Solo 401K Investing in Syndications

[Danielle Wolter]

I've got some money in a solo 401K that I'm considering investing in multifamily syndications, but I'm having a little trouble figuring out to vet syndicators. I've been approached by a couple people and have seen examples of deals, but honestly am not sure how to go about vetting the person/persons putting the deal together. I know there are a lot of people out there doing great things, I'm just not sure how to separate out the winners from the non-winners. Any advice would be appreciated! 

[Tony Lin]

@Danielle Wolter That's a topic I know all too well. I personally know of 40+ syndications and have invested in 7 of them. The experiences were quite varied which is what I was expecting. I started a meetup to meet like-minded people and compare syndicators, and really learned which are the good/bad syndicators. That has helped me to operate my active deals the right way. 

A lot of folks say to meet the sponsor and get a feel for their style. That will only go so far as what they say and what they do don't always line up. In fact I find the sleekest talkers to be the worst performers. The ones that aren't busy shining themselves for more deals are more productive. 

Here are a few things I look for: 

1. The deal structure: It's all talk until you learn to read their numbers. Ask for a sample project and look at their projections. Are they assuming crazy rent growth? Unreasonably low expense ratios? Underestimating economic vacancies?  There's some education involved so learn as much as you can or meet a fellow passive investor who knows how to check the numbers. 

2. Sponsor reputation: Talk to other passive investors. How are past deals doing? Are they hitting their projections? Is the group communicating frequently and sharing financial data? You get the best background check by talking to others. 

3. Do the sponsors have money: Not always fair but I look for sponsors who already have money. They put more skin in the game with their own investment into the deal. They're also much more inclined to use their own money as a loan to save a floundering deal through tough times. They care about their reputation and having the capital as backup is important. 

4. Are they doing too many deals: There are syndications that are successful then ride that success to acquire as many properties as possible. The team obviously can't manage that many assets as well as when they were focusing on just a couple. 

5. Type of deal: New construction deals have more obstacles and delays. I would stay away from these in the beginning and take their timeframe and add 1-2 years on top of it.