@Account Closed A few things to consider when vetting a potential sponsor to be a passive investor.
1. Review the opportunity and make sure that it aligns with your goals. What kind of investment are you looking for? Are you wanting higher returns, even if that means a riskier investment, or are you looking for a more secure, stable investment with potentially lower returns? Be realistic when reviewing the opportunity; if it’s not a good fit, then move on to the next one.
2. Get to know the deal sponsor. Once you’ve confirmed that the property aligns with your interests, you should find out more about the deal sponsor, including their background and experience level. If the sponsor has experience with this kind of property, it’s likely that they’ll have higher success rates than someone who is just branching out into the area.
3. Confirm that the opportunity includes a preferred return. Preferred returns divide available profit among investors before the sponsor receives a cut, and they tend to be between 5-8%. An opportunity with a preferred return below that should be approached with caution unless some other aspect of the deal is favorable for investors.
4. Ensure that the profit splits are favorable. Profits splits between you and the sponsor depend on how much work the sponsor expects to do for the investment, such as whether the building is still in development or if it is existing and in good condition. You should consider profit splits that are at least 50% in favor of investors on the low end and splits that are 80/20 in favor of the investor on the high end.
5. See whether the sponsor used conservative assumptions. No one wants to be disappointed by their investment’s performance, which is what often happens if a sponsor uses more aggressive assumptions in the pro forma. A sponsor who uses conservative assumptions will have a higher likelihood of meeting their target.
6. Find out more about the business plan and strategy. It’s easy to assume that the deal sponsor will have a business plan and strategy in place and that they will both make the best use of the property. However, less experienced or even less skilled sponsors may not have done so. Review the plan for the property and see if it makes sense to you; there’s no reason to invest in a property that does not make the best use of the space.
7. Get to know the surrounding location. Is the area thriving now or is it expected to in the future? Or does the opportunity stand on its own in a relatively run down or ill-fitting part of town? If you can’t see a future for the property that looks promising in the near future, then you may want to pass on this investment and move to a different one.
8. Make sure you’ve reviewed all documents. The information held in the investment documents tells you most of what you need to know about the property and about the company or individual managing it. Making sure you’ve read through and understood everything in each document will keep you from being surprised by unforeseen risks orunfavorable terms.
