You may already know the benefits of real estate syndication, but how do you actually go about finding deals? And beyond finding deals, what kind of due diligence should you perform to compare potential opportunities? In this post, we’ll walk you through everything you need to know about how to find and vet real estate syndication deals.
Kent Ritter is an experienced multifamily investor and operator helping you to build real wealth through real estate syndication. Learn More
How to Find Real Estate Syndication Deals
The process of finding a real estate syndication deal varies based on whether an investor is accredited or non-accredited. You can learn whether or not you are an accredited investor here.
- Accredited investors. Syndications that are SEC Regulation D 506(c) offerings can advertise to an unlimited number of accredited investors. By doing so, however, they cannot accept non-accredited investors.
- Non-accredited investors can invest in Regulation D 506(b) offerings, but they may be challenging to find. That’s because the SEC prohibits syndications from soliciting non-accredited investors. The best way to find these deals, then, is through networking and word of mouth.
Both accredited and non-accredited investors without a network may find success in finding opportunities through online forums devoted to syndications and investing. Alternatively, try reaching out to any syndications found online by contacting them directly.
How to Vet Real Estate Syndication Deals
Real estate syndications offer many advantages—from tax advantages and passive income to the chance of significant returns. Investors traditionally consider real estate a safe investment vehicle, but not all syndications are created equal. That’s why it’s always important to perform your due diligence on any potential opportunity. Here are some key things to consider as you compare opportunities:
How to Vet Syndication Sponsors
When limited partners invest in a syndication, they are not the ones personally inspecting the property, reviewing due diligence documents with a fine-tooth comb, or even deciding on plans to increase the property’s value. Instead, LPs rely on the project sponsor for all of these tasks. Consequently, researching the sponsor is the most important steps to take when vetting a deal.
The sponsor is responsible for finding and vetting the project, taking it through underwriting and the due diligence process, and ultimately overseeing the management of the property to collect rents and add value. That is a lot of responsibility that requires a lot of trust on the part of LPs. Here are some traits that investors can look for to determine whether a sponsor is really up for the job:
- Sponsor Character. This is the MOST important. This is where the investor should spend time getting to know the sponsor. Do you believe the sponsor feels a moral obligation to do what is right? What is their WHY? Do they have a calling beyond making the most money? Do a background check.
- Sponsor Experience and Track Record. Sponsors should have a portfolio of work demonstrating past deals, including the total value of their transactions and the number of units sold. Be sure to ask whether the sponsor has experience in the specific market of the property type and whether they have worked with that property type in the past.
- Sponsor Capital Contributions. Determine whether the sponsor is investing any of their own funds, and if so, what percentage of the capital they are contributing. Sponsors who have nothing to lose may have less motivation to pursue the syndication’s best interests zealously.
- Sponsor Group’s Financial Means. You don’t want a sponsor who is just doing deals for the fees. This type of sponsor isn’t worried about getting you into the right deal. They are just worried about getting you into the next deal to get their fees. If a sponsor has other income streams to support them day-to-day, then they can wait for the right deal.
- Network & Resources. Will the sponsor be operating alone, or will they be working with a team of partners to ensure the success of the project? Ask about any potential partners involved in the project and what experience they bring to the table.
Questions to Ask about the Property and Project
In addition to vetting the project sponsor, it’s also important to carefully review the terms of the project itself. Most of the answers should be in the documents provided by the sponsor, including the private placement memorandum and executive summary, but here are some key things to look for:
Payment Structures
Of course, knowing how you will be repaid is critical. The private placement memorandum should provide all payout details. Many syndications use a waterfall profit-split structure, making the profit ratios dynamic throughout the project and dependent upon the project’s performance. Look for projects with preferred returns that prioritize early profits for the limited partners.
Projected Rate of Return
The sponsor creates the property management plan, which may include renovating or simply holding the property. As part of the business plan, the sponsor makes projections regarding the likely profit based on the asset’s income and potential appreciation. Those figures help create a projected return rate for investors, which estimates the percentage of profit investors may receive on top of their capital repayment.
Capital Calls
In addition to up-front capital contributions (typically $5,000 or more), limited partners may also be expected to provide additional funds later on in the project. Most of the time, these cash injections are planned and will be detailed in the project documents. The documents will also specify whether unplanned requests for capital can happen, and if so, how frequently and for what amount.
Tax Advantages
Some syndications pass along tax advantages to limited partners through a Schedule K-1. Such tax advantages reduce investor tax bills, allowing investors to keep more of each dollar earned in their pockets.
Investor Takeaways
Real estate syndications can be a great way to earn passive income and a significant return on your investment. But not all syndications are created equal. Investors should commit time upfront to find and carefully vet potential opportunities before signing on the dotted line. If you have any questions, we will be more than happy to help answer them.
Kent Ritter is an experienced multifamily investor and operator helping you to build real wealth through real estate syndication. Learn More
