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Review A New Syndication Investment In Under 5 Minutes

by | Mar 9, 2021 | 0 comments

Real estate investing can be much like going to the grocery or department store. You can find a hundred different brands of cereal in a grocery store or dozens of different styles of blue jeans. Which one to pick? Which one to buy? Your options are almost limitless. Over time, we determine which brand or style we like best. So when we go to a store, we know what we want to buy, saving us much time.

There are numerous syndication opportunities available. How do you as the investor best sort through, evaluate, and choose which syndication to invest in?

Without a system or focus to evaluate passive investment opportunities, you may lose hours of precious time looking at all the options and end up not really getting anything done. This can lead to frustration and confusion. It is difficult to make good decisions when frustrated or confused.

You’ll soon begin to receive a seemingly endless string of syndication opportunity emails, each with a summary that could be 50 pages long! Although this is exciting, without knowing specific tactics, your goals, and a strategy for sifting through these, that aimlessness might turn into overwhelm. If your life is anything like mine, time is too precious to spin our wheels without a clear approach and game plan in mind.

I would like to show you a step by step process to evaluate every potential deal in 5 minutes and quickly eliminate those that are not a good fit for your investment goals and risk tolerance levels. Eliminating unsuitable deals quickly will save you time to really drill down on the deals that show some merit.

The First Glance

New deal alert emails are like a surprise gift. You had no idea it was coming, but you can’t wait to rip it open and see what’s inside.

The emails you receive about new deals are full of valuable information, but a few highlights you’ll want to pick out at first glance are the type of asset, market, hold time, minimum investment, and funding deadline. 

If you open the email and locate only these critical pieces of information, you’ve already avoided unnecessary information overload. All you’re trying to do at this point is to find out if these data points match your investing goals. If not, there’s no reason to waste any further time or energy. 

As an example:

You receive a deal alert and pull these details:

  • Asset Type: B-class multifamily
  • Market: Dallas, TX
  • Hold time: 5 years
  • Minimum investment: $50,000
  • Fund Deadline: 3 weeks from today

With this simple, at-a-glance information, you’re able to immediately see that although this is the perfect asset class and market you wanted, you are aiming for a longer hold or an emerging market. Or perhaps you already know you need more than 3 weeks to access your capital. PASS.

Another deal will pop up shortly and you’ll get opportunity after opportunity to practice this little exercise. At some point, the details will all be exactly what you’ve been waiting for and you’ll get to dig deeper.

The Numbers

Once you’ve decided a deal’s initial look aligns with your goals, it’s time to dig further into the investment summary and explore.

As an example, you might learn that this particular deal is offering:

  • 8% preferred return
  • 9% average cash-on-cash return
  • 17% IRR
  • 20% average annual return including sale 
  • 2.0x equity multiple

But what does all that mean for you and your $50,000? 

In time, you’ll get lightning-quick at this and know right away what all of that means, but right now, let’s pretend this is your first go. 

Preferred Return & Cash-on-Cash Return

Preferred return, a common structure for deals, means that the first percentage (in this case, 8%) of returns go 100% to the limited partner passive investors. Sponsors don’t receive any returns until the property earns more than that. 

This means that if you invested 50K and everything went according to plan, you should see 8% of $50,000 or $4,000 this year, which breaks down to $333 per month. 

Since cash-on-cash returns are projected at 9%, that tells you that this deal is projected to pay out above the 8% preferred return at some point. 

Equity Multiple

The next important number on the list is the equity multiple. This number quickly tells you how much your investment is expected to grow during the project. 

Continuing on the example above, your $50,000 investment with a 2x equity multiple should work out to $100,000 once the asset is sold. This total return accounts for the cash flow distributions during the hold period plus the profits from the sale.

We typically aim for a 1.75x – 2x equity multiple on deals, so you can use that as your benchmark. 

 

Average Annual Return & IRR

My last two concerns when initially examining a new deal alert are the average annual return and the IRR. 

The average annual return tells you what the average earnings are, averaged over the hold time. 

In the example above, we discovered that your $50,000 is expected to double to $100,000 over the next 5 years. That total return is 100% of your original investment, and when divided over the 5 year hold period, we see that your average annual return is 20%.

The IRR (internal rate of return) is the average annual return (in this example 20%) and adjusts for the time delay. Since the majority of your earnings are expected later, at the sale, and time has cost associated with it, the IRR takes that into account. An IRR of 14% or more is a great target. 

 

The Decision

After this 5 minute analysis of these data points, you should be able to tell is this deal is a potential yes or no for you. This isn’t a final decision and it doesn’t mean you’re putting in a wire transfer this afternoon, but it does mean you can decide to spend more time reading into the investment summary or not, and you can make that decision with confidence. 

If these numbers align with your investing goals, you can go ahead and let the sponsor know you’re interested by requesting the full investment summary, registering for the webinar (highly recommended) or submitting a soft reserve. 

One final point, investment decisions are not just about the numbers. The decision is not just quantitative but also qualitative. The track record and integrity of the lead operator or sponsor is probably the most critical factor. Be sure to also understand the market and the assumptions made during the underwriting process which produces the return numbers.

Spark Investment Group is uniquely qualified to help investors with the deeper analysis recommended prior to investment. We are happy to jump on a call or zoom meeting with our investor club members and go through every page of the underwriting and investment summary. It’s a big decision and we are here to help.

Conclusion

New investment deal opportunities can be exciting, but if you get lost in the weeds too quickly, they can become overwhelming too. 

Whether you’ve had funds ready for weeks or are still in limbo getting them rolled over into a self-directed IRA, it’s imperative to know exactly what you’re looking for so you can jump on the perfect deal and minimize wasted time. 

With the data points, you learned to look at in this post, you’ll be able to identify if a deal is even worth your time and energy right off the bat. If the deal looks promising, schedule a call or zoom meet with Arn to take a deep dive into the investment.

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