As a passive investor, you rely on your syndicator to find the right property, in the right market, and at the right price. However, in order to have trust and confidence in the syndicator, there are some key questions to ask that will help determine rather or not the syndicator is a proper fit for you. After all, everyone has their own ideas about how to define a “good” investment, and you want to be sure that your views on multifamily investments and the syndicator’s are in alignment.
Some industry experts say that finding the right syndicator is just as important as finding the right property to invest in. I believe that a deal is as good as the syndicator who manages it; you can buy the best deal in the best market in the world, but if the syndicator doesn’t do a good job – then it won’t be a good deal. I’m not saying that a strong syndicator can make any deal work, but that a syndicator is as – if not more – important than the deal itself.
In order to help you determine whether a syndicator is a good fit, I’ve put together a series of key questions that you should ask your real estate syndicator before investing in any deal. I’m asked these questions by passive investors who are considering working with me, and I think the answers will help guide you as you choose the syndicator who is right for you. I’m also investing with other syndicators as a passive investor and always make sure to ask these questions of them myself.
Question #1: What is your investment approach?
Each syndicator has his or her own unique investment philosophy; just as each investor has one. Some investors look for high returns and are not concerned with the risks involved, as do some syndicators. Others are more conservative in their approach and would rather have a lower return in exchange for lower risk. When someone told me they wanted to double their investment in 18 months, I told them we were not a good fit, because I am pretty conservative and look at a 5-yr horizon. That’s why it’s smart to start by asking the syndicator what their appetite for risk is and see if it matches your own.
Another aspect of exploring a syndicator’s investment approach is to ask what markets they prefer to invest in, and more importantly, why they chose those markets. I look for markets with high employment, strong population growth, and a high rent growth. I also search for markets that are in states with “landlord friendly” laws regarding evictions and rent control.
Ask whether they prefer value-add deals or turnkey deals. I always look for value-add deals, because the opportunity to improve the property and increase rents, and ultimately the building’s value, exists. By renovating the property’s exterior or updating individual units, syndicators are able to increase the monthly rent. There is always a risk, however, that after renovating the building or apartments the syndicator won’t be able to charge higher rents. Value add deals usually provide higher returns than turnkey ones, and even though it takes time and money to improve the property, the rewards are worth it.
Question #2: What is your and your team’s background?
Syndicators rarely work alone. With the amount of knowledge and work involved, a syndicator puts a team together to manage all of the aspects of the syndication. The team might include a CPA, lawyer, real estate broker, and a lender. However the team is configured, it includes many different people.
One of the key questions to ask the syndicator is for details on their experience and their background. This question applies to the team members as well. What are their education credentials, how many years have they been syndicating, and how many deals have they put together with passive investors is another good question to ask. The more experience, the better. Something else to consider: do you like the syndicator? People tend to invest in people before they invest in a deal.
Find out how long the team has been in place and has worked together. Find out how long the principals have been involved in real estate investing, particularly with regard to multifamily properties. It would be interesting to find out if they have had prior experience with the location of the proposed property. Additionally, find out how many assets the team has acquired and how many they currently own or manage. It’s also important to find out what the leadership team does itself, and what they outsource to others.
Question #3: How successful was you past performance?
This is a very important question to ask, because it will disclose the syndicator’s track record and level of experience. It will also show you how transparent the syndicator is willing to be. While past performance is not a guarantee of future success, it is a good indicator of how well their investments have performed over time. Most syndicators have easy access to information about previous properties, purchase prices and sale information, and investor returns. Hopefully they’ve made money for their investors, but if there are a lot of losses, ask for an explanation.
Ask if they are willing to share a report that shows projections versus actuals. This will show you how much return on investment was projected every month or quarter, versus how much the syndicator actually achieved. Something else to ask: if they missed their projections, find out why. Was it due to market conditions, excessive costs, or a poor performing property manager? The answer will be revealing and if he or she is willing to share that information, it’s a good indicator that you’ll have open communication down the road. Just remember that it’s perfectly acceptable to ask about previous performance.
When reviewing a syndicator’s past performance, be sure to evaluate their target returns compared to their actual performance. If they show that their returns consistently underperform their target returns, it’s as good indication that they’re assumptions are unrealistically high. On the other hand, a syndicator that always meets or even exceeds their target returns are using conservative assumptions that are more credible.
Find out if the syndicator is willing to share references from past and current passive investors. Speak with them and find out how they feel about working with the syndicator. What did they like most, and ask if there were any areas that they weren’t happy with? Also, ask if they have repeat investors. This is a key indicator that investors are satisfied with the syndicator’s performance and abilities.
Question #4: Why do you like a particular deal?
A very important question to ask is rather or not the syndicator puts in his or her own money in the deal. I always invest in all the syndications that I put together, and you should always work with a syndicator that does the same. It shows that the syndicator has faith in the deal.
With regard to a specific deal, take a good look at the Private Placement Memorandum (PPM), as this will provide you with a detailed summary of the objectives and risks involved. It’s also prudent to ask to see a previous PPM from the syndicator you’re considering to compare the two in order to see if they’ve changed over a period of time.
When doing your due diligence on a specific syndicator, review their assumptions about a specific deal. You want to be sure that the assumptions aren’t simply guesses, but instead they should be based on the market’s past performance, current market dynamics, and any changes in demographic trends. The reasons this is important is that the target returns or their pro forma financial projections that are calculated are based on their assumptions.
Question #5: How long will my money be tied up?
This is a common question among passive investors, particularly those who are new to multifamily syndications. Money is invested in a property to not only create cash flow and income from rents, but to appreciate as well. The time in which the investment is held to realize appreciation is called the hold period. This time can vary from syndicator to syndicator, and can also be impacted by market conditions.
The hold period depends on the type of investment. Some syndicators like the “fix and flip” strategy. They purchase a property, make needed improvements and then sell it as soon as the improvements are made. It’s a short-term hold, anywhere from a few months up to 2 years. Another strategy, one that I prefer, is the “buy and hold” approach. It can be a turnkey property that doesn’t require any improvements, or it can be a value-add property, with the intent to make improvements in order to raise rents.
For properties that are buy and hold, the average hold period is 3-7 years, while some are held for 10 years or more. The hold period is something you should ask the syndicator before investing any money, because your money won’t be liquid like investments in the stock market, for example, where you have the ability to sell from one day to the next. It’s up to individual investors as to what period of time they’re comfortable with having their money tied up. Many investors are comfortable having a hold period of 7 years, while others find that amount of time is too long.
As part of the hold period, a key question to ask the syndicator is to explain their options to let investors sell their shares in the investment. Sometimes, investors are allowed to sell their shares in the investment, but generally the syndicator has the right to approve the new investor before they can purchase those shares.
Before you invest any money in a real estate deal as a passive investor, map out your investment criteria so you know what you expect from your investment, and what questions to ask the potential syndicator. Get to know the syndicator and see if their investment approach is a match with your own. Look into their background and experience, as well as others who are on the syndicator’s team. Find out if they’ve done similar projects, in similar markets, before you invest with them. Ask relevant questions as to why they’ve chosen the specific deal you’re considering, and learn how long your money will be tied up in the investment and whether there is a way to sell your shares if you have to gain access to your funds. The more questions you ask, and the more you know about the syndicator, the more you’ll be able to have confidence in the investment.
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.