How To Vet A Real Estate Syndication

Have you ever thought about investing in a real estate syndication? Or maybe you are thinking of syndicating your own deal? Real estate syndication is a business, and a successful business comes down to the people that are running the business.  As an investor, you want to partner with people that you can trust.

So here are some questions you should ask the sponsor team:

  • Who is on the sponsor team?

  • How many deals has the sponsor team done?

  • How many investors have they worked with before?

  • What’s their average return on previous deals?

  • Do the sponsors have experience in a particular market?

 

These questions will provide you with a basis of their experience and knowledge the sponsors may have.

Another topic to investigate while doing your due diligence on a sponsor team is whether they are aggressive or conservative in their underwriting.  This can be accomplished through reviewing the proforma in the investment package.  Here is what you should look for:

What is the exit cap rate?

  • It should be higher than what it is bought at.  Which means they are being conservative on the sale price.

What is the rent growth rate?

  • If it is a stabilized deal, it shouldn’t be more than 2%.  If the value add is to increase rents, make sure the rents are brought to market rate over a 2-3 year period.

What is the vacancy rate?

  • It should be at least 7%.  If rents are being increased aggressively, then 10%.

What is the expense ratio?

  • It should be at least 50%.

 

Ultimately, it is essential to have complete faith in the sponsor team prior to making an investment.  Faith is accomplished through proper due diligence.  So make sure to follow the above criteria before making a commitment.

If you are interested in learning how you can partner with Smart Asset Capital on future deals, please click here.

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