If you are new to investing in commercial real estate or real estate in general, it is likely that you do not know many people that are investing in this space. Multifamily real estate investments are primarily offered in private markets which means that there may not be a significant amount of publicity around these investments. You may not even know where to find these investment opportunities. One of the keys to find more investment opportunities is connect with syndication deal sponsors who can present you with investment opportunities.
What is a sponsor in a real estate syndication?
The deal sponsor is the individual or group of individuals that help to organize and put together a syndication. This includes the efforts to source and evaluate an investment opportunity as well as raise money to complete the purchase and business plan of the investment. They will oversee the operations of the investment property while it is held and provide reporting and updates to the passive investors in the syndication. Sponsors get paid in various ways such as a deal sponsor fee in addition to a portion of the profits based on performance of the investment deal.
You don't want to get scammed and you want to make a good investment. As you begin to meet syndication deal sponsors and build relationships with these individuals one question you may be wondering “how do I evaluate real estate syndication deal sponsors?”
Character and Reputation
A quick google search could potentially save you tens of thousands of dollars. Character is one of the most important qualities to evaluate when looking to invest with a deal sponsor. If you do a google or other media search of the sponsor, their team members or affiliates and you are flooded with results showing negative reviews, ethical missteps, or other potential character flaws this is a sponsor you should consider staying away from. Of course, there may be people that make mistakes or false information that is on the internet, but it is probable that anyone that is surrounded by drama is likely a questionable choice to steward your investment capital.
Investment and business track record and expertise
A natural expectation as a passive investor you would have is that someone that has already been successful at completing real estate syndication deals will be a deal sponsor that will be successful in completing future real estate syndication deals. You would have even more confidence if the deal sponsor has been through various market cycles and survived multiple recessions. A new syndication deal sponsor will not have a lengthy track record of success in real estate, however. Don’t let this lack of history automatically rule out a new deal sponsors. The new deal sponsor may be able to show a strong track record in business prior to starting to invest in real estate or have a team that supplements their lack of experience and expertise.
Team
Having a good team is critical to a successful real estate syndication. It takes a lot to make an investment successful and there are many different roles that the sponsorship group needs to take on during the investment life cycle. Each team member in the sponsorship group should have experience that helps to add value to the sponsorship group. If the lead sponsor and team are both inexperienced this should raise a red flag. You should evaluate the character and experience of the team in addition to the lead deal sponsor.
Investor Relations
As a passive investor you want to know that the sponsorship team has a communication style and manages investor relations in a transparent and open way. When deals are performing well this communication may not seem to be that important. Passive investors often realize the importance of the investor communications after a problem arises in the investments. You should look for deal sponsors that are proactive communicators who let passive investors know when there are issues. A good sponsor should increase the frequency of communication during times of crisis and does not shy away from communication. Before investing you should get an understanding of how you will receive investor updates and how you can communicate and get any questions resolved during the hold period.
Alignment of Interest
It is key that your deal sponsor has an alignment of interest with you as the passive investor in the deal. This means that if the deal does well, both you and the deal sponsor reap the rewards. It also means that if the deal performs poorly both you and the deal sponsor will be impacted by the downside. You should be cautious of sponsors that make money regardless of what happens to the investment. Deal sponsors that invest their own capital in deals as well as are incentivized (based on deal structure) to ensure the deal performs well will have the best alignment of interest with passive investors.
Deals and Investment Approach
Another way to vet a deal sponsor is their investment strategy and the type of deals they present. Is this deal sponsor primarily investing in high risk, high reward deals and you want safe stable assets? If their strategy doesn’t align with what you want to invest in, then this deal sponsor may not be a good fit for you. Even if there is alignment on investment strategy there may still be a poor fit based on the deals themselves. Perhaps you have previewed a few deals from the deal sponsor and after reviewing each of them you did not like the deal itself. After you have passed on multiple deals from this sponsor, it may be time to reconsider if this sponsor is a good fit for you as they are not able to provide deals which appeal to you.
Interested in learning more about investing in multifamily apartments? Give us a call or check out some of the other free resources we have available at Investupmultifamily.com.
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