New to multi family passive investing
Member since 2018 · 9 posts · 9 votes
New to multi family passive investing
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Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes
7y@Mike Gehard, when I started investing passively in multifamily syndications, the first thing I did was identify the markets I wanted to invest in. This was most important to me. I can find sponsors in any market, but I don't want to bet my money that Cleveland is turning around any time soon. I wanted markets with the highest population growth, highest job growth, highest rent growth, lowest unemployment, etc. You could argue that these aren't that important for a 2-3 year hold on a value add play, but they're insurance in case something goes wrong. If I have to hold for 10 years instead of 3, I want to be in an appreciating market. Next, I looked at the sponsors doing deals in those markets. You can find transaction summaries from the big advisors/brokerages, and that will tell you who is active in that market. I then researched those sponsors' investment strategy, usually through their website. I knew I wanted someone doing value-add, likely with a cash out refinance after repositioning. Lastly, hop on a call with the sponsor to make sure you're comfortable with them. And yes, past performance is important. I think that's more important that doors under management or assets under management.
My thought process for this route is that since those sponsors are the most active in that market, they're getting the best deals. They have a relationship with all of the brokers in that market. They have a pretty established team in that market, from property manager to construction crew.
Sure, you could go with a sponsor that hops around the country with their deals, but they're likely seeing the deal second or third in line (still off-market, but after the more active players in that market). They also might not know the intricacies of that market. Where is development happening, which areas are turning around, which areas are getting worse, etc. Many developments take years to break ground, so you might not know just by driving the neighborhood that there will soon be new development next door.
Notice I've only talked about location and sponsor so far. Those give you a foundation for good deals. You still have to inspect every deal you want to invest in, but it's likely not worth your time if the foundation isn't very strong.
Deal level inspection: Look at who the property manager is for the deal. How many doors do they have under management (this is an area where # of doors definitely does matter)? Do they have experience with repositions?
Also, when looking at a deal, you want to know every assumption the sponsor made in calculating their returns. You need to know how those assumptions affect your return. The easiest way is through a sensitivity analysis. A lot of sponsors have started providing this with their investment summary, but there's no way to provide one for every assumption (they'll usually pick 1-3 assumptions to provide this for). What happens if rents are $50/mo lower than what they projected? This can have a huge affect on your return. You also need to ask the sponsor to support their assumptions. Why are they using 3% rent growth instead of 2%? Why are they using 1% higher cap rate on the exit, instead of keeping it the same? (this is a good thing, but you should still know why, and how this assumption could change your return).
Limited partners still need to be educated enough to understand all of these risks. The SEC actually requires it for non-accredited investors. Sophisticated investor means sophisticated.
38 Replies
- 7yIvan BarrattBusiness MemberInvestor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
Hi @Mike Gehard
Everything you mentioned is of paramount importance. Search this site for great content on underwriting sponsors (it's more important than the deal!).
Further; the best way to get good at evaluating deals and sponsors is by underwriting a lot of deals and sponsors! I recommend 100 offerings (perhaps less if you're dealing with a personal relationship).
If you want to get good at pull ups; practice doing more pull ups! ;)
All the best!
- Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes7y
@Mike Gehard, when I started investing passively in multifamily syndications, the first thing I did was identify the markets I wanted to invest in. This was most important to me. I can find sponsors in any market, but I don't want to bet my money that Cleveland is turning around any time soon. I wanted markets with the highest population growth, highest job growth, highest rent growth, lowest unemployment, etc. You could argue that these aren't that important for a 2-3 year hold on a value add play, but they're insurance in case something goes wrong. If I have to hold for 10 years instead of 3, I want to be in an appreciating market. Next, I looked at the sponsors doing deals in those markets. You can find transaction summaries from the big advisors/brokerages, and that will tell you who is active in that market. I then researched those sponsors' investment strategy, usually through their website. I knew I wanted someone doing value-add, likely with a cash out refinance after repositioning. Lastly, hop on a call with the sponsor to make sure you're comfortable with them. And yes, past performance is important. I think that's more important that doors under management or assets under management.
My thought process for this route is that since those sponsors are the most active in that market, they're getting the best deals. They have a relationship with all of the brokers in that market. They have a pretty established team in that market, from property manager to construction crew.
Sure, you could go with a sponsor that hops around the country with their deals, but they're likely seeing the deal second or third in line (still off-market, but after the more active players in that market). They also might not know the intricacies of that market. Where is development happening, which areas are turning around, which areas are getting worse, etc. Many developments take years to break ground, so you might not know just by driving the neighborhood that there will soon be new development next door.
Notice I've only talked about location and sponsor so far. Those give you a foundation for good deals. You still have to inspect every deal you want to invest in, but it's likely not worth your time if the foundation isn't very strong.
Deal level inspection: Look at who the property manager is for the deal. How many doors do they have under management (this is an area where # of doors definitely does matter)? Do they have experience with repositions?
Also, when looking at a deal, you want to know every assumption the sponsor made in calculating their returns. You need to know how those assumptions affect your return. The easiest way is through a sensitivity analysis. A lot of sponsors have started providing this with their investment summary, but there's no way to provide one for every assumption (they'll usually pick 1-3 assumptions to provide this for). What happens if rents are $50/mo lower than what they projected? This can have a huge affect on your return. You also need to ask the sponsor to support their assumptions. Why are they using 3% rent growth instead of 2%? Why are they using 1% higher cap rate on the exit, instead of keeping it the same? (this is a good thing, but you should still know why, and how this assumption could change your return).
Limited partners still need to be educated enough to understand all of these risks. The SEC actually requires it for non-accredited investors. Sophisticated investor means sophisticated.
- North of Houston · Member since 2018 · 350 posts · 181 votes7y
Mike, what area do you reside?
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Ivan Barratt:
Hi @Mike Gehard
Everything you mentioned is of paramount importance. Search this site for great content on underwriting sponsors (it's more important than the deal!).
Further; the best way to get good at evaluating deals and sponsors is by underwriting a lot of deals and sponsors! I recommend 100 offerings (perhaps less if you're dealing with a personal relationship).
If you want to get good at pull ups; practice doing more pull ups! ;)
All the best!
Mike - pay attention to this conversation...
Ivan, with all due respect, I disagree with your characterization that the quality of the sponsor is more important than the quality of the deal. Let's think about this Socratically:
Question: Why is there so much interest in syndications today?
Answer: The reason we are having these conversations is that so many sponsors have been so successful for a long while now, and this makes syndication look like an amazing opportunity to folks.
This begs another question: Have all of these sponsors who have generated great returns been brilliant?!?
The logical answer is: No. The truth is that the market run-up and cap-rate compression created exists for everyone who bought early in the cycle. Now, you had to be bold when others were scared - yes. But, does this mean that you were an excellent operator? No, and you didn't need to be. Such is the nature of the cycle.
I contend that today, more so than at any time in the past 8 years, what really is most important is the quality of the market, sub-market, and the deal.
Even a brilliant sponsor couldn't make money on 95% of the crap that is being sold today, Mike.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @Mike Gehard:
Hello all,
I'm looking into my first multi family passive investment and trying to dot all of the i's and cross all of the t's before signing on the dotted line to protect everyone involved.
How deeply do I need to dig into the sponsor, deal and location? I've read that the sponsors are the most important one to research.
What kind of information do people look for when choosing a sponsor to go with?
How important is seeing the sponsor's past performance on deals? Is the number of doors under management enough? Is past performance of the property management company enough?
The deeper I dig the more I realize this is a relationship/trust situation and sometimes that doesn't show up in the numbers.
Thanks in advance,
Mike
Welcome to the site Mike.
- 7yIvan BarrattBusiness MemberInvestor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
@Ben Leybovich smart sponsors pass on the 99.5% (199 out of 200 deals give or take) of the crap being sold today. A poor sponsor can F up the greatest of deals rather quickly. #execution
- 7yIvan BarrattBusiness MemberInvestor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
@Ben Leybovich smart sponsors pass on the 99.5% (199 out of 200 deals give or take) of the crap being sold today. A poor sponsor can F up the greatest of deals rather quickly. #execution
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Ivan Barratt:
@Ben Leybovich smart sponsors pass on the 99.5% (199 out of 200 deals give or take) of the crap being sold today. A poor sponsor can F up the greatest of deals rather quickly. #execution
Hahah tou-che'
- Member since 2018 · 9 posts · 9 votes7y
Originally posted by @Charley C.:
Mike, what area do you reside?
I'm currently in Colorado.
- Member since 2018 · 9 posts · 9 votes7y
Originally posted by @Sam Grooms:
@Mike Gehard, when I started investing passively in multifamily syndications, the first thing I did was identify the markets I wanted to invest in. This was most important to me. I can find sponsors in any market, but I don't want to bet my money that Cleveland is turning around any time soon. I wanted markets with the highest population growth, highest job growth, highest rent growth, lowest unemployment, etc. You could argue that these aren't that important for a 2-3 year hold on a value add play, but they're insurance in case something goes wrong. If I have to hold for 10 years instead of 3, I want to be in an appreciating market. Next, I looked at the sponsors doing deals in those markets. You can find transaction summaries from the big advisors/brokerages, and that will tell you who is active in that market. I then researched those sponsors' investment strategy, usually through their website. I knew I wanted someone doing value-add, likely with a cash out refinance after repositioning. Lastly, hop on a call with the sponsor to make sure you're comfortable with them. And yes, past performance is important. I think that's more important that doors under management or assets under management.
My thought process for this route is that since those sponsors are the most active in that market, they're getting the best deals. They have a relationship with all of the brokers in that market. They have a pretty established team in that market, from property manager to construction crew.
Sure, you could go with a sponsor that hops around the country with their deals, but they're likely seeing the deal second or third in line (still off-market, but after the more active players in that market). They also might not know the intricacies of that market. Where is development happening, which areas are turning around, which areas are getting worse, etc. Many developments take years to break ground, so you might not know just by driving the neighborhood that there will soon be new development next door.
Notice I've only talked about location and sponsor so far. Those give you a foundation for good deals. You still have to inspect every deal you want to invest in, but it's likely not worth your time if the foundation isn't very strong.
Deal level inspection: Look at who the property manager is for the deal. How many doors do they have under management (this is an area where # of doors definitely does matter)? Do they have experience with repositions?
Also, when looking at a deal, you want to know every assumption the sponsor made in calculating their returns. You need to know how those assumptions affect your return. The easiest way is through a sensitivity analysis. A lot of sponsors have started providing this with their investment summary, but there's no way to provide one for every assumption (they'll usually pick 1-3 assumptions to provide this for). What happens if rents are $50/mo lower than what they projected? This can have a huge affect on your return. You also need to ask the sponsor to support their assumptions. Why are they using 3% rent growth instead of 2%? Why are they using 1% higher cap rate on the exit, instead of keeping it the same? (this is a good thing, but you should still know why, and how this assumption could change your return).
Limited partners still need to be educated enough to understand all of these risks. The SEC actually requires it for non-accredited investors. Sophisticated investor means sophisticated.
Thanks Sam...all great information. As I'm just looking into this as a strategy I haven't thought about getting in touch with many syndicators. I was introduced to one and have been using that as my one data point.
Your thoughts lead me to believe that it is time to branch out and talk to more to get a better idea of what is out there.
Any tips on good sources of leads for someone with capital to invest but that lacks a network?
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
Gotta network...it's why some of us have so many forum posts...ferreting out opportunities. Listen to podcasts and reach out to the guests...sponsors jump on the podcast circuit and in these forums when they have an open offering. Things start to snowball from there...I received three offerings in my inbox this week. And there are tons of offerings on the crowdfunding sites.
- Rental Property Investor · Houston, TX · Member since 2018 · 40 posts · 26 votes7y@Mike Gehard If you don’t mind me asking, what is a “passive” multi-family deal?
- Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes7y
Hi @Mike Gehard - The most important items in my mind are the team, the market, and the deal. All of which have nearly the same importance. You obviously want a competent team who has a successful track record. The market is crucial as Ben pointed out. Lastly, the deal and business plan need to be solid. If you have all of those items the next thing you'd want to ask yourself is can I trust this person. Trust is key and you can only get there by building relationships and really getting to know people. That's why networking is so important as @Mike Dymski suggested. Hope that helps and happy to chat further any time!
- Member since 2018 · 9 posts · 9 votes7y
Originally posted by @Megan Hodges:
@Mike Gehard If you don’t mind me asking, what is a “passive” multi-family deal?A deal where I am a limited partner by bringing money into the deal but don't have any responsibility for managing/running the property.
- Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes7y
@Mike Gehard, you could talk with Mike Dymski about all of the sponsors he knows. He probably has the biggest list of BP sponsors.
However, I'd highly recommend looking beyond BP and the podcast circuit for sponsors. They're such a small subset of what's out there.
So the big advisers/brokerages all have quarterly sales/transaction summaries. They usually post these reports on their websites. I'm looking at the Q3'17 MF Sales Summary for Phoenix from Cushman & Wakefield. There's 15 transactions for Class C multifamily properties (I believe they're only including 100+ unit transactions). I'm looking at Class C because that's where most of the value-plays are happening. For every transaction, it shows who the buyer and seller are. Right away, I notice that some groups/sponsors are showing up in multiple transactions. I'm curious who this Western Wealth Capital group is, or who 29th Street Capital is. I can see WWC offers exactly what I was looking for. Value-add plays with a cash out refinance after reposition. In fact, they have this nifty little video explaining their strategy: https://www.youtube.com/watch?v=kiywADbS6wQ
I later find out from brokers that they're the largest purchaser of multifamily properties in the Phoenix area. They're the second largest owner. They focus their efforts on 2-3 very selective markets.
29th Street Capital is a little different. They purchase all over the country. They don't just invest in conventional Class C value add deals.
These two groups/sponsors were from one quarterly report. If I look at the last 6-8 reports, I'll see that there are plenty of groups that are very active in my market. I find a newer group (4 transactions, but all in the last 6 months) called Rincon partners. They're a group of former C level executives from one of the largest REITS in the country, and I realized I actually worked with one of them back in my CPA days.
I also joined crowdfunding sites like RealtyShares and RealtyMogul. If a listing came through in my area, I'd note who the sponsor is and look into them (note that I also invested through these sites, but I recommend going directly through the sponsor for deals, if possible).
Lastly, you can talk directly with brokers. They know who the large sponsors in the market are, they work with them all the time. They'd be happy to connect an investor with them.
This is just the route I took. I don't know if its any better or worse than others. But I did get so interested in multifamily along the way that I moved over to the sponsor side.
One of the most helpful concepts I've run across in evaluating sponsors is the idea of Batesian Mimicry. Real Estate Syndication can draw a lot of copy cats due to the low barriers to entry and high returns/fees. The question is, can you tell the real thing from an imposter?
Also, a rising tide lifts all boats...
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
I agree with @Matt Nusbaum that all three things are equally important: the market, the sponsor, and the offering. Going over the numerous posts on BP will certainly help to find both sides: the investors and the sponsors in order to start networking as @Mike Dymski advised. I'd discourage you from going with the 1st sponsor you met unless you had a chance to review many other deals from others sponsors and the first sponsor's deal still makes the most sense.
Here's a blog post to help you with the questions for the sponsors:
- Rental Property Investor · Houston, TX · Member since 2018 · 40 posts · 26 votes7y@Mike Gehard Oh I see, I am on the opposite side of the fence.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
@Sam Grooms That's an excellent process. Here are a few more. I cold called the top fifty operators on the Inside Self Storage list to see if they raise capital. Same with MHPs...list at Mobile Home University. Most of these are dead ends but networking is a numbers game. I talked with the financial advisers of numerous colleagues and friends to find the ones who offer alternative investments (i.e. real estate). Last week, I invested in a conservation easement...strategy presented by my CPA in VA, called a colleague in SC, he referred me to a financial adviser in GA, and ended up investing in a property in AL...all without leaving the office.
Incidentally, on the conservation easement, as I was reading the PPM, I recognized one of the general partner's names from prior networking and he happened to have an account on BP; so, I PM'ed him and then spoke with him on the phone (which is uncommon for the conservation easements sold through financial advisers).
- Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes7y
@Mike Gehard Performance on past deals is huge! As a passive investor this is the most important part for you. What is their business plan and have they successfully completed this same plan or a similar one in the past? What was their target return for investors? Did they fall short, meet or exceed that?
It is a relationship/trust situation. But their previous successes should absolutely show up in the numbers.
Now if it's a newer sponsor that hasn't yet completed a business plan, that's a different story. But do you want to start with an unproven sponsor or a proven one? Go with a proven one first, learn, and then you'll be more versed on how to vet the less experienced sponsors.
- Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes7y
@Mike Gehard Why specifically are you looking into Multi-family syndications? Is it because you have some capital to invest and met a syndicator offering great returns?
I ask because I think that is a fairly common scenario these days and I think before you go that direction you should look into all the opportunities available to you.
Even just sticking with Commercial real estate, you could look at syndications in Retail, Office, Industrial, Residential and many other miscellaneous things.
Or, you could look at things like oil & gas or farm or timber land.
Why not self-storage or mobile-home parks?
Assuming you have settled on multi-family, why not just invest in a stock like Avalon Bay instead of a syndication? Or, why not buy an apartment building directly yourself?
How much of your total portfolio do you intend to put into this particular investment?
I'm not trying to say a passive investment in a multi-family property is a bad idea, I have 3 myself right now.
But, I think it's important to take a more holistic and proactive approach with what you are doing with your investment dollars.
- Member since 2018 · 9 posts · 9 votes7y
Originally posted by @Jeff Kehl:
@Mike Gehard Why specifically are you looking into Multi-family syndications? Is it because you have some capital to invest and met a syndicator offering great returns?
I ask because I think that is a fairly common scenario these days and I think before you go that direction you should look into all the opportunities available to you.
Even just sticking with Commercial real estate, you could look at syndications in Retail, Office, Industrial, Residential and many other miscellaneous things.
Or, you could look at things like oil & gas or farm or timber land.
Why not self-storage or mobile-home parks?
Assuming you have settled on multi-family, why not just invest in a stock like Avalon Bay instead of a syndication? Or, why not buy an apartment building directly yourself?
How much of your total portfolio do you intend to put into this particular investment?
I'm not trying to say a passive investment in a multi-family property is a bad idea, I have 3 myself right now.
But, I think it's important to take a more holistic and proactive approach with what you are doing with your investment dollars.
I like your idea of holistic/proactive approach.
I decided to start in multifamily because I did meet a sponsor/syndicator that opened my eyes to that asset class. I'm now casting a new wider in this class simply out of ignorance for the other classes that you mentioned. Also, multi family feels familiar to me which makes it easier to wrap my head around.
Do you have suggestions for finding opportunities (syndication or not) in those other asset classes/ways of investing? I'm open to researching them and I'm sure I'll be able to wrap my head around those as well. :-)
I'm focused on passive investing right now due to the perceived "ease of use". I already have a full time job so I'm just looking for some diversification of investment without a lot of active work that would come from buying an apartment building.
Thanks for opening my eyes to other options and questions to ask myself...time to do a little research. Any tips you have for finding opportunities in those other asset classes are welcome.
- 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Mike Gehard as others on this thread have alluded to, sponsor selection is everything. It is absolutely the most critical component.
An inexperienced sponsor is far less likely to produce a better outcome in an adverse market than an experienced sponsor that has lived through cycles before. And I think there is a higher probability than not that an adverse cycle will materialize at some point in the future.
But this doesn't mean that you should just find the largest sponsor or the most active buyer in a market, either. I know people who have worked for very large shops, and man, the stories I've heard...big doesn't necessarily mean better.
Look for experience, time in business (over 10 years because that's how long it's been since the last downcycle), and track record. And especially focus on what they did during the Great Recession. Anybody can show a stellar track record if they bought at the bottom and rode to the top. Even the worst operators have seen the market bail them out of their mistakes. I don't think you can count on that going forward.
Next most important are the assumptions made in the underwriting. Don't pick investments by looking for the highest IRR or multiple. Those yardsticks are simply the result of manipulating the numbers. How those numbers are manipulated are the assumptions. Play close attention to things like forecasted rent growth, economic vacancy, expenses and exit cap rate assumptions. And don't forget debt assumptions like interest rates, IO periods and refinances. Finally, look at sources and uses of funds--are they raising enough money? You'd be surprised how often the equity raise is cut too close to the fence, or worse. This also sways the IRR.
So back to the sponsor. Good sponsors should be getting the best deals because of their relationships. They should be underwriting with the best assumptions because they are conservative and experienced. And they should make the best decisions when the going gets tough. That is why the sponsor is so important. Find a good sponsor and they should be showing you good offerings.
- 7yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
@Mike Gehard, Every investor has their own process. Here's the process that I use. Background: I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive.
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
The Real Estate Crowdfunding Review - Rental Property Investor · Member since 2018 · 41 posts · 47 votes7y
@Mike Gehard You are getting great advice here. As a sponsor I don't want you all to feel I have ulterior motives with my comments.
When we present a project we try to be conservative, but not all sponsors are - particularly now when deals are harder to find and returns are trimming off a bit. They are good deals, but not 20% IRR, maybe not even 15% IRR.
I echo what other investors say. These comments are from the sponsor viewpoint.
When a project is presented -
Are the market rents listed really the market rents for the area?
Is the deal recession proof?
Are there more than a couple of industries employing people, more than a half dozen employers?
Is population declining? (Run away unless there is a compelling reason to expect improvement)
Is income steady to rising, and sufficient to pay the rent?
How low can the occupancy go below it no longer breaks even?
Will the sponsor need your money longer than you want to give it up?
If they can't refinance, are you OK with that?
If the value add are renovations, do the numbers look reasonable? Sometimes the scale brings the cost down a bit so that it looks unreasonably low. Is there timeline reasonable for renovation?
Is the management company good at what they do, for this type of property?I want to piggy back on @Sam Grooms comment about population growth, income growth for a 2-3 year flip. It is vital that it be in place to make sure you will be able to find a buyer when you want to flip. Plus is there any meat on the bone when it is time to flip so someone else can see the value. We don't always sell to REIT's.
Going the a well known sponsor is not always the a safe move. I know of one fairly well known sponsor and have been told be investors that the numbers don't look like they will prove out. That being said, I don't think you should do a 100 unit apartment with someone with no experience. On our first deal we partnered with experience. You need experience in the stable.
Putting the project together is the job of the sponsor. You need to dissect it till you are comfortable. Though you may never be 100% comfortable. For most people, if they don't jump past their fear, they never jump in. That being said, there is a difference with feeling uncomfortable with a deal and fearing the deal might not work out. If you are comfortable that things look good, that's when you push past the fear. Risk/Reward quotient.
I concur with @Ben Leybovich what really is most important is the quality of the market, sub-market, and the deal. Deals are running longer. Though I am not sure there will be a 2007 downturn in the CRE market, there will be something. It could be a regional economic drop.
You may not fully break out everything in the project package and do a full underwriting, but you need to trust the numbers.
Trust is a big factor. Do you trust the sponsor?
Transparency is critical for our company. Any question asked, gets answered fully. But also just as important is
Is This Project Right For Your Objectives?
If I have a project that I expect to double the investors money in 7 years, but it turns out I can do it in 4 years - are you ok with that? Or would you prefer that we wait till year 7 to sell and try to get more than double. Some would be good with doubling, some would feel we didn't maximize returns.That's enough from me for now. Hope it helped.
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