How do I vet a syndication as an investor?
Hi all! I'm interested in passively investing in large apartment deals. I already have connections to a few operators and have browsed their packets but haven't pulled the trigger yet.
Does anyone have any recommendations for educational resources (books, podcasts, courses, etc) for how to vet the operator and the deal itself? I understand the math but need more information on what to look out for as red flags.
I'm seeing returns of around 18% IRR for a 5 year hold- is that in line with what most are offering?
Thanks!
@Kayla V. I wrote this in another thread about red flags to look for, thought it might be helpful to evaluate different deals and different operators:
- Are they co-investing in the deal or are they just collecting fees and operating? Do they have skin in the game?
- Are their percentage growth numbers on income and expenses very different (5% vs 2%), and just understanding why that is. Could be a good reason, or could be someone trying to make the deal work.
- Whats their track record and do they have any deals that have gone the full cycle? (buy, operate, sell, make money)
- How has their track record performed financially as compared to their budgeted numbers? So many people have made great returns because cap rates went from 6.5% to 5.0%, but their projected NOI was off by 20%.
- They won't admit to any losses, errors, misses, incurred problems, lower than expected returns, etc. They're either lying or haven't been doing it long enough.
Hope that helps!
@Kayla V.
I'm interested as well and doing search, can we connect and share our findings? I requested to connect.
@Kayla V. Great post! Kayla - I am a multifamily apartment syndication investor (14+ and counting), I've learned a lot over the past few years. I am also in the Denver area, happy to help anytime. Good book = The Best Ever Apartment Syndication by Joe Fairless. As far as vetting a deal...So many topics to discuss but a few include:
- Understanding the background and credentials on the team
- Getting references from current investors
- Researching the firm online and asking around on forums etc
- Meeting with the syndicator(s) in person (if possible)
- Seeing the track record
- Understanding the fee structure
- Happy to connect anytime. Best of luck!
One can learn as well on how other crowdfunding platforms vet the syndicators. Crowdstreet does a thorough job in vetting syndicators, a lot more thorough than a private investor.
From their website:
https://www.crowdstreet.com/resources/how-to/how-we-select-and-designate-our-sponsors/
Some highlights:
To be considered for the CrowdStreet Marketplace, prospective Sponsors must have at least 10 years of private-equity real estate expertise and proven experience managing investment capital from individual high-net worth investors and/or institutional investors. Sponsors that meet this requirement are subjected to an objective review process and are classified into one of three categories based on experience.
Crowdstreet does the following background checks as well: (and some of those include below)
| Bankruptcy and Lien Search |
| Criminal and Lawsuit Records Search |
| UCC Filings Search |
Unfortunately, many syndicators I see today don't have enough experience and they have not gone through the Great Recession and survived it.
Originally posted by @Greg Scully:@Kayla V. Joe Fairless has some very good info on his website.
Nice tip on the website. :)
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#2 Multi-Family and Apartment Investing Contributor
- Rental Property Investor
- St. Paul, MN
@Kayla V. Look for overall experience, business plan of the property, strength of the market, details of the underwriting and the team.
The IRR of 18% means nothing if you cannot achieve it.
Some big red flags that I see are:
1. The sponsor doing a lot of deals, taking acquisition fees up front, asset management fees and low splits (90/10). This is fee heavy, meaning they get paid sink or swim
2. Showing high rent increases every year. Inflation is roughly 2%. If the sponsor is underwriting increases much higher than that, why? I don't care if the market is increasing 10%/year, eventually that will stop.
3. Cap Rate reversion: Sponsors often use a generic number, putting no thought into why they came up with the cap rate reversion. With aggressively compressed cap rates, why do they think that in 5 years they will only move 50 bps?
4. Cap rate at purchase: Just because they are buying at a 5 cap, doesn't mean that the market cap is 5. This plays into the exit/reversion cap rate as well. I have seen sponsors send out deals saying they're buying at a 4.75 cap and are going to sell at a 5.25 cap. They say that they are being conservative, but forget to mention that the actual cap rate today is 5.75. I actually saw this on a deal that I was offering on. Then a month later I received a deal package from the sponsor that got it. In this case cap rates need to compress by 50 bps for them to hit their numbers. Because the exit heavily weighed on the deal, a sale at 5.75 would result in them returning only 8% IRR to their investors.
Check out this article here on vetting sponsors and deals