right fit for you. Take note of how they carry themselves, how they stay organized, how they interact with you, and how transparent they are.
Remember, being an expert real estate investor also means knowing when to trust your instincts.