Here we go! In the previous blog, we discussed basic syndication deal structures and the benefits of using these investment vehicles to diversify your portfolio. You now have the capital to deploy and are hunting for yield to hedge against inflationary pressure. It’s time to start peeling back the layers of these offerings, so you can compare them head-to-head with others and examine how each fits into your investment goals.
The offering will likely come in PDF or PowerPoint format. Often it will be accompanied by a live webinar with the recording shared shortly after. Let’s dive into the details!
How to Analyze Passive Opportunities
Projected returns are always the bright shiny objects; after all, we are in this deal to make money. However, I suggest that you focus your attention on two critical aspects first: the market and the team.
The Market – “Location, Location, Location”
The location of the asset is one of the most important characteristics to consider before investing in real estate. Metrics like population and job growth and the overall desirability of the area are vital to an asset’s overall performance.
Population Growth
Before investing in an asset that houses people, it is essential to ensure that customers (tenants) need this product. What are the population trends of this city and state? Is the population growing, stagnant, or declining? Comparing the last two U.S. census studies are a start; however, I try to dig deeper for more recent population trends in the area.
The population size of the market is equally as important. Investing in a 100 unit building in a town with only a few thousand people can drastically increase your risk of vacancies. I prefer to invest in metro areas with populations over 100,000.
Job Growth
Your tenants have to have jobs to pay rent. Is the market adding or losing jobs? Are incomes in the area rising? People often relocate for economic opportunity; therefore, expanding population and job growth are positive market indicators.
The economic diversity of the market is equally as important as growth. Investors like to observe economic activity driven by multiple sectors of the economy. If a metro relies on one economic driver and that driver leaves or suffers a downturn, jobs will disappear along with your tenants’ ability to pay rent.
The Submarket
A submarket is a distinct market within a larger geographical area. It can consist of an entire neighborhood or a few city blocks. It is vital to understand the demographics of the submarket of an investment. One submarket may be booming while others are depressed. Is this depressed area in the path of progress and the next hot area? Local knowledge is critical.
Proximity to major transportation hubs, employers, universities, hospitals, and retail amenities bode well for a submarket. Amazon, Whole Foods, and Chick-fil-A will not likely invest in areas experiencing economic and population decline; therefore, it is encouraging to see these businesses within the market.
Investors must also examine the competition within the submarket and compare it to the business plan. A new construction 350 unit apartment building expecting $2,500 per month in rent in a depressed market area could be a risky endeavor if tenants find that area lacking amenities. Is this a proof of concept project or a plan that is proven in the area?
Legal Landscape
The laws governing the tenant-landlord relationship can affect an investment’s performance. Is this considered a “landlord-friendly” market, or does it take significant time and legal resources to remove non-paying tenants?
The Team
Putting together a multi-million dollar real estate deal is not a one-person show. It takes a team, and vetting this team is your primary task as a passive investor. Just as I worked my way up to being an anesthesia provider, most deal sponsors have followed similar paths to get where they are. I like to hear the story of how sponsors got to the point they are now and where they plan to be in the future.
The Sponsorship Team / General Partners (GP)
The sponsorship team consists of the individuals running point on the deal. I’ll use the age-old quote used by countless entrepreneurs, “you are betting on the jockey, not the horse.”
Relevant questions to ask the sponsorship team include:
- What is their track record?
- How many assets do they own as a GP, LP, or individually?
- Have they implemented a similar business plan?
- Have they completed a full-cycle business plan?
- Do they have references?
- Are they investing their own money into the deal?
- How have they dealt with problems encountered in past deals?
Remember, we all have to start somewhere, and there are plenty of new sponsors out there doing great things. I’d ask less experienced sponsors the following questions:
- Do you have a mentor?
- Did you pay for a formal mentorship?
- Is your mentor in on this deal or vet it?
Other important questions to ask the team include:
- What will be the cadence of communication?
- Monthly or quarterly distributions?
Roles of the Sponsorship Team
It is equally important to understand the roles of the GP team. Who is the lead on this deal, and what is their primary function? What happens if the lead becomes incapacitated? Roles can include acquisitions, asset management, construction management, financial modeling, and investor relations. Often these roles may overlap; however, you should have a general idea of who is doing what.
I also like to ask the team what key performance indicators (KPI) they plan to track to ensure they are running a data-driven project. Every deal is going to have ups and downs. Remember, this is a 3-6 year, multi-million dollar project. Treat meeting the sponsorship team as an interview. You are both vetting each other to ensure you fit together as partners over the life of the deal. I strongly recommend following the team’s social media accounts in addition to meeting them virtually or in-person; after all, you want to invest with a group that you know, like, and trust.
Property Management Team
The property management team is a significant partner in large multifamily properties. Along with implementing the plan, they will be the face of the business to your customers. They should understand the market and submarket as well as anyone. Investors should ensure this team manages similar size and vintage assets in the market and has implemented similar plans.
Legal Team
Substantial legal work goes into a syndicated real estate deal. This work can include setting up LLCs and drafting purchase-sale agreements and private placement memorandums (PPM). Investors should ensure that the legal work is conducted by an attorney specializing in these types of transactions.
Conclusion
Although real estate syndications are entirely passive, limited partners (LP) should conduct detailed due diligence before investing in an offering. By focusing on the team and market first, you are more likely to find a great team in a strong market that increases the chance that your investment performs. As always, feel free to reach out any time. I love to talk shop! Happy investing!!