The main purpose of this site is to help people who want to make investments in real estate syndications. In a series of posts, we've outlined what we look for in a syndicator. The five traits we look for are: trustworthy, experienced, conservative, communicative, and values-aligned. In each of the posts in our series on Choosing a Syndicator, we offer things we look for. But what specific questions do you ask when you are getting to know someone?
We have a whole protocol we use, but for starters, let's outline a few questions that you might consider as you are vetting a syndicator, a deal, or a fund. We break these questions up based on a few different levels of questioning. Recall that you are (1) choosing a person or firm with which to work and then (2) selecting a specific deal. If you consider investing in funds, then (3) analyzing the fund structure and potentially the deals within that fund call for additional questions.
Level one questions: getting to know the syndicator (or sponsor).
In order to be able to invest in most syndications, you ordinarily have to have a pre-existing relationship with the syndicator. There are legal reasons for this requirement which have to do with how the syndicator is allowed to market (or not allowed to market) their deals. The easiest and cleanest approach is for them to have a pre-existing relationship with the prospective investor. The way that most syndicators handle this--i.e., to establish this "relationship"--is that they set up an initial call with you--perhaps a 30 minute call with the syndicator themselves. For bigger firms, this intake-type call may be done by others on the team and not the main person themselves--that itself may be a sign of how big and complex the firm is.
Here are five of the "firm-level" questions we ask:
- How long have you been investing in real estate syndications of this specific type? (We don't take chances on first-time syndicators fresh off a "guru course." That is a quick way to lose a lot of money.)
- Have you been both an LP and a GP? Tell me about your experience with each role. (We prefer those who have seen deals from all sides. And ideally, they may be LPs and GPs in multiple deals today.)
- How do you tend to communicate with investors? (Communications is one of the on-off switches for us.)
- Does your firm have a stated set of values and/or a mission statement? (We seek values-alignment. Do you want to be in business with someone who is out to make money at all costs?)
- Please share with me your track record as a syndicator. (If there's no good, clear track record to share... well, maybe come back later when there is one.)
Level two questions: considering a particular deal.
Once you have become comfortable with the syndicator, you will then need to consider the particular investment that they are offering. Typically, this is a single asset that they are seeking to raise money to help acquire. The standard deal might have a minimum of, say, $50,000 per investor. It could be less: $25,000 would be a low minimum; it could be more, and we are in several deals that have a $75,000 or $100,000 minimum.
Here are five of the "deal-level" questions we ask as part of our standard protocol:
- How are you compensated on this deal? (We are looking to ensure our interests are aligned with the syndicator. The more they get their income from the outcome of the deal at the end, the better. The more they are getting in fees up front or along the way, the more we want to run the other direction--fast.)
- How much are you investing in this deal yourself? (The more the better. If they say something like "we are rolling our fees into the deal" or the like and not talking about a significant amount of cash in the deal, then we are not interested.)
- What is the nature of the debt? (The more it is low-cost and fixed for a longer term, the better. The variable interest rate debt that many took on in 2021 and 2022 is now blowing up deals. Beware!!!)
- How familiar are you with this deal's specific market? (If they live in and know the market well, that's great. Ideally they are in multiple deals in that sub-market. If not, are they partnering with someone who does?)
- With whom are you partnering on this deal and what are your specific roles? (Most deals have multiple parties involved. Do they together have the requisite experience to ensure the success of the deal?)
Level three questions: assessing a fund investment.
We have invested in a few funds of syndications but we don't love it and typically do not do so. An exception for us: we have liked Fundrise and have invested in several of their funds as well as in the company itself.
Here are five of the questions we ask before investing in a fund:
- How many deals do you expect to invest into via this fund? (Some funds have a few deals already identified; others have many "TBD" investments, which makes us nervous unless the syndicators are very skilled and experienced.)
- Please tell me about the timing of this fund and how it works--and in particular the liquidity. (We want to know: When will this deal close, when will you make the first investment, and when can we expect distributions? And as to liquidity: if and when we need to take funds out, when can we do so?)
- What happens if you do not raise all the capital you have set out to raise? (Some funds get going and then either the raise does not go as anticipated, the market shifts, the deals don't materialize as expected--so, what then?)
- What are the fees and splits for this fund? (Fund expenses matter!!!)
- Have you offered a fund before and if so, what were the results? (As above, the track record is among the most important factors to consider. If this is a first fund, beware. And if they won't tell you how past funds have gone... well, we wouldn't touch it.)
Bonus tip #1: The best podcast we have found on this topic, by the way, is the J Scott episode on the Bigger Pockets Money podcast (episode 219). It is 2 hours and 6 minutes well-spent--and NECESSARY listening if you are just getting started.
Bonus tip #2: The best book we have found on this topic is Brian Burke's The Hands-Off Investor, not surprisingly from Bigger Pockets Publishing.