Apr 12, 2024

10 Questions to Ask Before You Invest in Real Estate Syndication Deals and Why?

Jacob Blackett
10 Questions to Ask Before You Invest in Real Estate Syndication Deals and Why?

When you invest in a new real estate syndication, you are putting your faith in the sponsor team and asset management. These individuals will be in charge of day-to-day operations, implementing the company plan, and safeguarding your investment funds.

Once you've signed the PPM (private placement memorandum) and paid in your funds, you have very little control over the asset's direction and performance, including what's done to produce cash flow. As a result, before proceeding, it is critical to ask the sponsor your questions.

Your initial due diligence is critical, as its thoroughness will decide your experience in real estate syndication for the entire hold time. Of course, this might have an impact on your cash flow. It may, however, have an impact on your overall perception of the information contained in a private placement memorandum and how a real estate syndication is conducted.

Take the time to ask questions, conduct research, and read between the lines. Before investing in the offer, clear your mind of any worries, and only invest if you are completely convinced that the sponsor team will assist you in generating passive income.

A Quick Overview of Real Estate Syndication

Real estate syndication, a centuries-old idea, is an investment mechanism that combines cash with other investors to acquire property. Real estate syndication investors use their combined purchasing power to acquire commercial properties that would otherwise be prohibitively expensive.

Real estate syndications are commonly organized as a limited liability corporation (LLC) or a limited partnership (LP). Investors, sometimes known as "limited partners," own a stake in the LLC or LP and contribute the majority of the financial capital. Limited partners devote no time or "sweat equity" as passive investors; all they have to do is sit back and enjoy recurring passive cash flow after their first financial investment.

A sponsor often oversees real estate syndication deals (also sometimes called the syndicator, asset manager, general partner, GP, or operator). A sponsor is an individual or corporation who manages and operates the transaction. The sponsor identifies the opportunity, obtains the cash, executes the purchase and acquisition, and is in charge of the investment's day-to-day operations.

What Is a Real Estate Syndication Deal?

Real estate syndication is the collaboration of a group of investors who pool their resources to acquire more assets than they could alone. In commercial real estate syndication, there are normally two roles: syndicator and investor. The syndicator, or general partner, manages the syndication agreement, seeking and acquiring property investments and maintaining investment properties, and is often compensated with a management fee or purchase fee. The investors give the majority, if not all, of the capital for the real estate investment and take a more passive position in the transaction.

We have created an infographic with 10 questions one should ask before investing in real estate syndication deals. Let's roll through it.

invest in real estate syndication deals

Why Should You Ask These 10 Questions Before Investing in Real Estate Syndication Deals?

We've developed a list of 10 things to ask before investing with a new real estate syndication sponsor to get you started. Of course, you may not want to directly ask each question, but this list will give you an idea of what you should be thinking about and looking for answers to.

#1. What experience do you have?

To guarantee that what is claimed is delivered, it is critical to inquire about the sponsor's track record and real estate background.

#2. How many of your investors return to team?

Knowing that investors are returning to engage in more agreements with the sponsor indicates that they did well on past possibilities.

#3. What is the benefit of investing in your company or your team?

There are several investment options and sponsor teams available. Ascertain that you are connected with the team that best meets your requirements and investment objectives.

#4. What is the benefit of investing in this Asset class or apartments?

Knowing the advantages of the asset class you are investing in might be critical and ensuring that they coincide with your investment objectives.

#5. How long should I leave my money in the deal?

Understanding what you are committed to as an investor requires being thoroughly informed of the investing schedule.

#6. Have you ever completed a deal from start to finish?

Has the investor ever completed the cycle or implemented this strategy to a sale on another deal if the investment is a 5-year purchase and holds with a sell in year 5?

#7. What does a worst case scenario for this investment look, and are you ready for this possibility?

In real estate, not everything will go as planned, and not every prediction will be entirely correct. The operator/syndicator must evaluate, anticipate, and prepare for the best and worst-case situations.

#8. How will taxes effect this investment?

How will the investment degrade over time, and how will this affect the investor in years 1, 2, 3, and so on? Knowing when you will receive your K-1 for your tax return and what tax breaks are available is critical in any investment.

#9. What happens if i would like to use my invested capital for another deal while the hold is in effect? When and how can i get out of these deal?

Understanding how you may get out of the contract is critical if necessary.

#10. What if you do not meet your projected cash flow or returns?

Optimistic predictions usually seem nice in a presentation, but as with the worst-case scenario inquiry, determine whether the sponsor included language in the operating agreement stating if the predicted cash flow is guaranteed.

4 Real Estate Syndication Deal Tips

1. Determine the ideal role for you.

Based on your abilities, assets and net worth, risk tolerance, and experience, determine if you are better suited as a passive investor or a syndicator.

2. Make contact with reliable partners.

It is extremely important for investors engaging with a syndicator to ensure that they can trust their partners because the syndicator is in charge of working to manage the building. Do your homework to identify a syndicator with a track record as a property manager.

3. Ensure that the contract protects you.

When negotiating contracts with a syndicator, look for items like preferred returns provisions that provide you more security as an investor.

4. Always think about your risk.

When making investment decisions, whether you're an investor or a syndicator, use prudence. Real estate syndication arrangements provide a greater safety net, but there is still some danger.

To Summarize

When it comes to potential investments, no question is off-limits. Perform your due diligence and ask the real estate syndication sponsor all of the pertinent questions before investing your own money. Before signing the confidential private offering memorandum, you should feel at ease and confidence in the real estate investment agreement and the sponsor. If the deal sponsor shrugs you off or fails to provide clear answers, consider how the relationship will be over the lifespan of the real estate syndication contract.

Frequently Asked Questions

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