Real estate investments can be profitable, but the process can also be challenging and time-consuming. This is why many investors prefer passive syndication. Passive syndication involves pooling funds together to invest in a real estate project managed by a professional management firm or operator. This approach allows investors to earn profits without being actively involved in the property management. However, there are crucial factors that passive syndication investors should consider before making an investment.
In this blog post, we will highlight the top ten factors that investors should take into account.
- The Track Record of the Sponsor: One of the top factors to consider before investing in passive syndication is the track record of the sponsor. The sponsor can make a significant impact on the success of the investment. Research the sponsor’s experience, their track record in managing investments, and the team members involved in the project. Questions to ask might be: 1. How many other assets in the market does the sponsor currently own and operate? 2. What type and age of apartments does the sponsor own and operate in this market?
- The Investment’s Risk Profile: The risk tolerance of the investor should match the risk profile of the investment. Passive syndication investments offer different levels of risk. Educational, self-storage and multi-family properties are some of the typical low-risk investments. In contrast, high-risk investments include development projects and speculative properties.Questions to ask might be: 1. What is the structure of the debt? 2. What are the operational and cap ex reserves going into the deal?
- The Asset Class and Micro-Market: While investing in passive syndication, it is essential to consider the asset class and micro-market. Each asset class and micro-market has its risks, which should be evaluated before investing. For example, the retail industry has different risks compared to multi-family or office properties.
- The Fees: The fees can impact the return on investment significantly. The fees that investors should focus on include acquisition fees, asset management fees, and disposition fees. Review the terms and conditions of the investment and ensure that the fees are reasonable compared to the expected returns. Note: Confirm investor return metrics include the cost of all fees – ie the returns shown are what the investor will actually receive.
- The Capital Stack: The capital stack should also be considered before investing. The capital stack is a term used to describe how an investment is financed, and it determines the order in which investors get paid, the returns offered, and the risk level. Be informed on the capital stack preferred equity, common equity, and debt.
- The Market Cycles and Timing: Market cycles and timing should provide insights into the investment’s long-term outlook. Research the market cycles of the micro-market and the impact of market trends on investment returns. Investors should ask their sponsors to provide market reports on the investment property and location.
- The Exit Strategy: The exit strategy is crucial when investing in passive syndication. The exit strategy outlines how investors will be paid, how long they will be required to hold the investment, and how to meet predetermined objectives. Review the sponsor’s proposed exit strategy, and ask how the project’s success will be measured.
- The Property Management: The success of a passive syndication project is dependent on the property management. Review the management team’s experience, their reputation, and their operating strategies. Property management can impact return on investment, vacancy rates, and tenant satisfaction. Question to ask might be: Is property management 3rd party or “in house” – vertically integrated?
- The Financial Stability of the Sponsor: Before investing, review the financial backing behind the sponsor. Ensure the sponsor has stable sources of financing and can cover unexpected project costs. This can help in providing more assurance in the eventual success of the investment. Questions that might be asked are: 1. How much capital is sponsor investing in the deal? 2. What is the net worth of the entire sponsor team?
- Investing Goals: Finally, investors should consider their investment goals and objectives. Investing in passive syndication should align with overall investment goals. Factors like investing philosophy, risk preferences, and timeline determine whether an investment opportunity makes sense.
Investing in passive syndication has several benefits, including no active management and sustained off-market opportunities. However, investors should consider several factors before making an investment in passive syndication. Consider the above ten factors, and always consult with a professional before making an investment decision. Success in passive syndication starts with being informed, confident, and aware.
To learn more about real estate investing and syndications, reach out to us at https://investwithspark.com/contact/ today!