What are the first questions to ask as passive investor?

Question

Michael Bishop · Answer

@John L. the answers to your questions are really going to depend on he deal and more specifically the Sponsor. I'll answer some of your questions best I can:

1. Depends on your level of knowledge. If this is brand new to you, everything and anything is on the table. If you're not sure, ask.

2. That will depend on the Sponsor, but most likely Sponsors won't want to divulge this information. Privacy reasons. I'm sure you wouldn't want them sharing your information with everyone and their mother either.

3. In commercial MF syndication, it varies a bit but General Partner earnings commonly revolve around 3 things; acquisition fee, asset management fee, and the promote (profit split). Acquisition & asset management fee are normally around 1-2% and sometimes as high as 3%. You'll often see a preferred return (pref) of 8%, meaning the GP doesn't take a dime until LPs earn 8%. You'll see the promote, which is the profit split AFTER the pref has been achieve, at anywhere from 50/50 to 80/20, but most common is 70/30. Most likelly non negotiable unless on a smaller deal.

4. Most syndicators reserve all decision making rights, with good reason. The second the LP has voting rights is also the second that they are liable beyond their invested capital. It protects LPs (and yes, makes things a bit simpler). That said, ask your Sponsor about options to get out in case of hardship - you want to see good faith effort here.

Feel free to connect/PM me to discuss further. Here are some articles on MF syndication to keep the wheels turning:

What is Apartment Syndication?

8 Reasons Apartment Syndication is an Appealing Investment Vehicle

34 Must-Know Apartment Syndication Terms

Hope this helps!

Gino Barbaro · Answer

@John L.

I would look at it as if I was the one buying the deal. You need to understand every aspect of the investment, from the underwriting to due diligence, to management to finance of the deal.  You have to know if the market is the right one for what your goals are.

The most important element is the sponsor. DO they have a track record and are they trustworthy.  I would rather have a terrific sponsor and a decent deal than a terrific deal and a bad sponsor, because when things go south, the bad sponsor is out of there.

Gino

John Casmon · Answer

@John L. Run through every scenario of why the deal could fail and see if they've thought through and answered those questions. Are the sponsors investing their own money into the deal? If so, how much and is this new money or an acquisition fee? Do they have backup plans in case they miscalculated somewhere?  You're trying to make sure they are protecting investors and will protect your money so make sure you get questions answered. Key things you will want to know about are the market dynamics (is it growing, shrinking, diverse economy, tenant friendly, etc), the property and operation plan (seeking proof of concept for the plan and a safety net in case market shifts or projections were off) and references for the sponsors.

Henri Meli · Answer

@John L. I would agree with most here that the team driving the deal is more important than the deal itself. Is this the first deal from this team? Have they done other deals before? Do they have references from previous deals? If they have done other deals before, can you talk to people they have worked with? ... it is like interviewing a new employee. You need references. You need to feel comfortable in their ability to deliver on their promise. In addition, you need to understand how this team deals with challenges. What happens if something goes wrong. Not everything always goes as planned. What's their backup plan? How creative are they to change direction, but come out with expected results?

Good luck !!!

Lennon Lee · Answer

John,

It seems like these guys up there have nailed the answers to your first set of questions.

You should definitely visit the property if possible, although is not a must. If it's your first investment and you haven't personally met the sponsor yet, then I'd recommend you spend the time/money to go tour the property, meet and talk to the sponsor and ask all the questions you have. Being there in person will allow you to get a good feel of the market, the property, and most importantly, the team that will be handling your hard earned money.

One thing I always try to do with my investors is tour the comparables properties. The sponsor team should have used nearby properties as comparables to know what rent premiums they can achieve at the subject property. Touring those comps yourself will allow you to confirm that the numbers that are being projected by the sponsor are accurate and will provide peace of mind (or not).

Before signing any legal commitments (Subscription agreement, PPM) you should have access to a comprehensive investment summary with info about the market, the team, and the deal itself, including the financial model. Basically you should have access to as much information as the sponsor is legally allowed to share.

At the end try to remember this:

A good sponsor/operator/syndicator can make a bad deal work and be successful. A bad sponsor/operator/syndicator can make a great deal fail.

So focus more on vetting the sponsor and the team than the actual deal. Make sure you can trust them, run background checks, meet them in person, ask them a million questions, and trust your gut. (Yes running the numbers and analyzing the deal itself is very important as well, I'm just saying focus first on the team and then the market, and then the deal)

Good Luck!

Lane Kawaoka · Answer

@John L. a mentor will not be found on a forum nor in some phone call here or there.

John L. · Answer

@Lane Kawaoka when you say mentor, do you mean a mentor to guide me through passive investing?

Lane Kawaoka · Answer

@John L. just a thought here. If you have more than say 400k to invest go and learn this stuff completely. Get a mentor or someone who can teach the analysis and the repositioning process so that you could do it yourself.

If not you are sorta fishing from the shore so to speak.

Mike Dymski · Answer

John, feel free to send me the OM and I'd be happy to provide you with feedback.  I currently invest in syndications and, like you, am looking for investment opportunities.

John L. · Answer

Thanks @Michael Bishop, @Lane Kawaoka, @Matt Popilek!

It seems reasonable to visit the property if you’re investing a good deal of money. Suppose I trust the lead and everything looks great on paper, is this overkill?  Is this less passive, but still proper?

How much due dilligence should be available prior to signing anything? For example, is it typical to sign some type of letter of intent in the process, or should all be available up front?

What are the first questions to ask as passive investor?

Most Popular Reply