LOOKING FOR THE RIGHT SPONSOR IS MORE > LOOKING FOR RIGHT DEAL

[Jason Malabute]

If you are thinking about passively investing in a syndication deal, choosing the right sponsor is more important than the actual deal. The most obvious reason is you want to make sure you are not investing your hard-earned money with a criminal who will take your hard-earned money and run. Now let’s look at less apparent reasons to vet your sponsor.

Look at the character of your sponsor. Here are questions to ask yourself before investing with a sponsor. The first thing to question is to look at the sponsor’s experience. Do they have full market cycle experience in multifamily? If not, make sure they work with a partner, mentor, or property manager who has such experience. Another question to ask yourself is how the sponsor talks about real estate investing. Do they say “real estate only goes up” or acknowledge that real estate investments come with risks and are cyclical?

Last, look at how the sponsor did their underwriting. Remember, how they calculated their returns is more important than the actual returns claimed. Some questions are: is the rent growth they used realistic even after the market settles down? Did they use a new property tax amount to consider the reassessment after the sale of the property? Is the insurance expense amount realistic? Do they think cap rates are going to continue to compress forever? Are they using less than 10% vacancy because it is a “hot market?” Those are a few things to consider when screening a sponsor before investing with them.

[Evan Polaski]

@Jason Malabute, I agree, sponsor is more important than deal, but don't lose the deal too.  A great sponsor should be able to filter out a bad deal, but even the best sponsors can and have gotten into bad deals.  Then again, a bad sponsor or unfocused sponsor can turn a great deal bad.  

Per Jim's comment, I was just posting on a different thread about this.  There are so many sponsors out there.  There are some great ones and less than great ones. Just like finding properties, you need to broaden your net as an LP and actively seek out different syndicators.  There are SO many out there, but if you stick with one "sphere of influence" you will not expose yourself to the diversity of operators.  

Within the BP community, you would assume that only multifamily, value-add operators exist, with a handful of self-storage and mobile home parks.  But there is a big world out there.  Retail, office, industrial, hotel.  Then you get into size: grocery anchored retail, unanchored retail, neighborhood mixed use, etc in the retail side.  You can invest in core, core plus, value-add, redevelopment and ground up development.  

As Jim mentioned, your network is your best place to find more opportunities.  But I have found sponsors by making note of various apartments that seem nice, and then googling that owner.  Low and behold, on their website, there is an "invest with us" link.  I know many independent financial advisors, and they have told me that they receive PPMs from real estate operators raising money on a daily basis, so talking with them.  And even, as you have conversations with operators, asking who their competitors are.

I mention all of this, because I am firm believer in having a lot of conversations.  If I only talk to one group, I have nothing to compare to.  But over the course of hundreds of conversations, you begin to understand nuances of strategy, you can get a sense for who knows their stuff more than others, who has contingency plans.  Jim's group is valuable because it crowdsources this info, but it is not impossible to do on your own either.