What Traits Predict a Good (or Bad) Real Estate Sponsor?

Question

As my net worth has grown, I’ve started considering putting some capital with sponsors. But I’m cautious as I read about recent post on biggerpockets about sponsors underperforming, asking for capital calls and losing investor capital.

What I want to learn is how to minimize my risk and avoid placing my money with sponsors who are more likely to lose my money.

A few questions I’d love feedback on:

Are there common traits among sponsors who lost investor money?
Conversely, are there common traits among sponsors who’ve consistently performed well?

My Research
I’ve noticed that some sponsors mentioned here on BiggerPockets have faced challenges. I wanted to share my notes and see what others think about whether these issues are warning signs to watch for:

Open Door Capital (Brandon Turner / Brian Murray / Ryan Murdock) – Broad focus across asset classes (mobile home parks, apartments, self-storage) and geographies (half the country). Multiple funds launched in quick succession. Some investors worry they’re stretched too thin and spending time raising capital instead of fixing/stabilizing current projects.

Norada Capital Management (Marco Santarelli) – Originally focused on real estate investments but later pivoted into note investing, where they may not have had as much experience. It seems the pivot into a new area could have introduced risk.

Ashcroft Capital (Joe Fairless) – Large but somewhat focused footprint (about 10 markets). Vertical integration (rehab, property management) seems like a strength. My only hesitation is that the sponsor’s time is divided between the fund, a large networking event, and daily podcasting.

Rise48 (Zach Haptonstall / Bikran Sandhu) – Very focused (4 markets, 100% real estate). The main drawback is limited track record—the sponsors started in 2019 and have less than 10 years of direct real estate experience, with backgrounds in non-RE fields prior.

Based on this, my current criteria for sponsors I’d consider investing with are:

• Focus on 1–2 regions
• Focus on one asset class
• Have 10+ years of direct real estate investing experience
• Primarily dedicated to running investments (vs. running podcasts/courses/events)
• Appropriate amount of capital raised / projects going on in a given year.

Focus on 1–2 regions

Focus on one asset class

Have 10+ years of direct real estate investing experience

Primarily dedicated to running investments (vs. running podcasts/courses/events)

Appropriate amount of capital raised / projects going on in a given year.

My question to the community:
Are these the right criteria to evaluate sponsors, or am I missing key factors? For those of you who’ve invested in syndications, what sponsor traits have you found to be the biggest predictors of success or failure?

Jeremy Dyer · Answer

That’s really solid criteria, Basit. As someone that has personally invested in over 50 deals with a dozen different investment sponsors, I’d say you’re on the right track focusing on experience, focus, and bandwidth. A couple of other things I’ve found valuable to look at are:

• Track record through cycles (how they’ve managed deals in both good and bad markets).
• Transparency and reporting (how proactive they are with communication, especially when things aren’t going perfectly).
• Alignment of interests (skin in the game, fee structure, co-investment).

Track record through cycles (how they’ve managed deals in both good and bad markets).

Transparency and reporting (how proactive they are with communication, especially when things aren’t going perfectly).

Alignment of interests (skin in the game, fee structure, co-investment).

In my experience, those have been big predictors of how well a sponsor actually delivers in the long run.

Evan Polaski · Answer

@Basit Siddiqi

2 and 3 from your list: 100%

Regions and dedication to running investments is a scale issue.  I.e. Blackstone seems to have limited issues going into new regions but they have ~5,000 employees.  Same with marketing efforts: typically the "household name" was never running deals.  They were the marketer, while the other partner is focused on deals.

Appropriate capital raised: also a scale issue.  A new group raising $20mm is vastly different than a large group raising $20mm, proportionately.

Indicators of success:

1. Market cycle. All groups you mentioned only know a bull market.  They built average track records within the timeframe they were investing, and clearly assumed things could only go one way.  I don't know that we are in the bottom (I thought 2008 was close to the bottom, but *boom* 2009 and 2010 made me long for 2008, again).  But, if you catch a deal with solid, LONG TERM fundamentals, you might not get a home run, but you likely will be safe.

2. Acquisition Fee: biggest driver I see (and apparently all institutions too) is level of acquisition fee.  2% or less is ideal.  Most institutions won't pay more than 1.5% (and some 1%).  3+% is a solid indicator that sponsor is more focused on quantity over quality. Note: also look at co-invest minus acq fee.  This should still result in sponsor having money in deal.

3. Reaffirming your experience piece.  Sponsors should have worked in industry long before they raised a dollar of outside capital.  Some groups scale slowly with their own money, others come from long experiences working for other companies.  Personally, I don't invest in anyone that hasn't lived professionally through the GFC, so by default I don't invest with anyone under the age of 45 yrs old.

4. Deal level fundamentals. This is very broad and can encompass a lot.  But a big one is capital structure: financing type and terms.  A deal that can support a 10 yr fixed rate loan today at an inplace 1.25 DSCR is far safer than a floating rate bridge loan at 1.25x DSCR due to a significant rate cap purchase.

And most of all: know your own goals.  If you want to minimize your chances of losses, you will not be getting 20%+ projected IRRs.  If you want 20%+ net IRRs, you are taking on more risk, and therefore more likely to strike out.

At the end of the day, real estate can either be very safe or very risky.  It can create great long term returns, or it can wipe you out.  In general, real estate is a highly efficient market, if you are seeing 20%+ net IRRs, just know there real risks in the investment in various ways.  And if you want safety and surety, you will very likely not be getting much more than high single digits/low double digit returns.