How to Evaluate a Real Estate Syndication

Real estate syndication is a good way for property investors to pool their financial resources in order to invest in real estate projects that are much bigger than what individual investors could manage or afford on their own.

Real estate syndications often provide investors with an opportunity to invest in properties that are larger, more exclusive, and have the potential for higher profits. In fact, it is one of the best ways of making money in real estate since it is a passive income investment. Investors are able to invest passively while the sponsor is responsible for the evaluation of the location and the property, property management, and the daily duties of the project.

One other advantage of investing in real estate through syndications is that investors have the opportunity to leverage the expertise of the sponsor with their capital. This form of real estate investing also offers diversified investments where funds from investors are spread among many properties instead of just a single asset. This makes syndications one of the best low risk investments in real estate.

Related: The Ultimate Guide to Real Estate Syndication

However, thorough due diligence is needed to find the best real estate syndication deals. Investors need to be familiar with what to look for when comparing different opportunities. Here are some of the most important things investors need to consider when evaluating a real estate syndication.

1. Track Record

Since a real estate syndication is a passive income investment, it is crucial that the sponsors have a proven track record in the acquisition, management, and successful completion of similar investments. They should have sufficient knowledge of the location and niche they are investing in and also have a good reputation within the real estate community.

For past failed investments by the sponsor, you may want to know how they conducted themselves to maximize value for the investors and how they communicated with them. This is particularly important now since real estate syndications can be offered online through crowdfunding, where there is no face to face interaction with the sponsor.

2. Investment Duration and Exit Strategy

Real estate syndications are passive and illiquid investments, meaning that the sponsors are the ones who decide how the execution of the plan is done and when the property should be sold. A good sponsor needs to have an exit strategy with a projected hold period, depending on market conditions.

You should know the length of time that the sponsor intends to hold the property as well as the expectations for principal return at the end of the investment period. Having a good understanding of the investment duration will allow an investor to better determine whether an asset is a good fit from the perspective of the asset-liability match. The investors will also be able to understand if they are being compensated adequately over the investment duration.

Value-add deals will mostly be shorter since most of the value is created in the early years. On the other hand, stabilized property deals will often be longer so as to take advantage of equity build up through debt payoff, increasing rents, and stabilized cash flow. You also need to determine whether liquidation of your investment is possible if you want to have an early exit and what will happen in case the property cannot be sold profitably when the intended investment period comes to an end. It is essential to map out exit strategies before making an investment.

Related: The Exit Strategy – Key for Successful Real Estate Investing

3. Profit Split

In syndication deals, net profits are usually split between the sponsor and the investors upon sale. The percent of profits that will be split among investors will vary significantly on the real estate syndication structure depending on sponsor experience and involvement throughout the projected duration of the deal, the risk involved, and overall return structure.

Profit split is certainly one of the main factors that will determine the return on investment for an investor and, therefore, is a very important item to look into when evaluating a real estate syndication agreement. For instance, sponsors will work more when it involves a ground-up development relative to a stabilized existing property. They would, therefore, command a bigger profit split for the former.

4. Investor Relations

The sponsor/investor relationship is critical in real estate syndication. Investors need to know how the sponsor will care for them after they have invested. Will they have time to address concerns by the investors and answer their questions? Real estate investors are sometimes wooed during the capital raising period and neglected later. However, quality real estate sponsors know that open lines of communication are the key to long-term relationships. Sponsors should provide continuous education and answers to all reasonable questions that an investor might have. The investor is an equal partner and therefore communication needs to be treated with importance. Good sponsors should be able to provide examples of their previous communication and schedules.

5. Asset Management

The sponsor is responsible for general asset management of the real estate syndication and is also the steward of the investor’s capital. The investor needs to understand the key plans by the sponsor and how they will be implemented to efficiently manage the asset.

One key aspect of asset management is communication. Sponsor teams should be able to facilitate regular communication with investors. Regular communication will ensure that the investor has knowledge of how the sponsor, together with the property manager, is working to address both current and emerging issues. The communication doesn’t always have to be extensive and complex. It could be a few bullet points that outline operational details, main wins, losses, and the handling of issues.

Related: Investment Management in Real Estate Investing

The Bottom Line

Real estate syndication is among the best investment for many real estate investors. However, investing in a real estate syndicate needs due diligence when looking into the advantages and disadvantages of the potential investment since there are never any guarantees that the deal will be profitable. Therefore, it is highly recommended that those considering investing in a real estate syndication do an in-depth evaluation of the real estate deal and measure whether it is consistent with their goals and personal risk tolerance.

Mashvisor offers a variety of real estate investment tools and insights that can aid in investment analysis. To learn more about how we will help you make faster and smarter decisions, click here.