Posted about 2 years ago

How to Choose the Right Real Estate Syndication Opportunity

So you've decided to invest in a real estate syndication. Now the question is, how do you choose the right opportunity?

Below we will discuss what to you need to consider before making an investment.

Your Investment Criteria

Before looking at investment opportunities, you first need to determine on your investment criteria.

Why are you investing?

Are you investing for retirement? Your daughters wedding? Your child's college education? Or are you investing for another reason?

The reason you're investing will determine how long you can tie up your money, and how much risk you are willing to take on.

If your child is going to college in 3 years then investing in a syndication with a hold period of 5-7 years wouldn't be the right fit. But if your investing for retirement in 20 years, then it doesn't matter that the investment has a hold period of 5-7 years.

And if you're investing for your child's education or retirement, you might not be willing to be as aggressive as you would if you're investing the loose change sitting in your bank account.

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What is your risk tolerance?

Do you like to play it safe? Or are you comfortable taking calculated risks?

The amount of risk you can handle will determine which strategies and asset classes are right for you.

What is your expected ROI?

What is the current rate of return on your current portfolio? What is the rate of return on other investments available to you? Do you have a minimum rate of return you are willing to accept?

Once you know your expected rate of return, you can weed out investment opportunities that fall below your desired rate.

The Right Strategy

Not all syndication opportunities are created equal.

Some involve an aggressive value-add strategy that includes vacating the entire property, doing extensive renovations, then leasing the building at higher rents.

Others involve a more mild value-add strategy where the property isn't vacated, instead units are renovated and released at higher rents as normal tenant turnover occurs.

And sometimes properties are simply bought and held for cash flow.

Then there's less common strategies that include condo conversions, converting properties to a totally different use (i.e. warehouse to self-storage), and more.

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The more aggressive the strategy, the more risk is involved, but the higher the return. Your risk tolerance and expected rate of return will determine which strategy is best for you.

It is also recommended that you only invest in strategies that you fully understand. So you shouldn't invest in an opportunity that involves a NNN lease if you don't understand what that is.

The Sponsor

Choosing the right sponsor (the team responsible for managing the investment) is the most important aspect of this entire process.

And that's because even if you choose the wrong strategy, but have a good sponsor then your investment will be fine. They say a great manager can take a bad deal and turn it around, but a bad manager can take a great deal and turn it into a disaster.

Questions to Ask Yourself:

Does the sponsor have a previous track record of success with this asset class and strategy? Have they invested in this market before? How have they handled unexpected circumstances in the past? Have they ever lost investor capital?

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The answer to these questions will determine weather or not you should trust the sponsor with your hard earned money. And you can always request references from past investors to verify a sponsor's past performance.

The Market

One thing about real estate that you cannot change is location. When you invest in a syndication, the market is an important factor.

You want to look for opportunities in markets with diverse economies, job growth, population growth, low unemployment, low crime, and a good balance of supply and demand.

If invest in these markets it will be easy to keep the property occupied and increase rents in the future - which makes for a profitable investment.

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But, If you invest in a market that is weak in these areas, it can lead to high vacancy rates. Which can cause a number of issues, from having to lower rent rates and provide concessions to not being able to cover debt payments or operating expenses. All which are not good for the return on your investment and can even cause you to lose money.

Another factor is weather or not the state and/or locality is landlord or tenant friendly. Landlord friendly states (i.e. Ohio) make it easy to quickly evict tenants that don't pay. But tenant friendly states (i.e. New York) can make it a nightmare to evict deliquient tenants.

But, if you chose a good sponsor, they will pick markets that meet this criteria. And all you have to do is verify it.

The Property

Once again, if you chose the right sponsor, they will pick a great property based on their expertise and past experience.

And as a prudent investor, you just need to review the merits of the property before making an investment decision.

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Questions to Ask Yourself:

Is the property located in a desirable part of the market? Does the property have access to major highways? Is it located close to major employers, shopping centers, schools, and other points of interest?

A residential property will be in high demand if it is located near the above areas.

Who is the tenant base? Is it reasonable to assume that they can afford to pay increasing rent prices? Does the investment strategy make sense for this type of property?

If the tenant base are blue collar families it wouldn't make sense to convert a C class property to an A class property and raise rents $400. The strategy needs to make sense for the tenant base that lives in the area.

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Are there any obsolete features (i.e. aluminum wiring) or other problems with this particular property that add additional risks? And do you believe the sponsor can execute their plan to solve these problems?

Cosmetic upgrades such as new doors, cabinets, flooring, painting, etc. are easy to execute. But more serious problems like cracks in the foundation can be much more complicated to fix and may come with unexpected setbacks.

Bringing It All Together

The first step to choosing the right syndication opportunity starts with knowing your investment criteria.

Next you need to decide which strategy makes sense for you based on your investment criteria. Typically the more aggressive the strategy, the more risk is involved, but the higher the return.

From there you need to identify which sponsor you can trust to manage an investment and keep your money safe. This is the most important part of the process because the manager can make or break the deal, no matter how good the deal is on paper.

Next you need to review sponsor's chosen market to see if it is a growing market with a diverse economy and if it is located in a landlord friendly state.

Finally you will need you need to review the property to see if the chosen strategy makes sense for this property. And there isn't any serious problems that can cause significant set backs and may cause you to lose money.

Comments (2)

  1. Great article-thank you!

    Typo in last paragraph-series should probably be “serious “

    1. Thank you, fixed!