You’ve selected a commercial real estate sponsor and invested in your first deal. Once the due diligence is completed and the deal is closed, what comes next?
Here are some insights into what a passive investor can expect after investing in their first deal.
1. Deal Updates
Nearly every syndicator will approach investor communication differently, but most will send some sort of deal update via email. The ideal frequency is every month, but some sponsors elect to send deal updates on a quarterly basis.
The first email will notify you of the closing. Ideally, the email is sent the day of closing and includes a FAQ-style guide that answers common questions, like:
- When, how, and how much you are paid (first-time and ongoing)
- Contact info of the point person
- When you will receive deal updates, and what the updates will entail
Each syndicator’s deal update communication will also be different. Typically, important operational metrics are included, like occupancy rates, preleased occupancy rates, and collections rates. If these metrics are nowhere they are supposed to be (which depends on the investment strategy), then an explanation of the problem and the proposed solution should be communicated.
For value-add opportunities, updates on the number of renovated units and rent demand will be included. The important thing here is how the actual rent premiums compare to the projected rental premiums. If actuals are below projections, an explanation of the problem and the proposed solution should be communicated.
Other information a sponsor may include in a deal update email includes capital expenditure updates, market updates, and resident updates. They may also include details on other investment opportunities available.
2. Financial Reports
Another best practice for real estate syndicators is to provide actual financials on the investment. The most common financial report is a profit and loss statement, which breaks down all income and expense line items. This will promote transparency and allow you to see exactly how the investment generates money and where the money is going.
Quarterly financial reports are the most common frequency. However, more and more syndicators are using investor portals to manage their passive investors. If you are investing with such a syndicator, you may be able to access financial reports more frequently.
At some point after closing, you will begin to receive distributions. The amount and frequency of the distributions will vary based on the syndicator and the investment strategy. For example, core or value-add investments may pay out distributions immediately while opportunistic and distressed investments may not pay out distributions for a few years. However, you should know the amount and frequency of distributions prior to closing, and the syndicator should adhere to those terms. If the amount or frequency of distributions does not align with what was originally communicated, the syndicator should provide an explanation in the deal update.
Eventually, once the investment is sold, you will receive your original investment plus any profits, when applicable.
4. Schedule K-1
The Schedule K-1 is the report the sponsor sends to you each year for your tax returns. Once a year, you should receive your personalized Schedule K-1 tax report. Oftentimes, sponsors will communicate the timing of the K-1 in the FAQ portion of the original closing email.
5. Educational Content
Many real estate syndicators create educational content for their passive investors. This could be in the form of an exclusive newsletter or webinar, a specific section on their website, an eBook, blogs, podcasts, and/or YouTube videos they post to their website, etc. The purpose of this content is to help you learn more about what you are investing in.
5 Things to Expect After Investing in Your First Real Estate Syndication
After you have invested in your first real estate syndication, expect to receive deal update emails and financial reports from the syndicator. Based on the timing outlined in the PPM, you will also begin to receive distributions.
Once a year, you will receive a Schedule K-1 report for your tax returns.
If you want to be proactive and learn more about what you are investing in, the syndicator may offer additional educational resources, either by sending out a newsletter or posting information to their website.
Bottom line: you can be as active or as passive as you want. You can do nothing except check your bank account each month, or you can read every deal update email and financial report. My advice is to be active in what you enjoy and passive in what you don’t enjoy.
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.