Syndication Investment Criteria and Strategy

12 Replies

I am an accredited invester and have invested in two syndications already . I have been reading a lot about Multifamily Syndications and have been following a lot of syndication threads and listened to a lot of Podcasts on syndication investing.I am planning to invest $500000.00 in syndications in next 5 years .I am trying to write down my criteria for an investing but have been distracting from my ideas So I request the genius investors and syndicators here on bigger pockets to help me finalize my criteria and strategy for my investment. 

5 years is my time frame and will reinvest the proceeds again and it is a legacy for my son and I will not be spending that for my retirement because I have my retirement secured.

@Kay Kay Singh , my wife and I are in a similar situation right now. We're accredited investors and just invested in two syndication deals. However, we're now looking to do our own syndications. 

For your criteria, I would determine your minimum cash on cash return (8%+) and minimum IRR (15%+). That will allow you to easily screen deals that sponsors bring you.

Most passive investors will stop there, but there are more qualitative criteria you can look for, like what markets you want (emerging markets), class of property (C+ or better), class of neighborhood (B- or better). You can also decide what hold period you want. Do you want projects with a 10 year horizon, or do you want short 2-3 year value-add projects? Do you care what size property it is (20 unit minimum, or 300 unit minimum)? 

It just depends on how much you trust the sponsor/syndicator. If you're just starting out with them, I'd analyze everything about the deal, especially their assumptions. Are they projecting 10% rent increase per year, when historically the area only has 3%? Assumptions have a significant impact on your IRR. I would do my research on each assumption they make, to confirm it's realistic. As you get more comfortable with a sponsor, maybe you only need to know cash on cash and IRR, before deciding if you want to invest on the deal. Personally, I would still read through everything and make sure that there are no assumptions way out of the ordinary, even if you've done 10 deals with them. After that many deals, you should be able to read through it and determine fairly easily if they're realistic.

With that said, if a repeat sponsor brought you a deal in a new market that they haven't worked with in the past, I'd treat them like a brand new sponsor and go through and confirm everything. 

@Sam Grooms Thank you very much for a great advise and as we go means as others chip in with their insight  I will be drafting my strategy and criteria for invest.And in the end I will post my criteria for investment here. 

Please check out several Podcasts on YouTube with Jeremy Roll for helpful tips and this post (http://astudentoftherealestategame.com/top-10-steps-when-reviewing-a-passive-real-estate-investment-opportunity/). He focused on passive investment for he last decade.

@Kay Kay Singh

If you haven't already, I'd recommend that you take a step back 1st and look at what you're going to use the money for and how much risk you can take with it. For example, you'll need to choose between different investment strategies which all have different risk and potential reward (core plus, value-added, opportunistic). Each of these is evaluating a completely different way. Also, why are you making the choice to do only one asset type (multifamily) versus diversifying?

Hi Kay Kay,

I have had the pleasure of chatting with you before.  You have a catchy name..ha.  I think you are doing the wisest thing and that is reading, asking questions and ultimately developing a strategy and plan that works for you.  Assuming you want to be passive and its real estate related (I won't portend to go into financial advising areas, diversification, etc), there are a variety of niches that might be logical for you to consider.  I think diversifying into areas you have researched that make sense to you (trends, good downside protection especially since we may be later in the cycle here); thinking about geographic and sponsor diversification may set the framework.  Timing and specifics you'll ultimately need to work out.  I like 3 areas now (value add MF apartments, mobile home parks and self storage).  

I have several articles on my blog sections but here's a few to get you started (diversification with syndication; 10 tips for vetting sponsors).  I wish you the best and reach out if you'd like to go deeper into some of these areas.  

https://www.biggerpockets.com/blogs/9145/59865-div...

https://www.biggerpockets.com/blogs/9145/53959-vet...

@Kay Kay Singh some great advice here. Ultimately I think it comes down to finding a sponsor that you can trust. I think there are some solid quality people on BP that are syndicating that you can have a phone call with. As you talk with them, you will find out more about what you like and don't like. 

I think in this environment other than finding someone with integrity and honesty, it is finding someone that is very conservative and cautious with there approach. Some syndication companies use aggressive numbers and really high leverage to achieve 15% IRR, those are the ones to watch out for.

Good luck with your investments!

@Kay Kay Singh some very helpful and insightful responses here with a lot of experience behind them. To back what others have said an provide my own opinion, I'd stress two areas:

1. Narrowing down your market. A market can (and likely will) make or break a syndication deal. A strong, growing market can easily cover for an average deal or team, but the opposite is a lot less likely. Focus on population growth, job growth, and major employer diversification. Are population growth and job growth above national average? Is the market dominated by one major employer or does the main employer account for 1/4 or less of the jobs? Imagine one employer providing 50% of the jobs in your market, and suddenly up and relocating. This is a recipe for disaster.

2. Find a Sponsor that places a major emphasis on conservative underwriting. You always want an operator to under promise and over perform, rather than the other way around. For example, if the market supports a rent premium of $120 on renovated units, a Sponsor using a projection of $110 premium/unit in order to make the deal work is an absolute red flag.

To recap, a strong growth market and conservative underwriting would be my top two criteria. Of course, there are plenty of other criteria to consider, and I think that you're doing the absolute right thing in reading everything that you can and developing and plan that works specifically for you before taking action.

Best of luck and look forward to reading your criteria!

@Kent Chrisman  @Jeff Chen @Ian Ippolito @David Thompson @Todd Dexheimer @Michael Bishop ant others

 A  great insight by all the seasoned Investors and Syndicators here on BP and it helped me a lot to write down a better Criteria  for my Investments and also to have a five year strategy and I will be posting my investment and criteria here in a few days but I am still expecting some more investors and syndicators to give me their thoughts on this.Thank you all very much.

@Kay Kay Singh

You have received a lot of valuable advice here. From my own experience, I can add that you should determine whether you want to stick with the same sponsor (aka syndicator), or prefer to use different ones. If it's a different one every time, I strongly encourage you to research each of them (personally and professionally) prior to entrusting your investment money. In addition to asking a sponsor for references, find other people that have worked with your potential syndicator in the past and ask about their experience. 

If you'd like additional feedback, feel free to PM me.

Best!

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