5-Step Guide for Evaluating a Real Estate Opportunity when Investing with a Syndicator

Updated: Jan 9

Passive investment is an excellent way of diversifying your investment portfolio for better returns. In particular, passive investments in real estate, if invested wisely, can provide a steady cash flow that can either supplement or replace your main income. Some passive investors gave up highly paid jobs and make their living from the proceeds of their passive investments. Whether you are a seasoned passive investor or just beginning to consider becoming one, this article can provide you with valuable information and guide you through the passive investment process.

Here are 5 steps you should follow when considering an opportunity to join a syndication as a passive investor.

Step 1: Determine the Exact Nature of the Opportunity

Ostensibly, this is the very first step that one should take before considering a real estate opportunity. It is imperative to determine the nature of deal;

  • Location: is the property located in an area you feel comfortable with? Is it in a market that you are familiar with or at least comfortable with. Some investors like to invest in their ‘backyard’ and some are comfortable investing out of state. Additionally, make sure you understand the location’s demographics profile – is the property located in a decent area or in a crime zone? If you are unfamiliar with a certain city or neighborhood, look up the crime rate on Trulia and Google the city/neighborhood name to gather more information that will help you assess whether the property is located in a decent area or in a crime zone. Some investors have a higher appetite for risk, where returns are high, but the risk is high as well. Knowing your preference when it comes to property’s location can help you save time and focus on the right deals for you.

  • Hold period: take a close look at the business plan – does the syndicator plan to hold the property for 3-5 years? 10 years? Longer? Every investor is comfortable with a different time frame, and knowing your ideal hold period will help you screen the numerous investment opportunities out there and focus on the ones that fit your needs.

  • Risk Profile: is the deal low risk (core or core plus, no renovation or raising rents needed) or a high risk (repositioning of a Class B apartment building in a Class D neighborhood). Make sure you understand your appetite for risk before making a decision to join a syndication. Don't be tempted by high returns! The higher the returns, the higher the risk, so make sure you are comfortable with the risk associated with the deal.

  • Return Driver: is the opportunity based on appreciation (low cash flow throughout the hold period and high appreciation factor), cash flow (high cash flow during the hold period with a modest appreciation projections), or both. Finding opportunities that have strong cash flow and appreciation is ideal, but very hard to find these days. It’s a balancing act and you should know in advance if you favor cash flow or appreciation as a main driver for returns.

Step 2: Evaluate the Sponsor’s Experience

Once you decide that an investment opportunity is the right opportunity for you, the next step involves evaluating the experience of the sponsors. Consider the experience level and competence of not only the sponsor, but of the sponsorship team as a whole. A sponsorship team with a well-balanced backgrounds and experiences in real estate and outside of it can be a great asset and will add unique value to the deal. 

Step 3: Look for Your Ideal Return

The most experienced and seasoned players in the realm of passive investment provide effective clues and guidance, when it comes to looking for an appropriate and most preferred return. In fact, in their book it’s not feasible to consider any passive opportunity unless and until it does not include a preferred return for them. It’s best to take a leaf out of their book as a preferred return essentially guarantees receipt of the first installment of the profit amount, before it’s split for the manager’s share. When this happens, it helps in recouping the original investment amount on a priority basis. The amount of return definitely depends upon the level of experience at the end of the day.