This is a repost of an article we wrote for Forbes, originally published on February 7, 2019.
When I first started investing passively in real estate syndications, I thought I’d discovered the holy grail of investing. I could reap all the benefits of owning real estate, without having to deal with any of the hassles of being a landlord.
Over time, I discovered that not all real estate syndications are created equal. Sometimes, the ones that promise the highest returns end up being complete duds, while the ones with more conservative projections hit it out of the park. So as a passive investor, how do you know which are which?
To the untrained eye, every investment summary that you get for a real estate syndication looks dazzling. The photos are beautiful, the charts seem to make sense and the returns look great. But beyond the glossy pages of the investment summary, how do you know what makes a real estate syndication truly worth investing in? And as a passive investor, how do you ensure that your investment will be protected?
To ensure you can find the best opportunities for you, follow these four essential tips for navigating potential investment opportunities.
Before you request a single investment summary, start first by examining your investing goals. Have you invested in real estate before, perhaps through rental properties? What are you hoping to achieve through passive investing?
When I first started investing passively in real estate syndications, I had been directly investing in rental properties for 10 years. We had amassed a decent portfolio of small rental properties, and they were doing pretty well, but they also came with a decent amount of work, particularly for our out-of-state rentals.
Thus, when I began investing passively, one of my main goals was to dramatically decrease the amount of effort needed from me in maintaining the investments, while still maintaining roughly the same amount of cash flow as with my rental properties.
When you start looking at real estate syndication investment summaries, you’ll quickly get lured in by the promise of high returns. That’s why it’s important now, before committing to an investment, to assess why you want to start investing in real estate syndications, and what you hope to get out of them.
Once you’ve determined your investing goals, work to develop your own investing criteria. If your primary investing goal is high cash flow, you might include in your criteria a preferred return of 8% or more. If you’re investing for appreciation, you might take a closer look at how the splits will work when the asset is sold. And what about hold time? Are you comfortable with a hold time of seven or 10 years, or would you prefer a shorter horizon?
Put your feelers out, and start networking with others in the real estate investing world. Ask them if they know anyone who does syndications, and ask them for examples of investment summaries from deals they’ve closed in the past. Sign up for real estate crowdfunding sites, and start reviewing their deals. The more investment summaries you review, the more clarity you’ll gain on exactly what you’re looking for in a passive investment opportunity.
When looking for a potential passive investing opportunity, the No. 1 thing to scrutinize is not the market or the asset class. Rather, it’s the team you will be investing with. This sponsor/operator team should include people who have a proven track record of success with similar assets and in similar submarkets.
When considering a real estate syndication opportunity with a new sponsor, be sure to ask them about the people who are part of the core team and their previous experience. How many deals have they done? What have the returns on those projects been? Are they meeting or exceeding their projections?
Ask for references, so you can speak with other investors who have invested in their deals. Ask them to provide an example of when things have gone differently than planned, and what they did about it.
Investing in a real estate syndication is not like investing in a rental property. With a rental property, you’re in charge, but when you invest in a real estate syndication, you’re putting your trust in the sponsor/operator team, so make sure to do your due diligence to ensure that they will be good stewards of your investment.
When reviewing investment summaries, it’s important to read between the lines and to do your own due diligence. The investment summary is a great place to start, but you should never invest in a real estate syndication based solely on the information provided in an investment summary.
Do your own research on the market and the submarket. What are the local headlines saying? What data can you find on local job growth, population growth and job diversity? Take a look at the comparable assets in the neighborhood, and verify the information provided in the investment summary. Read reviews of the asset online. What are existing tenants or customers saying about the property?
If you discover anything that concerns you, ask the sponsor team for more information, and listen to their perspectives on it. Remember, if you decide to invest with this team, you are partnering together in this deal, so you want to be sure that you’re all on the same page.
By defining your investing goals, developing your personal investing criteria, investing with experienced teams and doing your own due diligence, you’ll be well on your way to finding passive real estate syndication opportunities that will be true assets to your overall portfolio. When all these pieces are in place, you’ll be able to find passive investing opportunities that are truly passive. Your work will be minimal once you invest, because you’ll be able to trust the sponsor team. The sponsor team will be good stewards of your investment, and the deal will be a win-win for everyone involved.