8 steps to Determine if Investing in a Syndicated Real Estate Deal is Right for You
Finding the right investment or even determining if investing makes financial sense for you can be a challenge, especially for a new investor. Here are a few key steps that investors should take when considering investing in a syndicated real estate deal.
1 Review the opportunity and consider whether it aligns with your goals
What kind of investment are you looking for? Are you wanting higher returns, even if that means a riskier investment, or are you looking for a more secure, stable investment with potentially lower returns? Be realistic when reviewing the opportunity; if it’s not a good fit, then move on to the next one.
2 Get to know the deal sponsor
Once you’ve confirmed that the property aligns with your interests, you should find out more about the deal sponsor, including their background and experience level. If the sponsor has experience with this kind of property, it’s likely that they’ll have higher success rates than someone who is just branching out into the area.
3 Confirm that the opportunity includes a preferred return
Preferred returns divide available profit among investors before the sponsor receives a cut, and they tend to be between 5-8%. An opportunity with a preferred return below that should be approached with caution unless some other aspect of the deal is favorable for investors; however, each investment will have terms that vary.
4 Ensure that the profit splits are favorable
Profits splits between you and the sponsor depend on how much work the sponsor expects to do for the investment, such as whether the building is still in development or if it is existing and in good condition. You should considerGenerally, for real estate investments, profit splits that are at least 50% in favor of investors on the low-end and splits that are 80/20 in favor of the investor on the high-end of the scale; however, each investment will have terms that vary.
5 See whether the sponsor used conservative assumptions
No one wants to be disappointed by their investment’s performance, which is what often happens if a sponsor uses more aggressive assumptions in the pro forma. Generally, a sponsor who uses conservative assumptions will have a higher likelihood of meeting their target.
6 Find out more about the business plan and strategy
It’s easy to assume that the deal sponsor will have a business plan and strategy in place and that they will both make the best use of the property. However, less experienced or even less skilled sponsors may not have done so. Review the plan for the property and see if it makes sense to you.
7 Get to know the surrounding location
Is the area thriving now or is it expected to in the future? Or does the opportunity stand on its own in a relatively run down or ill-fitting part of town? If you can’t see a future for the property that looks promising in the near future, then you may want to pass on this investment and move to a different one.
8 Make sure you’ve reviewed all documents
The information held in the investment documents tells you most of what you need to know about the property and about the company or individual managing it. Making sure you’ve read through and understood everything.
If you’re interested in taking the first step toward investing in real estate, or if you’d like to discuss adding another real estate investment to your portfolio, Founders Grove can help. Contact our team to set up a strategy session so we can discuss your needs in greater detail.