All Forum Posts by: Eric Wang

Investing with an experienced real estate operator is one of the most rewarding ways to enter the world of real estate investing. You can rely on the expertise of an experienced real estate professional to carry out the business plan of a project, while watching your savings grow through passive income and appreciation. And today, there is even more access in the market by allowing you to use funds from a self-directed IRA for tax savings.

The role of a real estate sponsor is to manage and ensure the success of a deal. They are are a developer, and they are your partner. It’s important to understand that there is a wide range of personalities and each sponsor has their own approach to investing. Their decisions on on which markets to enter, how to manage a rehabilitation, how to structure a capital stack and partnership, and exit strategy vary widely, and you should know their thoughts behind each of these decisions.

When searching for a real estate manager…

Consider these tactics that will help you carefully analyze which sponsors are the right partner for you.

1. In It Together

As you consider the capital stack and the equity required, find out the general partner’s contributions. Does your sponsor have their own personal funds in the deal? If they are using another entity to co-invest beside you, who ultimately owns that entity? If the manager truly believes in the projected returns, they will have “skin in the game”. Why wouldn’t the sponsor be willing to take on the same risk as her investors?

At Rev Projects, we always invest alongside our partners, because when our investors succeed, we succeed. We believe in each and every project because of our expertise and years of institutional experience in the commercial real estate industry. By contributing our own capital, we are willing to take the risk and celebrate the same successes with our investors.

2. Track Record

Understanding a potential sponsor’s track record is crucial. Reliable sponsors will often be willing to provide a schedule or table with this information and should openly detail their past successes or shortcomings. Sophisticated sponsors should be able to identify and disclose the specific variables that made past deals turn out the way they did.

In particular, you should directly ask them whether they have ever lost investors’ money. Now realistically, almost every experienced real estate developer with a long enough track record has lost money. So losing money is not a deal-breaker, but dig further into the specific circumstances or mistakes they might have made that resulted in the loss. Lastly there are a few other questions to show your caution: Are the stated returns net before or after fees? Can they provide calculations and schedules that backup the stated returns? Can they provide an investor reference who can corroborate the stated returns? Have any investments been omitted from the track record?

3. Sensible Assumptions

There are numerous lines of expenses and income sources on models, but it’s imperative to study their accuracy. Be wary of any line-items that seem overly ambitious when compared to market values. For instance, what is the difference in their projected cap rate compared to the current market cap rate and what is the reason for the delta? Are operating expenses realistically forecasted and can they provide historical operating expense numbers?

Perhaps the manager believes she can execute the best value-add renovation or intuitively foresee strong potential in a particular aspect of the asset. Questioning the competitive advantages that a sponsor promotes is a good way to identify if they are rational investors.

Like with any other type of asset, a down market may come unexpectedly, leading to less than favorable outcomes for investors. That’s why it’s helpful to also question managers for scenario modeling of upside or downside cases with changing interest rates, inflation, and market developments. Whether your sponsor is holding onto refinancing strategies or capital buffering in their toolkit, they should be transparent on how the asset is securitized or leveraged to handle risk in a downtrend.

At Rev Projects, we take a conservative approach with our underwriting so that we can confidently enter a new project. We don’t stretch or massage numbers, because we believe that a well-executed business strategy that results in strong investment performance is more important than persuading investors with fanciful projections.

4. Investor References

One organic way to gauge reliability is to speak with another investor that has partnered with your sponsor in the past. Asking questions not only about their realized returns but also observations regarding a sponsor’s communication skills may provide valuable insight.

Some questions to consider:

• How did the sponsor handle setbacks?
• How did the sponsor communicate with his investors and how often?
• Was the sponsor transparent and honest throughout the project?
• Were you satisfied with your achieved returns given the economic environment and the challenges of the project?

There are multiple opportunities to engage with other investors, whether that’s through sponsor-held property tours or referrals. At Rev Projects, we appreciate the loyalty of our investment partners and frequently host property showings for new or current deals, in which investors get the chance to connect with each other.

@Jack Martin Good points! I will be adding those points to another article I am writing on how to evaluate a real estate sponsor

For many people, investing in a real estate partnership will be a new endeavor, but we describe the process in just a few steps here. Preparing for these steps will give you confidence to take on your first deal. Over time, as you build your portfolio and invest in more partnerships, these steps will come naturally.

The steps it takes to invest in a partnership

These are the steps to expect to complete your investment in a real estate partnership.

1. Get to Know Your Partner

The first step is to get to know the general partner, or sponsor, you are investing with. At Rev Projects, we like to arrange a phone call or meeting to understand your investment goals, whether our projects would be fitting for you, and your accreditation status. Investing in private real estate is not for everyone, and we want to ensure that each investor is making the best decision for themselves and their family. We aren’t private wealth advisors, but we can offer some guidance on what to look out for as you add real estate to your portfolio. Use a meeting like this to get to know your partner and ask any questions on your mind before investing. 

2. Review Investment Offering

The project sponsor will often present the investment offerings in either a Private Placement Memorandum (PPM) or an offering memorandum (OM). We at Rev Projects produce an OM, since all of our investors accredited and our offerings are registered as 506(b) offerings by the SEC. Both of these documents will detail the property summary, business plan, principal terms, and other risk factors.

Review the documents diligently and make note of anything that stands out to you or raises questions. While the OM will project the expected rate of return and waterfall distribution, investors should understand that these numbers are projections and are not guaranteed. It’s vitally important that you understand the terms presented in these documents, and review it with the sponsor before you commit to the investment. Understanding the risk factors will help you decide whether the project is the type of risk you want to introduce to your personal portfolio.

At Rev Projects, we have an online investor portal that allows investors to download and review all of the documentation, with maps, links, pictures, and videos. It’s an excellent way for investors to explore a new investment offering. Each of our investors is provided an account to login, allowing them to view projects they have previously contributed to and view future Rev Projects investment opportunities.

3. Follow Up

Ultimately, a new investor will want to ask their sponsor as many questions as possible until they feel confident enough to make a decision. A good general partner will make themselves available and more than willing to tackle any questions about the deal. 

At Rev Projects, we hold conference calls, webinars, and Q&A sessions to ensure that all investors understand the strategy and terms behind the deals. For investors who live nearby, we offer in-person tours of prospective properties, which facilitates face-to-face meetings so we can more effectively help you with all your questions. We believe in total transparency on all aspects of a project. We want to understand our investors and their needs, whether that means diving deeper into the offering memorandum together, touring the project in person, or providing backup for our analysis.

4. Execute Documentation

In terms of legal documents, real estate partnership deals usually require both parties to sign a partnership agreement, oftentimes in the form of a LLC agreement. These legal documents are the industry standard for bringing investors into a deal.

Make sure to read carefully, as these agreements will also detail the legal terms of an investor's ownership shares. In addition, there is typically a subscription agreement to formally subscribe to the investment, ultimately formalizing your execution of the LLC agreement.

We recommended that you consult with your sponsor about the particular legal documents you will need to execute. If there are any documents that are more complex, you should consult a legal advisor to ensure that the terms are fair.

5. Fund Contribution

By now you’ve made it past the most time-consuming steps. The last step to investing in the deal is to fund your investment with your contribution. Oftentimes, the project sponsor will accept either a wire transfer or check.
Be considerate of the project's closing timeline and fund your contribution punctually. The sponsor is managing a lot of moving pieces with the acquisition of the project, and it can't be held up by delays in funding. And of course, check on where contribution is being funded--there should be a bank account established in the name of the project entity, usually an LLC.

Please feel free to reach out to me with questions!

Hi Bigger Pockets community! I am a commercial real estate developer / investor / GP that acquires and renovates underperforming and mismanaged properties in the Bay Area. Over 4 years ago, I left my job working for larger institutional private equity firms to start working on the type of projects I truly cared about, in locations where I was most interested in. So I founded my company to go out on my own, to revitalize buildings, but also to positively impact the communities where my projects are. It’s been a blast since then, re-positioning several buildings. I truly believe that dedication, doing what's right, transparency, communication, and simply staying true to my word got me where I am today.

 My background is in institutional real estate that includes over $1 billion in transactions experience in multifamily, office, retail and hospitality property types. I focus on adaptive reuse strategies, particularly with historic buildings, and I led the repositioning of assets throughout the Western United States. While I worked at institutional real estate firms, I was responsible for the asset management of value-add funds totaling over $400 million. I was also responsible for a value-add portfolio totaling 5.2 million square feet of office assets, over 1,300 apartment units and 4.5 million square feet of retail centers.

The acquisition of my first project in 2015 was a 21 unit live-work loft residential building, and it was such a stressful push to piece together the investors and negotiate with the seller. It was near the holidays, and the seller imposed a deadline by the end of the year. But I made it through and it closed just a few days before the new year of 2016. I successfully renovated it and it was a great exit for my investors in 2017.

Two weeks ago, I completed the sale of another project, an office and R&D building in Fremont, California, next to Tesla’s main manufacturing facility. It was completed renovated and sold to a technology company who liked the improvements and is moving in their operations.

Earlier this year I closed the purchase of a 120 unit student housing project, just a block away from the UC Berkeley campus. I’ve uploaded a picture of it below – it’s been such a fun project to work on, and it still has much more work to be done over the next couple years. 

If you're in the Bay Area and want to grab coffee, let me know and message me. I'm glad to talk about any real estate related questions you may have. 

Best to all of you! Look forward to being a part of this community!

Eric