5 Questions You Need to Ask before Investing in a Syndication
Real estate investments can be rather time intensive and laborious.
Especially if you’re investing on your own.
But what if you enjoy your current career, aren’t looking for a new venture, and still want to invest in commercial real estate?
Well - that’s where real estate syndication comes in.
Syndication allows investors to place their capital with operators who find, fund, and run the real estate investment.
If you’re going to trust an operator with your capital, here are 5 questions you need to ask before investing in a syndication.
1. Who Are The Deal Sponsors?
In my opinion, this question is the most important.
An inexperienced deal sponsor can ruin a great investment while a seasoned group can make even a marginal project work well.
So, it’s important to know your deal sponsors.
A few of my favorite questions to get to know the investment team are:
How many deals have you acquired in the last 24 months?
What is the total value of your assets under management?
How many deals similar to this one have you completed?
I like to know that my operators have “been there and done that,” so that if any obstacles pop up along the way, which is almost always guaranteed to happen, they have the wherewithal to manage it.
So, get to know your sponsors.
2. Who Is on Their Team?
Aside from the principals of the General Partnership (GP), you should know who else will be working on this project.
The GP won’t undertake every aspect of the project.
In fact - they’re very similar to a general contractor, since they put the deal together, bring the team in to make it happen, and oversee that team.
So, depending on the type of deal, these sponsors will likely be bringing in:
A property management team
A leasing brokerage
A general contractor
And a CPA firm
But there could be others, depending on the type of investment and strategy.
While you will be a limited partner in the deal, you’re still a partner and if you have any objections or questions about any party on the team, you should make that known on the front end.
3. What’s the Investment Strategy?
There are many different ways to make money and build wealth in real estate.
They also come with varying degrees of risk and upside.
So, you should understand the investment strategy and your potential returns prior to making a commitment.
A few of the most common investment strategies include:
Value-Add
Development
and Long-Term Buy and Hold
Your personal goals will help determine which of these strategies is right for you.
Financial planning also becomes an important aspect of syndicate investing because every investor has a different idea of a strong return, how long their money should be in play, and what level of risk is tolerable.
4. How Will Distributions, Reporting Be Handled?
After your group has acquired the property, you will (hopefully) be receiving a return on your initial capital investment -a distribution.
Will these distributions be made to the investors monthly? Quarterly? Annually?
These payouts, in my experience, are most commonly made on a quarterly basis, which helps keep down the administrative responsibilities of the general partners.
However, there may be other reasons for different distributive timelines.
Since you’re not in the day to day operations of the project, you’ll also want to understand how reporting and updates will be handled so that you’re in the loop.
Will you be receiving information on traffic, vacancy, maintenance, and more?
It is important for you and the GP to have these expectations set on the front end so as to avoid any confusion or frustration during the investment term.
5. What Are the Long-Term Goals?
These goals will, of course, depend on the investment strategy.
If the goal is to renovate, reposition, and refinance the project as quickly as possible, you’ll be on a very different timeline than a long-term buy and hold investment.
You’ll want to be sure that your vision and the GP’s vision is aligned so that 1, 3, or even 5 years down the road, you’ll still be on the same page.
Keep in mind, though, that real estate is constantly evolving.
Your short-term deal could become a long-term hold if the market suddenly shifts.
And vice versa - your long-term deal could become a short-term hold if another investor comes along offering the right amount of money for your group to walk away.
Investing in Syndication
Real estate syndication makes investment far more approachable for the average person.
They allow you to place your capital with full-time real estate professionals, who can help grow your cash flow and wealth while you spend your time and focus elsewhere.
However, as with any investment, it’s important that you understand the risks involved and investigate each opportunity thoroughly.
Now that you know the 5 questions you need to ask before investing in a syndication, good luck finding your next deal!
About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
Cap Rates are an extremely important factor in the buying and selling of commercial real estate. If you’re investing, this article will give you a strong grasp on this concept! And check out our commercial real estate cap rate calculator, too.