How to Vet a Real Estate Syndicator
If you’re a passive investor looking to get in on multifamily property investments, the best way to go is with a syndicator. There are many reasons to go with a syndicator, but one of the top reasons includes having access to large investment opportunities. Another good reason to invest with a syndicator is access to constant deal flows of multifamily properties that you might not otherwise have access to.
You’ll also be able to invest completely passively. The syndicator will do all the hard work, including finding the right deal in the right market, analyzing the deal, signing on the loan, managing the property, finding other investors, and selling the property at the end of the business plan. All you have to do is put up your money.
There are other reasons to go down this path, including the ability to diversify your real estate investments. Using syndication, you can choose different properties, regions and syndicators, so you’re not locked into only one investment, which helps to minimize your risk.
There are many real estate syndicators available to work with, so the question comes up as to how to vet a syndicator so you feel comfortable letting someone else manage your investments. In this article, I will lay out the key questions every passive investor should ask a syndicator before they start investing with them.
Question #1: Can you tell me about one of your investments that failed or didn’t go as you originally planned?
Syndicators are always happy to talk about their successes, but unless they are asked, they don’t usually volunteer information about an investment that either failed or didn’t go as anticipated. So, that’s a good question to ask!
You’ll learn more about the syndicator by asking about what went south on a particular deal. You’ll also learn about the syndicator’s honesty and integrity through their answer. By sharing a story with you about an investment that wasn’t successful, they’re showing you they’re not only honest, but humble as well.
By probing the deal’s failure, you’ll also gather what they learned from their mistakes and what they’re doing to prevent them from happening again. That’s the key: acknowledging a mistake and admitting what they learned shows growth, both professional and personal. Those are the type of syndicators you want to work with.
If they’re not willing to answer the question, a red flag should immediately emerge. The reason is that not every single deal a syndicator is involved with goes exactly as planned. So, if they’re not willing to share the information, they either are not giving you the whole story, or they’re too inexperienced to work with. The bottom line is if they haven’t had a deal that didn’t go as planned, then they haven’t had enough deals or opportunities in their past, which shows a lack of experience.
As a potential investor, you really need to not only hear what they have to say, but how they say it. How did they react and respond to your question? Were they defensive, upset or angry, or were they open to talk about the trouble they’ve encountered? Did they accept responsibility for the problems that happened, or were they simply blaming others? How they answer you is just as important as what they have to tell you about the deal.
Question #2: What is your investment goal?
This is a key question because you want to be sure that your investment goals are a good match with the syndicator’s goals. If the syndicator is willing to take large risks to go after a larger reward, then he or she might not be a good fit if you are risk adverse.
As a syndicator, I shy away from potential investors who are looking to invest their money with unrealistic expectations. For example, if a potential investor told me they’d like to double their money in a few years, I’d encourage them to look elsewhere. Every syndicator has his or her own investment philosophy, and mine is to invest conservatively and look for appreciation over time. That excludes “doubling someone’s money in a short amount of time.”
How do you vet the syndicator’s approach? Ask to see their business plan. Analyze it, and look to see if you’re comfortable with their plan. One factor is the hold period. Some investors are fine with a 3-year hold period, while others are comfortable with a 10-year period.
Another key to look for is whether they are cash flow or appreciation buyers. There are two types of investors, and you know which category you are in and comfortable with. Make sure you and the syndicator are in sync with one another.
If the syndicator is honest and open, and willing to share their goals, then you have a good syndicator. If they’re simply telling you what you want to hear, it’s time to walk away. More specifically, ask about what they consider desirable returns on investors’ money. You can look at their past deals and check the IRR and CoC. If they’re in alignment with yours, you’ve got a match.
As previously mentioned, the hold period is another key indicator as to the type of syndicator you’re talking with. Generally, most syndications have a 5, 7, or 10-year hold periods. If the syndicator is proposing an overly aggressive hold period, like 1-3 years, they may not be right for you.
Their business plan will indicate whether they’re a value add or turnkey investor. I prefer value add deals, because I find there is more opportunity to have higher returns than by investing in a turnkey deal. By renovating the property or repositioning it, you’re able to increase rents, which increases the cash flow, monthly income, and ultimately, the appreciation of the property over time.
Question #3: What happens if the deal doesn’t go as planned?
Let’s assume the syndicator you’re considering prefers a value add approach. A fair question would be, “what if you can’t raise rents by the amount you project?” In my own deals, I never underwrite with the exact premiums that I plan to get. (A “premium” is the additional revenue I get from renovating the untis’ interiors and increasing rents, so if a unit is currently renting for $750 per month, and after renovation I plan on charging $900, the premium is $150.)
In a recent deal, I knew that I could get over $250 premium, but I underwrote the deal using only $150 premium. The deal still worked using the lower premiums, so it will work with the actual premiums as well. As a passive investor, make sure that the projected returns are still good using the lower rents in place by asking the syndicator to see the returns with the lower premiums.
Yet another good question to ask the syndicator is, “what if you need more time to renovate the units?” The answer will be a good indicator of whether the syndicator has any experience renovating the market you’re considering, and whether or not he or she has a “plan B,” and what it would entail. The fact is, with renovations you never know what might delay a project, so it’s good to see an alternative plan.
When evaluating the syndicator, one good thing to look at is whether they’re conservative in their underwriting, or if he or she is far too optimistic in their projections. If they are, you’re looking at a huge red flag. In discussing deals with the syndicator you’re considering, take a look at how they prepare to mitigate unexpected issues. Syndicators who underwrite deals based on the worst-case scenario are far better to work with than a syndicator who underwrites their deals based on overly generous numbers.
There are many syndicators who are looking for investors for their deals, just as there are many investors looking to find a syndicator. Start by assessing the syndicator, and examine their integrity by asking pointed questions. If there is any hesitation and their answers aren’t honorable, move on.
Another evaluation key is whether or not you like the syndicator. Remember that people invest in people before they invest in a deal. You’ll be in contact with the syndicator, so it helps to like one another. More importantly, make sure that the syndicator’s goals and your own goals are in alignment. Finally, be sure that the perspective syndicator has a backup plan in mind just in case the deal doesn’t go as planned. The old maxim “it’s better to be safe than sorry” applies here.
By vetting the syndicator prior to making a financial commitment you’ll be mitigating your risk. Asking these 3 key questions will help you invest with the right syndicator.
Are you a real estate investor and interested in learning more about passively investing in multifamily properties? Click here to download the Top 5 Critical Deal Components any Passive Investor Must Examine.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale, a podcast that focuses on APS of real estate: Asset, Process, and Strategy. This podcast discusses how investors can scale their real estate portfolio and businesses.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.