How to Vet a Syndication Sponsor
When you're investing in real estate with a syndicate investment, the sponsor that you select for this investment is essential. Syndication occurs as a partnership between yourself and several other investors. Capital and resources are combined to purchase and effectively manage a property that could not be bought without the assistance of other investors. When property syndication occurs, there are two distinct roles that you can be involved in, which include the investor and the sponsor.
The unfortunate downside of choosing a sponsor for a syndicate investment is that there are very specific criteria that should be used when making the decision, which can complicate the process. The following provides you with some tips and suggestions on how to properly vet a syndication sponsor when engaged in passive investing.
What Is a Syndication Sponsor?
A syndication sponsor is an integral role in any syndication investment. When you're attempting to make a property investment with several other investors, it's essential that the right property is chosen, which is when the syndication sponsor gets involved. The sponsor is tasked with scouting numerous properties and eventually securing the property that shows the most promising investment opportunity. Once the investment has been made, the sponsor will typically manage the entire investment, which is great when you're acting as a passive investor and don't want to be involved with the more granular details of the investment. There are times when the sponsor will put in a small portion of their own money towards the investment, which could be anywhere from 5-10 percent. However, many sponsors avoid investing their own money to focus more on finding and managing the right investment.
The role that your sponsor takes in this process depends on what the investors agree to. The sponsor usually earns some fees for finding the property and for managing the process. When an exit strategy has been found for the property in question, the syndication will be considered as complete. If you're attempting to earn passive income for wealth building purposes, you should receive money from your investment on a monthly or quarterly basis. After selling the property, the sponsor will earn a small percentage of the deal. Because of how important the sponsor is to any syndicate investment, it's essential that you do your due diligence if you want to find a sponsor you can trust. The key towards successfully increasing your wealth through passive investing is to make smart investments. Selecting the wrong sponsor can cause you to lose money in the long run, which is why vetting the sponsor is among the most important aspects of the syndication process.
How to Correctly Vet a Sponsor
In order to properly vet a sponsor, you'll need to be prepared for what you should look for in a sponsor. While the returns that will be generated from the investment may be more important to you,
the sponsor plays a large part in dictating whether the investment is a success or failure. When you're searching for the right sponsor, there are five areas of focus that can help you vet a sponsor and make sure that you can trust them. As a passive investor, you will have very little or no control over managing the investment, which means that most of the work you do will go into finding the best sponsor for the job.
Look at Their Background and Experience
The first things you should focus on are the background and overall experience of any sponsor you're considering. Most of this information can be found on the website that the sponsor hosts. Some of the background information that you should look into extends to acquisition criteria for properties, an in-depth portfolio of any previous projects that they've worked on, and the investment philosophy that they have. You should also be able to find their contact information, which will make it easier for you to ask any questions that you might have. When contacting these individuals, keep in mind that you will likely need to provide them with some information about yourself.
Syndicate investments are considered to be long-term investment strategies that can last for upwards of 5-10 years. As such, the sponsor will also want to make sure that they're partnering with worthwhile investors. If you're having difficulties finding the right sponsor, consider attending a real estate conference, which provides investors and sponsors with ample opportunity to meet in person. When you're assessing the track record of the sponsor that you're most interested in, identify the number of deals that the sponsor has closed, the amount of deals that have been exited, and any other information about the deals that they've worked on.
All of this information should be available in the sponsor's portfolio. It's also critical that the sponsor of your choice has some experience with the specific market or asset that you're investing in. If they don't, make sure that the sponsor provides you with information on what they'll do to mitigate the risk of going into a new market.
Consider Their Team Members
Many sponsors will have their own team members that they work with. Just as you vet the lead sponsor, it's also important that you vet the rest of the members who will be involved with managing the syndication. You should have a full understanding of what each member of the team will be tasked with handling when managing the investment.
Every task that the management team completes throughout the duration of the investment will play a role in the returns you obtain and the overall success of the strategy, which is why the team members are nearly as important as the sponsor themselves. A reputable sponsor will only work with experienced team members who can handle the type of investment that you're making.
Make Sure Their Interests Are Aligned With Yours
The interests of the sponsor should also be directly lined with yours. Since the sponsor will be involved with managing the property that you invest in, this individual should want to reach the same investment goals as you. Even though the sponsor isn't earning the type of passive income that you are, they should understand what your passive investment goals are. To determine if your interests are aligned with the interests of the sponsor, take your time to look through the fee structure of the deal itself.
If the deal is structured in a way that only has the sponsor making money after sizable returns have been provided to any investors, you can be more confident that the sponsor is interested in successfully completing a syndication. While it's possible to select a sponsor who doesn't invest any of their own money, you can be more confident in the sponsor of your choosing if their own money is tied into the investment. The amount of capital that the sponsor puts into the investment doesn't need to be a significant percentage of the entire deal.
Obtain References and Consider Fees
Before making your final decision on the sponsor for your syndication investment, you should obtain some references of past customers. The sponsor should provide you with contact information of the previous investors they've worked with, which will give you a good idea of the reputation that the sponsor has and the amount of experience that they've garnered over the years.
The fees are also important in any syndication deal, which will be listed in a private placement memorandum before being provided to yourself and other investors. The types of fees that a sponsor will typically obtain in this type of deal include disposition fees, acquisition fees, and asset-management fees.
Grade Their Professionalism
While you're vetting the sponsor, you should be able to better identify how professional this individual is. Professionalism is essential for a successful investment. There are always going to be issues that arise during the course of a 5-10 year investment. When these issues occur, it's important that the sponsor provides you and any other investors with consistent and timely communication. In fact, updates should be given to you by the sponsor on a quarterly or monthly basis.
The sponsor should also guarantee to you that they can be reached throughout the entire duration of the investment if you have any concerns or questions that need to be addressed. The best sponsors will be display professionalism throughout every facet of the syndication process, which can give you peace of mind while you continue to engage in wealth building. Making passive investments for the purpose of building your wealth is not always going to be as easy as you would like. For the majority of investments that you make, you will be required to trust someone else to manage the investment in question.
The same is true with a syndication investment. If you find the right sponsor who can acquire and manage the property that you wish to invest in, the chances of success are already significantly higher than they otherwise would be.