Best Ever CRE Blog

5 Things Every Passive Investor Should Do Before Investing in a Real Estate Syndication

Written by Justin Goodin, Next Level Equity | Jan 12, 2024 11:00:00 AM

Real estate syndications are increasingly becoming more mainstream, for good reason. When done correctly, real estate syndications are a powerful strategy to create passive income and build generational wealth.

By pooling capital together, passive investors have the opportunity to own a piece of a larger, more profitable real estate deal than they might be able to afford on their own.

However, investing in a real estate syndication requires careful consideration and due diligence. As a passive investor, the upfront due diligence is the only work you have to do in a real estate syndication. Thankfully, as you do this more and more, this process will become easier over time. Here are five things passive investors should do before investing in a real estate syndication.

1. Research the Sponsor

The sponsor of a real estate syndication is responsible for sourcing and managing the investment. The active investors in the deal comprise the sponsor team.

Before investing in a syndication, it's essential to research the sponsor's track record and experience in the industry. Look for sponsors who have a proven track record of success and experience managing similar real estate investments.

A few examples of how to do this:

☑️ Look for deals they have successfully exited in the past.

☑️ Run a background check on the sponsor.

☑️ Ask for references from past investors.

The key here is to look for a transparent sponsor with a proven track record. It's not uncommon for sponsors to get on a call with potential passive investors to get to know one another. This is your chance to ask questions and learn more about them and how they run their business.

Additionally, don't only ask about deals they've exited but also ask about how deals are performing in their current portfolio. Any sponsor can close a deal, but the real work starts after closing. Be sure to ask the sponsor for real examples of how their current deals are performing compared to their original underwriting. 

2. Understand the Investment Strategy

Real estate syndications can have a variety of investment strategies. Some syndications focus on value-add properties, while others invest in stabilized assets.

Passive investors should carefully review the syndication's investment strategy and make sure it aligns with their investment goals and risk tolerance.

Ask yourself questions like this:

☑️ How much risk am I willing to take?

☑️ Do I want to invest in short or longer-term holds?

☑️ Which is more important to me: cash flow or upside potential?

As a passive investor, you need to find investment opportunities that align well with your goals. This may take some upfront work from you, but it will be worth it.

For example, if you are looking for a long-term, 10-year investment, you would not want to waste time looking at an offering with a hold period of three years. Or maybe you want more cash flow throughout the whole period, so a ground-up development deal that takes several years to build, may not be the best fit for you and your goals.

3. Review the Deal

Passive investors should review the details of a real estate syndication to understand the projected returns, fees, and the sponsor's pro forma of the deal itself.

It's important to ask questions and seek clarification if any aspect of the offering is unclear.

Ask the sponsor questions like this:

☑️ What fees are being charged on this deal?

☑️ How are you determining the projected rents?

☑️ How does your proforma compare to the historical financials of the property? What is different and why?

☑️ How confident are you that we will achieve these projected returns?

☑️ What stress tests did you run on the deal?

When you are investing your hard-earned capital, there are no dumb questions! While asking these questions, pay close attention to how the sponsor answers these questions. Do they sound confident in their answers and do they have data to back it up? Or does it feel like they are not being genuine or trying to rush you off? Go with your gut feeling for this.

4. Evaluate the Risks

All investments carry some level of risk, and real estate syndications are no exception. The good news is there are many ways to mitigate these risks.

Passive investors should review the syndication's offering documents to understand the risks involved in the investment. Some common risks include changes in market conditions, property management issues, and construction delays.

Ask yourself questions like this:

☑️ Would I be financially secure if I lost my investment amount?

☑️ Do I trust the sponsor team to run this investment?

☑️ Do I think this market will continue to grow in the future?

After evaluating all potential risks that the investment may or may not have, take a look at the projected returns and determine if these returns outweigh the risks involved.

5. Seek Professional Advice

Real estate syndications can be complex investments, and passive investors should seek professional advice before investing.

A financial advisor, attorney, or real estate professional can provide valuable guidance and help investors understand the investment's potential risks and rewards.

Additionally, you can talk to other people who have invested in real estate syndications. Post on social media asking for advice from other passive investors. Facebook groups, LinkedIn, or the forums on BiggerPockets can be a great place to connect with other real estate professionals online. 

Talking to professionals and asking around will help you make the most educated decisions.

Conclusion

So let's sum it all up! Real estate syndications, when done correctly, can be a powerful way to create financial freedom for you and your family.

To invest in a successful real estate syndication, we recommend that you research the sponsor, understand their investment strategy, review the deal in-depth, evaluate all the risks, and seek professional advice from people within your circle.

Remember, there is no need to rush into any deal. As a passive investor, the upfront due diligence is the only work you have to do in a real estate syndication. This upfront due diligence on the sponsor and the deal is worth doing to have a worthwhile investment experience.

 

About the Author:

Justin Goodin founded Next Level Equity, a company dedicated to helping busy professionals passively invest in real estate syndications so that they can live a life by design now, instead of waiting until they retire. Next Level Equity specializes in value-add multifamily real estate and exhibits expertise in maximizing value on every asset they acquire. Rather than attempting to predict the market cycles, they strive to acquire cash-flowing apartment communities within Indiana.

 

Disclaimer:

The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.