The Ultimate Guide to Investing in Real Estate Syndications

Real Estate Syndications

An Investor’s Guide to Real Estate Syndications – Part I. Vetting the Sponsor

 

High-net-worth individuals are often encouraged to de-risk and diversify their portfolios by investing in alternative asset classes. One of the most popular alternative asset classes is real estate. Investing in real estate can be a great way to earn passive income. The illiquid nature of real estate makes it less volatile than stocks, bonds and other securities.

 

Many high-net-worth (HNW) investors are excited to invest in real estate, but most are unsure of how to get started. Some will opt for direct ownership, which requires the investor to actively manage the property. This can be incredibly time intensive, especially for someone unfamiliar with the field. An alternative is to passively invest in real estate. The most popular way of passive real estate investing is through a syndication.

In short, real estate syndications are spearheaded by a person or firm known as the “sponsor,” who pools capital from investors and then co-invests that capital into deals on the investors’ behalf.

 

This two-part guide to vetting real estate syndications will walk prospective investors through the process of how to evaluate the sponsor as well as specific real estate deals.

 

Part I. Vetting the Sponsor

The Role of the Sponsor
A sponsor is the person or team that champions all aspects of a real estate project on behalf of the equity investors. The sponsor is often referred to as the General Partner (GP), whereas the rest of the investors are Limited Partners (LPs). LPs take on a more passive role in the project, which is why they are often called “silent” or “passive” partners. As a result, LP investors also have limited liability – meaning their potential loss in a downside scenario is limited to the amount of their investment. Most HNW individuals invest in real estate deals as LPs.

The LPs put a lot of trust in the sponsor, and it is easy to see why. The sponsor has significant roles and responsibilities throughout a project’s lifecycle.

 

A sponsor’s role starts early on – usually a month or two before investors even know a potential deal exists. The sponsor often finds the deal, whether on or off-market. The sponsor then negotiates the terms of the purchase and sale agreement. They will prepare investor marketing materials and assemble the equity capital and debt financing needed to acquire (and later, renovate) the property. The sponsor also oversees all pre-acquisition activities, including all due diligence (such as engaging specialists to provide third party reports and reviewing existing financial information, among other things).

 

Because of all the work that goes into evaluating, underwriting and preparing a deal for acquisition, sponsors will take an acquisition fee to cover related costs (and compensate them for this work, which they do even when a deal falls through).

 

Following acquisition, the sponsor then oversees operations and management of the property, including any planned renovations, leasing and maintenance. Depending on the size of a project, the sponsor may hire a third-party property manager to handle day-to-day management, but the sponsor will still oversee the entire process to ensure the deal’s objectives are being met. At the end of the day, the sponsor is solely responsible for all aspects of the project.

 

Throughout the project, the sponsor is responsible for all financial reporting, which is usually shared with investors in the form of a quarterly letter. They will submit draw down requests to the lender, make payments to investors in accordance with the operating agreement, and engage accountants to prepare and distribute K-1s during tax season.

Lastly, the sponsor will arrange for the refinance or disposition of the property at the end of the investment period.


How Sponsors Make Money
Sponsors make money in a few different ways.

First, and as noted above, they’ll often take an acquisition fee for lining up and conducting all due diligence on a transaction. They may also take a construction management or asset management fee, depending on the nature of the deal.

Most sponsors will also directly invest in a deal, just like the LPs, though not to the same extent. Sponsors generally put about 5-10% (sometimes as much as 20%) of the equity into the deal. It is important that the sponsor have at least 5% of the equity to ensure they have adequate “skin in the game” – this helps to align interests and indicates the sponsor’s confidence in its own work product. The remainder of the equity capital comes from the LP investors. A project’s entire capitalization is the sum of GP equity, LP equity and bank debt.

 

Another way to better align sponsor and investor incentives is to use a promote structure with a preferred return. In other words, an investor is entitled to a full return of their investment capital plus an additional return above a certain threshold (known as the “preferred return”). Above the preferred return, the sponsor will be entitled to a percentage of total returns – think of this as their performance fee as they are only entitled to this fee if the project performs above a certain threshold.

 

The investment documents should clearly disclose what fees will be paid to the sponsor, how those fees will be distributed and when.

 

How to Evaluate a Sponsor
Given the important role of a sponsor in a real estate syndication, it’s imperative that the sponsor be highly qualified. The sponsor generally brings specific expertise to the project – whether about the local market or about the asset class (ideally, both). Investors should feel confident that the sponsor has a solid reputation, strong track record, the right debt and equity relationships and all other requisite skills and expertise needed to manage the project through its entire lifecycle.

Not all sponsors are created equally. Some are much more qualified than others. How can you tell? Here are some key questions to ask when evaluating the capacity of a sponsor:

 

  • How much experience does the sponsor have in the local market and with that asset class? For instance, someone who is primarily worked with retail or office properties is likely unqualified to sponsor the acquisition of a 100+ unit apartment building. A sponsor likely has more insight into, or resources in, markets in which it already has offices, employees, or investments.
  • Does the GP spearhead syndications for a living? This should go without saying, but to be clear: you will want to be sure the GP is not doing this syndication as a one-off pet project. It is always best to invest with someone who earns a living by managing syndications on behalf of investors like yourself. That is how they will have gained the experience needed to be successful.
  • What is the reputation of the general partners? To start, you have got to trust the people managing your cash. The best way to learn about the GPs is to talk to past investors. Anyone asking for your business should provide references on request. It is perfectly reasonable to ask those references if they were satisfied with their returns and if the investor relation packages were timely and thorough.

    Do a little cyberstalking before handing over your cash to any real estate syndication. LinkedIn, Google, even Instagram tell you a lot about an investor’s professionalism, or at least their marketing skills. At a minimum, the GPs should have a professional social media presence and a polished website. The reputation of the GP also affects the deals they see and secure. Investors and brokers will approach a GP with a solid reputation first and may choose who they sell to based on their reputation. A respected investor with a reputation for closing fast and keeping their word will get a phone call from a broker with a hot deal before an inexperienced GP. A good reputation leads to more investment opportunities and higher quality deal flow.

  • In addition to the partners, who else does the sponsor have on their team? At this point, you should have already done some research about the general partners sponsoring the deal. But in addition to the partners, you should look at who else is on their team. This includes those directly employed by the sponsor (e.g., analysts, project managers, construction managers and others who could be involved in the day-to-day of the deal) as well as third parties, such as the construction team, marketing team, property manager and attorney. Ask the following questions about the team:
    • What is each person or group’s individual role and responsibility? It should be clear who will be managing which aspects of the deal.
    • What experience does each team member have that they will be bringing to the table? You don’t want an overly bloated team if each person doesn’t add specific value. Be sure the person’s experience is tied to what their expected role and responsibility will be.
    • Has this specific team done deals together before? If so, what were those deals and how did they perform? If there were different team members involved, such as a different construction manager, ask why the GPs made the shift. Was there something that happened with the last syndication that caused the GP to swap out team members? You might probe further by following up with the group no longer on the team to ask for their side of the story. It may be that a team member was not fired by the GP, but for one reason or another, decided they did not want to work with the GP again – something that happens often and is very telling.
    • Who is missing from the team? The team may not be fully built out yet, in which case, you will want to know which roles still need to be filled. Ask the GP to explain how those roles will be filled and by whom.
    • What is the contingency plan if something happens to the GP and/or another key team member? In a worst-case scenario, say, one of the GPs passes away unexpectedly, you will want to know that the syndication sponsors can still see the deal through to completion.
  • Who is the property manager? We touched upon this above already, as the property manager is a key team member. But it’s worth having the GP provide more robust information about the property manager, specifically, given the importance the property manager plays in leasing up and stabilizing a property. Probe further about how many properties they manage, what asset classes they manage, and the size of the properties currently under management. You will want to be sure they have experience in the same submarket you are looking to invest in, as each submarket has hyper-local nuances that property managers need to contend with. Check out the property manager’s website. You might also want to unexpectedly pop in and request a tour of one of the properties they manage, which should be easy to do for those who manage larger properties like apartment communities.

 

  • How have the sponsors’ previous deals performed? Any sponsors should be able to provide you data on previous acquisitions. Details on past projects, including the timeline, returns, and how the results compared to their projections, should be readily available to you. A veteran syndicator who has been in business for decades will not have a perfect track record, and that is to be expected. Any syndicator that has never made a mistake has not been in the real estate business long enough. Even the best real estate moguls do not make a killing on every single deal. However, the bulk of past projects should have performed well before you consider investing in a real estate syndication.

 

  • Has the sponsor experienced (and survived) multiple real estate cycles? There is no substitute for experience. The real estate market moves in cycles. Buying, selling, and financing real estate in a downturn is not the same as operating in a market where everything is coming up roses. Simply living through a real estate cycle and experiencing a few rough years is sure to teach any real estate investor a few tricks. Try to find a real estate syndication led by folks who remember what the last downturn was like. Understanding the sensitivity of rent, property values and interest rates to the general economy takes practice and a new GP will not have that expertise, unless he or she has recruited some veterans to the team. The bios of the team should be available on the website for your review.

 

  • How many deals has the GP done? It’s not just the years, it’s the miles. Time in the market matters, but the number of properties bought and sold matters too. While every real estate deal is unique, the more deals GP has done, the more likely they will have the expertise needed to anticipate and handle any bumps in the road. Something goes wrong on every real estate deal and investors that have done 20 syndicated deals will see trouble coming. Knowing how to build uncertainty unto financial models is a skill learned by analyzing and executing multiple deals.
  • Have any of the sponsor’s prior development projects failed to meet expectations? Ask the sponsors to elaborate. This is not always a red flag. Related to the point above, a sponsor that has been in business through multiple real estate cycles will likely have some blemishes on their record—it is just important to understand what happened and how they course-corrected. You will want to know that even when a project hits a snag, the sponsor is committed to providing timely and accurate information to investors.
  • How capable is the sponsor in terms of evaluating risks? Every project carries some degree of risk. You will want the sponsor to be honest about the project risks, and then explain how they plan to mitigate those risks during the project’s life cycle. More experienced sponsors will be transparent about these risks (e.g., a looming recession), how they may impact the property and what steps they will take (or have already taken) to minimize the downside scenario.
  • How does the company identify other equity investors and arrange debt? You will want to know whether the sponsor lines up equity investment through a fund, through personal relationships, via crowdfunding or other avenues. In terms of debt, does the sponsor use a debt broker or does the sponsor have particularly strong relationships with certain banks? (A sponsor who has longstanding relationships with their debt partners is in a much better position to navigate through a recession.) Also ask about what sort of rates they expect to get on this project. Are they completely subject to the debt capital markets or are they able to source “better than market” debt by leveraging existing bank relationships?
  • What systems does the sponsor have in place to ensure proper management of the project? Evaluate their processes end-to-end, from financing to renovation all the way through leasing and stabilization. You will want to be sure the sponsor is very deliberate in how it manages the project – an ad hoc approach creates too much execution risk.

 

  • Are the sponsor’s fees logical? Anyone who is considering investing passively in a syndication will want to thoroughly vet the project sponsor. One thing to look at is the sponsor’s fees. Most sponsors will charge a small acquisition fee (approximately 1%) for finding a deal. Other fees will range depending on the type of deal. A development project, or one that requires construction management, will generally range from 3% to 5% of total project costs. Be sure that the sponsor’s fees are in line with industry average.

As you can see, the sponsor is perhaps the most critical factor in a real estate syndication’s success, so it is important to work with someone who is highly qualified and has a proven track record. When investing in syndications, be sure to understand who you are working with, what they are responsible for and how they plan to execute on the project’s business plan. As a passive LP investor, your decision-making authority is limited after you make your decision to invest. For this reason, put the time in up front to learn about your new investment partners as you will be spending the next 3-5+ years in this relationship.

An Investor’s Guide to Real Estate Syndications – Part II. How to Evaluate Deals

By: Amanda Maher – for Derek Carroll

Date: May 16, 2021

 

Now that we have looked at the questions you should ask when evaluating a real estate sponsor [INSERT LINK TO ARTICLE ONCE LIVE], it is time to dive into how prospective investors should evaluate specific real estate opportunities that sponsors may bring to them.

This is a step-by-step guide that investors can use as reference when considering deals. There are several metrics to look at when analyzing real estate syndications. For simplicity’s sake, we have opted to focus on multifamily syndications as that is where most investors begin their real estate journey, but the due diligence outlined here applies equally regardless of product type.

Read on to learn more about how to evaluate specific real estate deals.

 

Part 2. Evaluating Specific Real Estate Deals

 

After you have vetted potential sponsors, you must then evaluate the specific real estate opportunities that they bring to you. To be clear, the vetting process can happen in any order – as long as both steps in the process occur. You may be drawn to a specific deal, but then evaluate the sponsor in more detail.

In any event, here are the steps you will want to take when considering real estate opportunities. There are several metrics to look at when analyzing real estate syndications. For simplicity’s sake, we have opted to focus on multifamily syndications here, but the due diligence applies equally regardless of product type.

 

Step 1. Research the Local Market

 

Let’s say a sponsor approaches you with a “great” opportunity to invest in a multifamily syndication in Des Moines, Iowa. You had never considered investing in Des Moines. In fact, you’ve never even been to Iowa. But the returns the sponsor is promising are attractive. So how do you begin to analyze the deal? You’ll want to first research the local market.

Location is critically important to real estate. You will want to look at macro factors (such as the regional economy) as well as hyper-local micro factors. The viability of real estate can vary from block to block, so it really is important to know what’s happening in the immediate vicinity of the deal that’s being presented to you. For instance, a property located near a transit station may draw an entirely different demographic of people, at a higher price point, than a property in the same market located just a half mile away.

Here are some metrics to look at when analyzing a local market:

 

  • Demographics: Spend some time researching local demographics. Who currently lives in the area? What is the median household age? This will tell you whether you should expect to be renting to young professionals vs. families vs. empty nesters. An area with predominately families would indicate demand for a specific type of rental housing (e.g., at least 2- and 3-bedroom units) compared to an area with mostly young professionals or empty nesters, who may instead want smaller units with more amenities.

    You will also want to look at whether the area tends to be dominated by homeowners or renters. Roughly 65% of Americans are homeowners compared to just 35% who are renters. How does this split look in the market you are considering investing in? Strong rental markets often have an inverse split, with higher demand for rental housing than ownership opportunities. This is especially the case in urban areas and areas near colleges and universities, where the population is more transient.

    What is the local employment rate, and related, what is the median household income? Area with strong employment tend to be “safer” places to invest than areas with persistently high unemployment. Median household income will also give you a sense for what renters might be able and willing to afford. For example, if a sponsor is asking you to invest in a luxury apartment syndication where units will cost an average of $2,500 per month, but the local person only earns an average $35,000 per year, this discrepancy would be a major red flag.

    As a rule of thumb, renters should spend no more than 30% of their household income on rent each month. Another way to analyze income is to assume tenants need to make 2.5x to 4.0x annual rent (see underwriting for projected rent) to qualify for the apartment. Do this calculation to see what percentage of the demographic would be able to afford the rent the syndication is hoping to achieve.

  • Population Growth: Population growth is a key indicator of rental housing demand. Look at whether the local population has been growing or contracting over the last decade. To the extent data are available, look at year-over-year changes in population growth as well. Most investors will want to shy away from investing in an area with a declining population.
  • Economic Drivers: You should also understand what’s driving the local economy. Why would people want to live there? What’s bringing them to the area and importantly, keeping them there? In a place like Boston, for example, there are major colleges, universities and research hospitals that draw people from around the world. There are also major tech and life science companies that bolster economic growth.

    When looking at local economic drivers, look for two key factors: (1) Is the local economy expanding or contracting? And (2) Is there industry/employer diversification? Ideally, you will want to invest in a syndication located somewhere that is experiencing economic growth. Similarly, it is important for that area to have some sort of industry and employer diversification.

    Just look at what happened with General Electric, one of America’s largest Fortune 500 employers. GE had a sprawling, 66-acre campus in Fairfield, Connecticut that was the community’s primary economic driver. The company’s HQ had been based there since the 1970s, and for as long, employed thousands of people which in turn, created robust demand for local housing. In 2015, the company announced it was leaving Fairfield and shipping most of those jobs up to Boston. This had a staggering impact on Fairfield’s economy, as GE was one of the area’s only (and certainly, the largest) employers. As a result, the housing market took a beating. Just a few years later, GE announced that its plans for a major expansion in Boston would be drastically scaled back. Boston, with a more diversified economy, barely noticed. There was virtually no impact on demand for housing, which continues to remain high.

  • Submarket Considerations: It is also worth looking at hyper-local submarket conditions that could drive demand for local housing. For example, a suburban community that has exceptionally high-performing schools may continue to attract demand even absent any major, local employers. Similarly, an area’s economy might be struggling as a whole, but there could be a hyper-local housing driver that would encourage investment in rental housing. For example, the New London, CT economy has struggled for decades but demand for housing adjacent to the Groton-New London Naval Base remains strong. Apartments located within a half-mile of the naval base area relatively easy to rent and can be rented for prices well above the citywide average. In this case, the hyper-local conditions in the Groton neighborhood cause housing to outperform housing throughout the rest of New London.
  • Amenities: People, old and young, increasingly want to live in areas where they have convenient access to amenities. This is one of the reasons (COVID notwithstanding) that we have seen the pendulum shift toward demand for urban housing. However, as renters have been priced out of urban areas, many are now turning to suburban areas that have small downtowns that provide similar amenities, albeit at a smaller scale. This could include restaurants, bars, boutique retail, grocery stores, pharmacies, banks, fitness centers, parks and playgrounds, and more. Before investing in a real estate syndication, be sure to look at the proximity (and quality) of amenities like these.
  • Accessibility: Consider a property’s accessibility to amenities and more. In addition to amenities, like those mentioned above, look at accessibility to schools, highways, public transit, and major employment centers. For example, a neighborhood on the outskirts of Atlanta might not initially seem appealing, but if you consider that renters would be able to get downtown in 10 minutes, this location suddenly becomes much more attractive to investors.

  • Competition: One of the biggest missteps investors make is overlooking their competition. Start by looking at the local market’s supply and demand. What is the existing multifamily occupancy rate, and has that been increasing or decreasing in recent years? It’s a great sign when demand for rental housing seems to be high. Now, look at what’s in the pipeline for new construction. If you are preparing to invest in a 20-unit apartment syndication and fail to realize there is a 500-unit apartment complex coming online next year, the demand you hoped would exist might not actually be there by the time your project reaches completion.

    In addition to supply and demand, look at the type and quality of your existing and future competition. Even in the case where hundreds of new apartments are in the pipeline, it could be that these units cater to a very specific demographic, leaving a gap in the market for renters who do not fit this profile. For instance, using the example above, those 500 units might be studio- and 1-bedroom units tailored toward high-income renters. Your 20-unit apartment investment might be equally successful if it targets a different population, such as families with young children. In any event, you will want to understand your competition and how your investment property will differentiate itself from the others in the local marketplace.

  • Regulatory Environment: As home prices have risen, several communities as well as the states of California and Oregon, have adopted rent control regulations. Other communities have stopped short of that, but have implemented stringent landlord/tenant policies intended to protect renters from displacement. It is critically important to understand any city or state regulations that might impact your syndication, including any laws being considered that have not yet been adopted.

 

There is clearly a lot to consider when researching the local market. This might seem overwhelming at first, but again, the more practice you get with analyzing deals, the easier this will become.

 

Step 2. Analyze the Sponsor’s Underwriting

 

When investing in a syndication, the sponsor will share some preliminary underwriting with you. This underwriting shows their assumptions about the income and expenses related to the deal. The underwriting is how the sponsor comes up with their target returns (i.e., the profit).

Underwriting is just a fancy term for the numbers associated with a deal. Looking at the underwriting can be daunting, especially for first-time investors, but again, it gets easier to understand these numbers over time. Here are a few key things you will want to look at when reviewing the sponsor’s underwriting:

 

  • Cap Rates
    The term “cap rate” is often used by commercial real estate investors. Simply stated, a cap rate (technically, “capitalization rate”) is a formula used to estimate the potential return an investor will make on a property. Knowing a property’s cap rate is one way for investors to compare opportunities.

 

The cap rate is expressed as a percentage that varies according to asset class, quality of asset, stage of the cycle we are in, and other factors, and have an inverse relationship to property value – the higher the value, the lower the cap rate, and vice versa.

Cap rates provide a valuable point-in-time snapshot that investors can use to compare different investments in any given moment. Specifically, cap rates provide insight as to how much risk an investor would be taking on with a particular deal relative to other investment opportunities. Generally, the higher the cap rate, the more risk associated with the deal but accordingly, the higher the anticipated returns will be.

  • Internal Rate of Return (IRR)
    The IRR is another way to value an investment opportunity. The IRR attempts to express what someone will make on an investment over the course of the entire holding period, taking into consideration potential changes in income, property value, and debt service. IRR expresses total returns on a project, though they may vary from year to year, on an annualized basis. In short, IRR is a value that describes the sum of all future cash flows according to when they occur in time. The sooner the earnings from an investment are received, the higher the IRR.

    IRR is an important metric that supplements cap rates. Unlike cap rates, which only use the first-year NOI and purchase price, the IRR calculation factors in NOI for multiple years and considers both the purchase price and sales proceeds. In doing so, IRR factors in the overall returns on an investment.

    IRR allows investors to compare investment opportunities across the board, not just those in commercial real estate, and allows for leveraged returns to be compared accordingly.

  • Amount and Source(s) of Equity
    The financing terms will be impacted, at least in part, by how much equity the investors have in the deal. The higher the loan-to-value ratio, the higher you should expect the interest rate to be. Most lenders will require at least 25% equity in the deal, so be sure the underwriting supports that.

    In addition to the amount of equity, look at the source(s) of equity. Is the sponsor investing in the deal, or are they just collecting a fee-for-development? You will typically want to see the sponsor putting in at least 5% of the equity, which helps to ensure all investors’ interests are aligned.

  • Financing Terms
    Be sure you look at what the sponsor is projecting for financing terms. Look at whether the rates are competitive with current market rates. More experienced sponsors will qualify for better financing. While 50-100 basis points (0.5 – 1.0%) above market average might not seem like a lot, when amortized, this can result in several hundreds (even thousands) of dollars each month in interest depending on the size of the deal. The more money going to the bank, the less money going into investors’ pockets.

  • Expense to Income Ratios

The underwriting will include a detailed breakdown of all the expenses (e.g., insurance, taxes, utilities, property maintenance, property management and more). It will also factor in every source of income, which includes the base rent but also any rental income generated by parking, laundry units, etc. As a guide, you’ll want to see an expense to income ratio of no greater than 60%. The lower the expense to income ratio, the better the overall syndication returns will be.

 

  • Occupancy Assumptions
    A common mistake investors make is not factoring in some sort of vacancy. Even in the strongest of markets, there will be occasions when a unit sits vacant. This could be during periods of turnover, vacancy due to renovations, a tenant’s failure to pay rent and more. In markets with exceptionally low vacancy rates, investors should carry at least a 5% vacancy rate in their underwriting.

 

Step 3. Read the Terms of the PPM

A private placement memorandum, or PMM, is a document used by sponsors when issuing securities through a real estate syndication. PPMs can be 100+ pages long, and as such, some investors will just read the executive summary and skim the rest. While PPMs might be long, they contain incredibly valuable information related specifically to that offering, including the unique risks associated with that deal. Here are key pieces of the PPM to look at in more detail:

  • Voting Rights
    Generally, passive investors in a syndication have little to no voting rights. They invest with the sponsor and are expected to get their returns, but they have no influence over the deal in the meantime. That is the quintessential nature of investing in securities. This is much different than investing in a joint-venture, where the major investors may have ability to take control and influence decision-making.

    While most syndications have no voting rights, there are exceptions. There are some occasions where investors can, by majority vote of members, weigh in on decisions such as the sale of a property after a certain hold period. In any event, investors will want to understand what voting rights they have, if any.

  • Capital Calls
    Syndications will often allow the sponsor to make capital calls as needed. A capital call is a sponsor’s legal right to request additional capital contributions from investors. Capital calls are sometimes required if a project goes over budget, fails to lease up on schedule, or if a sponsor otherwise has a gap in financing. Review the offering memorandum to determine if the sponsor can make capital calls, how often, and under what circumstances. Ask the sponsor whether they have had to make capital calls in the past and for what purposes. This will help you understand the likelihood of one with your deal, as well.
  • Liquidity Events

You will also want to look at whether the deal allows for liquidity events. A liquidity event is one in which the investors are given an opportunity to cash out of the syndication early. In commercial real estate, this is most common in development deals or value-add projects where, after two or three years, once the property is stabilized, the sponsor has the property appraised and uses this new, higher appraised value to buy out investors. The sponsor will usually refinance the property to obtain the cash needed to pay out investors, thereby effectively ending the syndication early. A liquidity event is not a bad thing. On the contrary, it helps syndicators return money to the investors faster, which frees up investors’ cash to then invest in other syndications as he or she sees fit.

 

Step 4. Consider the Sponsor’s Exit Strategy


Last, but not least, you will want to look at a sponsor’s exit strategy for the specific deal you are considering. Most often, a syndicator will either (a) stabilize a property, refinance, and then pay out investors or (b) stabilize and then sell a property. This influences how and when you will be repaid and/or earn cash dividends.

 

The exit strategy is particularly important for investors to consider based on their own objectives. Buy and hold investors, for example, will want to partner with a syndicator that plans to own and operate the multifamily asset for a long time. In any event, you must feel comfortable with the investment duration and exit strategy prior to investing in any syndication.

 

CONCLUSION
As you can see here, there is a lot to consider when evaluating a real estate syndication. Understanding the underlying economics of a deal is important. It allows you to move forward with eyes-wide-open. The more homework you do in advance, the more apt you are to ask the sponsor questions, and the more confidence you will have when eventually investing in the syndication.

Are you interested in investing in real estate syndications? Contact us today to learn about the deals we have in the pipeline. We’ll walk you through our investment strategy and would gladly answer any questions you may have.