Getting started with real estate syndication can be extremely rewarding but also risky if not done properly. Here is an ultimate checklist of dos and don’ts for investing in real estate syndication deals to increase your chances of success.
Conduct Thorough Due Diligence
Before investing in any real estate syndication deal, make sure you conduct comprehensive due diligence. This includes evaluating the property, geographic market, partners or sponsors, fees, and overall investment structure in detail. Some key things to analyze include:
- Property Evaluation: Closely analyze the property and building. Look for factors like a solid location, condition, occupancy level, tenant quality, etc. Make sure the property seems likely to deliver solid cash flow and appreciation potential going forward.
- Market Evaluation: Analyze the overall market and submarket in which the property is located. Look at metrics like job and population growth, infrastructure projects, home values, rent growth, vacancy rates, etc. The market dynamics should support the continued strong performance of the property.
- Management Team/Sponsor Background: Thoroughly evaluate the background, experience, and track record of the partners, sponsors, and property management team. Look for experienced players with a proven ability to deliver positive investment outcomes.
- Fees and Expenses: Make sure you fully understand all fees and ongoing expenses involved with the deal. Total fees, including acquisition fees, management fees, and sponsor promotion fees should remain reasonable. High fees reduce overall returns to investors.
- Investment Structure: Carefully evaluate the overall investment structure and terms. Look at aspects like the investment timeline, preferred vs common equity, distribution of equity cash flows and proceeds, decision-making powers, exit strategies, etc. The deal terms should provide fairness and upside potential for all investors.
Understand The Pros And Cons Of Real Estate Syndication
Real estate syndication entails combining funds from various investors to fund a real estate project. This type of investment offers both benefits and drawbacks compared to direct real estate investing. The key pros and cons of real estate syndication are:
Pros
Diversification and reduced risk:
By pooling capital with other investors in a large real estate deal, you gain exposure to a larger investment than you could afford on your own. This diversification helps reduce the idiosyncratic risk of investing in just one property.
Higher potential returns through leverage:
Larger commercial real estate deals allow the use of bank loans and financing to unlock higher returns through leverage. The sponsor uses other people’s money (the bank loan) to increase potential gains.
Professional management of deal:
The sponsor and development team handle all aspects of finding, executing, managing, and exiting the investment. This removes the burden from passive investors who lack real estate experience.
Cons
Lack of control over investment decisions:
As a limited partner, you have little say in how the deal is run. You must trust the general partner to make the right calls on capital improvements, refinancing, property management, and exit timing.
Higher fees and costs than direct investment:
General partners charge acquisition, asset management, disposition, and other fees that reduce the overall returns to limited partners. These fees can be significantly higher than investing directly in properties yourself.
Potential issues between investors and sponsor:
Differences of opinion, lack of transparency, and conflicts of interest can arise between limited partners and the general partner. This can lead to dissatisfaction and even legal disputes.
Stay On Top Of Your Investment
Once you invest in a real estate syndication deal, you need to maintain an active role in monitoring your investment. While day-to-day property management is handled by the general partner, make sure you:
- Review Quarterly Updates: Carefully read through quarterly reports on the property’s performance and status. Look for continued strong occupancy, rent collection, net operating income, and any issues that need to be addressed.
- Analyze Annual Financial Statements: Have a qualified accountant review annual audited financial statements and tax forms for accuracy and discrepancies.
- Stay Engaged With the Sponsor: Maintain open communication channels with your general partner or sponsor. Discuss any concerns early and clarify expectations regarding responsibilities to investors.
- Visit the Physical Property: If possible, try to schedule a visit to tour the actual property, especially during periods of turnover or if there are any signs of declining performance. An on-site inspection is the best way to determine the property’s quality and condition.
