LOOKING FOR THE RIGHT SPONSOR IS MORE > LOOKING FOR RIGHT DEAL

[Jason Malabute]

If you are thinking about passively investing in a syndication deal, choosing the right sponsor is more important than the actual deal. The most obvious reason is you want to make sure you are not investing your hard-earned money with a criminal who will take your hard-earned money and run. Now let’s look at less apparent reasons to vet your sponsor.

Look at the character of your sponsor. Here are questions to ask yourself before investing with a sponsor. The first thing to question is to look at the sponsor’s experience. Do they have full market cycle experience in multifamily? If not, make sure they work with a partner, mentor, or property manager who has such experience. Another question to ask yourself is how the sponsor talks about real estate investing. Do they say “real estate only goes up” or acknowledge that real estate investments come with risks and are cyclical?

Last, look at how the sponsor did their underwriting. Remember, how they calculated their returns is more important than the actual returns claimed. Some questions are: is the rent growth they used realistic even after the market settles down? Did they use a new property tax amount to consider the reassessment after the sale of the property? Is the insurance expense amount realistic? Do they think cap rates are going to continue to compress forever? Are they using less than 10% vacancy because it is a “hot market?” Those are a few things to consider when screening a sponsor before investing with them.