8 Tips to Evaluate a Real Estate Syndication [Infographic]

Real estate investing attracts many entrepreneurs and investors due to a rare combination of stability, peace of mind through a consistent passive income, and lower risks involved. There are many ways to start investing in the real estate market.

Every investor may not afford to construct or buy a commercial complex or a residential apartment. The best way to 'be with the winners' is to become a part of a real estate syndication as a passive investor. Real Estate Syndication is hosted by sponsors or syndicators that develop a pool of investors who pour their investments to get a profit share.

However, how would you know that the Syndication you are about to invest in is the right one? Here are 8 tips for evaluating the ins and outs of a real estate syndication:

1. A Plan of Action

Does the Syndication encouraging you to invest in its project have a sound plan of action for the entire investment lifecycle? Along with that, if it has a plan, does it align with your financial goals?

Investors need to ensure this aspect before investing. If the details of the action plan are not precise, investors should not hesitate to ask the syndicator about it right in the beginning.

2. Proper Synchronization

Usually, a real estate syndication would have a strategy in place for the project's entire lifecycle. For instance, the Syndication may construct or acquire a residential apartment and rent out units to multiple tenants for a regular rental income.

Are these strategies in sync with your investment goals? Do these strategies help you achieve your objectives in the years to come? Get this factor clarified before you agree to invest.

3. Track Record Matters

Another significant factor is the track record of the Syndication you are planning to go with. Look out for detailed information about Syndication's previous projects. You can simply Google the name of the Syndication or the syndicator. If you don't find sufficient information online, ask them about it.

Experience matters when it comes to managing investments and real estate projects. A real estate syndication with a successful track record would be more promising than a new venture.

4. Their Holding Duration

As a potential investor, you must know the holding span the real estate syndication has planned. This duration would be your breathing time to get your principal amount back.

Syndicators prefer holding the property for about 5 to 7 years. Later, they look out for buyers and sell out the property at a better price. Are you comfortable with keeping your investment for this extended period?

5. Relations with Investors Count

To ensure that you will invest in a great deal, it would be vital to deep dive into the relations of the Syndication with investors. Leveraging Phil Fisher's "Scuttlebutt Method" helps you carry out your background investigation effectively.

The famous author has described this method to find investments. It involves interviewing competitors and studying the 'rumors' about the organization you plan to work with.

6. Asset Management Skills

Assess the asset management skills of the Syndication you are planning to invest in. Go through their portfolio and try to learn in-depth about their success rate to generate and transparently distribute profits among investors.

Try to learn how they managed their assets in the past. This exercise may take time. However, it helps you gauge the domain expertise of the Syndication.

7. Analyze Their Failures

The Syndication might have some bad patches. Ask them about their failed investments in the past. It is crucial to analyze errors in decision-making and execution of property management by the Syndication in the past.

Try to know what all challenges they faced and what went wrong that led to a failure. Are they learning from their mistakes in the current scenario?

8. Evaluate the Financial Sources

It is also vital to know the financial sources of the Syndication you are interested in investing with. Get detailed information about any loans taken by the syndicator. What is the interest rate? For what duration has the loan been taken? Try to know the syndicator's stake in the venture and more.

These factors affect the overall profitability of the Syndication. Syndicators need to repay the loan through the outcome of the Syndication or the real estate project. Ensure that the liabilities are manageable.

The following infographic will help you understand how to evaluate a real estate syndication.

The Bottom Line

We hope that the selection factors discussed here will help you choose well-performing real estate syndication and make an informed decision.