We all understand why it's important to invest in asset-backed real estate... it is a powerful vehicle for building long-term wealth whilst diversifying a substantial portion of your assets outside of the often volatile stock markets. But how to successfully invest in real estate with low hassle and high impact is not a path well known or understood by the average working professional.
It's not as hard as you might imagine, but as humans we always seem to automatically fear (or presume impossible) anything not known to us. In our experience, probably the best and safest way to invest in real estate without having to deal hands-on with the 3 T’s (Tenants, Trash, Toilets) is to invest collectively with other investors in a private offering or syndication.
In a syndication, a professional real estate operator (also called an asset manager or project sponsor or general partner) manages all aspects of the investment business plan, start to finish.
The syndicator locates the property, navigates the entire acquisition process including equity raising and debt financing, reviews and verifies financials, conducts physical/operational due diligence and renovation planning, executes property upgrades/rehab plan, manages all leasing and property management operations ongoing through the eventual sale and disposition of the asset.
Now, as I noted earlier, investing through real estate syndications is mostly passive and low hassle... but that doesn't mean you can just throw your money into any 'ole real estate syndication and watch your returns roll in!
The investment in and transformation of real estate is a business like any other, which means it has risk of failing, or at least missing its mark. But because real estate (more accurately the land it sits on) is a non-renewable resource it always holds some residual value that provides a bit of security.
Still, it's not just the investment deal itself that's got to make sense and pass muster through a thorough vetting process... The real estate operator (we call them multifamily syndicators) must pass due diligence too.
As operators and general partners, they control the success of the project - along with the anticipated returns on your investment. So you're definitely jumping in bed together! It's probably best to learn more than just their name before taking that leap.
Having vetted dozens upon dozens of investments and their providers, we are able to pay it forward to more novice syndication investors by sharing some insights we hope will aid your due-diligence process.
So here's our two cents on how we think about vetting syndication providers before investing with them….
Local Market Knowledge: This is the first area critical to understand if they have. Do the principals live in the local market where their syndication offerings exist? Have they grown up there and seen the growth of the market and know the different areas like the back of their hands? That knowledge alone is essential in selecting a provider given real estate is local and varies from street to street.
Market Cycle Experience: Did they go through the 2008 Global Financial Crisis and what was their experience? Do they apply the vacancy numbers from that period against their projected returns to understand if your investment will survive a similar down cycle? You want the captain of the ship to have navigated during stormy weather, not just sunny skies!
Full Deal Cycle Experience: Has the team fully executed on their investment plan and sold assets for a successful outcome? You want to ensure they have gone through not only asset acquisition, but also transformation, stabilization, disposition and full return of capital and profit payout to investors.
Asset Type Experience: An absolute necessity is that the operator has successfully operated the same asset class you are about to invest in. So if you are investing in a value-add multi-family project, have they successfully delivered on that niche asset type before? If the operator has predominantly managed retail strip mall revitalizations, you may not want to bet on them as an experienced operator running a multifamily project.
Reputation, Track Record & Organizational Effectiveness: As is often so when you get on the inside of an industry, real estate is a small world... especially when you focus in a particular asset niche like the value-add multifamily we love investing in. That makes it easy to quickly assess their reputation among peer syndicators and other investors.
And we look at the operator's prior track record - plus the size and location of their current offering relative to the rest of the assets under their management. How quickly did they build their portfolio? How much money did they raise? What was the length of the full cycle for those assets already sold? And did the projections match the prospectus returns?
Finally, is the syndicator a cohesive and efficient team that communicates effectively, creating a great investor experience? Do each of the principals in the syndication group have a defined role and the requisite experience for that role? Do their roles or expertise overlap or do they make the collective team stronger due to more diverse past experiences? Are they one-time partners or have they worked together for someone else prior? How long have they been together?
Are they guaranteeing the debt themselves? Is there a principal who demonstrates conservative values and has a hawk-like command of numbers and their deal financials? Which legal and accounting experts support them to ensure your money is safe from liability or loss?
Only after doing all this upfront work to determine whether you are hitching yourself to a partner whose competence and integrity you can trust... THEN you can finally move on to analyze the investment project being offered.
So, next time someone asks if you’d like to get in on a passive real estate syndication investment, send them this blog post and ask them to describe the five aspects we've discussed above for the syndicator in question as it's critical to your decision to invest or not!
If you want to tap into a trustworthy resource for vetting real estate operators of multifamily value-add investments across the US, we're happy to help. That's exactly what we do for our little investor collective we call Global Investor Alliance - there's something about referring to ourselves as an Alliance that makes us feel greater than the sum of our parts!
If you are an Accredited Investor and would like to join our Alliance, please click here to book a "get to know you" chat. We want to ensure we have a bit of melding of the (growth not fixed) mindsets to know if the Alliance is a good fit for you.
If it's a match, our goal is to help you take some stock market gains off the table now while the skies are still blue. Then after setting aside estimated taxes due, reinvest those gains into building sustaining wealth through a mix of real estate-backed investments, generating a mix of recurring income and asset appreciation that add healthy periodic bumps up in your net worth.
Would that give you the worry-free peace of mind to sleep like a baby tonight?
To your wealth,
Peter and Karen