What To Ask Before You Invest In A Real Estate Syndication

Once you choose a real estate syndication deal, sign the PPM (private placement memorandum), and send in your funds, you have very little control over the performance of the asset. You’re truly a passive investor at that point and must fully trust the sponsor team to manage the daily operations effectively, execute the business plan, and guard (and grow!) your investment.

This is exactly why you should be confident in the deal and the sponsor team up front.

This list of questions provides some great ideas and may guide you toward subjects and concerns that should be on your mind as a new investor. It will also give you some ideas of things that other investors are asking that you might not have thought about. Most of these will be answered in the pitch deck or offering summary. On any of our deals, feel free to reach out to our investor relations team and we’ll be happy to answer questions.

What To Ask The Sponsor Before You Invest In A New Real Estate Syndication

1. Why did you choose this market?
2. How long have you been in this market?
3. Who are the employers in the area?
4. What can you tell me about this submarket?
5. When was this asset built?
6. What do you like about this asset class?
7. How many units are there?
8. What’s the unit mix?
9. What is the cost per unit, and how does that compare to the average for this area?
10. What’s the current occupancy?
11. What do you project the stabilized occupancy to be?
12. What’s the median income for current tenants?
13. What’s the business plan?
14. What are the projected premiums for renovated units?
15. How did you come up with the projected premiums?
16. How much money are you raising for this project?
17. How much of that is for the down payment?
18. How much of that is for cap-ex (capital expenditures)?
19. What are the projected returns?
20. What is the overall equity multiple?
21. How is the deal structured?
22. What are the equity splits?
23. Is there a preferred return? Why or why not?
24. How often do you pay out investor distributions – monthly, quarterly?
25. What’s the projected hold time for this project?
26. How are investors kept up with the progress?
27. Are you taking an acquisition fee?
28. Are you taking an asset management fee?
29. Is there a refinance fee?
30. Is there a disposition fee?
31. What would happen if I had an emergency and needed access to my funds?
32. How did you find this deal?
33. Who is on the team?
34. What are their roles and responsibilities?
35. Have you done deals together as a team before?
36. Is this offering open to non-accredited investors?
37. Is this a 506(b) offering? 506(c)? Other?
38. How much deferred maintenance is there on this property?
39. Are you doing this full time?
40. May I invest with retirement funds?
41. What’s the minimum investment?
42. What’s the maximum investment?
43. When do you send out Schedule K-1s?
44. Will you be doing a cost segregation study?
45. Are you bringing your own money into the deal?
46. How do I send in my funds – wire, check, other?
47. What is the deadline for getting my funds in?
48. What percentage of the units will be renovated, and why?
49. What are the biggest risks of investing in this deal?
50. What do you like about the deal?

Hopefully, some questions in this list sparked new ideas. Most of these will be addressed in the pitch deck or offering summary so be sure to ask for that as soon as it is available. In real estate, time is of the essence so be prepared to act quickly and in an informed manner. Happy investing!

Imagine spotting an old bookshelf sitting out on the curb. You pull over to check it out, and since it’s in good shape, you proceed to lug it home and give it a fresh coat of paint. A few years later, you sell the shelf to someone else who claims to have the perfect spot for it. You took something that had been overlooked, committed some sweat equity, and breathed new life into it. This is the essence of value-add, and it’s a commonly used strategy in real estate investing.

The Basics of Value-Add Real Estate In the case of single-family homes, the process of buying a run-down property, remodeling it, and then selling it for profit, is commonly referred to as fix-and-flip. Your sweat equity and ability to see a diamond in the rough is rewarded monetarily, and the new owner gets an updated, move-in ready home. Value-add multifamily real estate deals follow a similar model, but on a massive scale. Hundreds of units get renovated over years at a time instead of just one single-family home over a few months. A great value-add property may have peeling paint, outdated appliances, or overgrown landscaping, which all affect the curb appeal and the initial impression that a potential renter will form. Simple, cosmetic upgrades can attract more qualified renters and increase the income the property produces.

In value-add properties, improvements have two goals:

To improve the unit and the community (positively impact tenants)To increase the bottom line (positively impact the investors) Value-Add Examples Common value-add renovations can include individual unit upgrades, such as:  

Fresh paint New cabinets New countertops New appliances New flooring Upgraded fixtures In addition, adding value to exteriors and shared spaces often helps to increase the sense of community:

Fresh paint on building exteriors New signage Landscaping Dog parks Gyms Pools Clubhouse Playgrounds Covered parking Shared spaces (BBQ pit, picnic area, etc.) On top of all that, adding value can also take the form of increasing efficiencies:  

Green initiatives to decrease utility costs Shared cable and internet Reducing expenses The Logistics of a Multifamily Value-Add The basic fix-and-flip of single-family homes is pretty familiar to most people, but when it comes to hundreds of units at once, the renovation schedule and logistics aren’t as intuitive. Questions arise around how to renovate property while people are living there and how many units can be improved at a time. When renovating a multifamily property, the vacant units are first. In a 100-unit complex, a 5% vacancy rate means there are five empty units, which is where renovations will begin. Once those five units are complete and as each existing tenant’s lease comes due for renewal, they are offered the opportunity to move into a freshly renovated unit.  Usually, tenants are more than happy with the upgraded space and happy to pay a little extra. Once tenants vacate their old units, renovations ensue, and the process continues to repeat until most or all of the units have been updated. During this process, some tenants do move away, and it’s important for projects to account for a temporary increase in vacancy rates due to turnover and new leases.

Why We Love Investing in Value-Add Properties When done well, value-add strategies benefit all parties involved. Through renovations, we provide tenants a more aesthetically pleasing property, with updated appliances and more attractive community space. By doing so, the property becomes more valuable, allowing higher rental rates and increased equity, which makes investors happy too. The property-beautification process and the fact that renovated property is more attractive to tenants is probably straightforward. But let’s dive into why value-add investing is a great strategy for investors. First, Yield Plays To fully appreciate value-add investments, we must first understand their counterparts, yield plays. In a yield play, investors buy a stabilized asset and hold it for potential future profits. Yield play investments are where a currently-cash-flowing-property that’s in decent shape is purchased and held in hopes to sell it for profit, without doing much to improve it. Yield play investors hold property in anticipation of potential market increases, but there’s always the chance of experiencing a flat or down market instead. In a yield play, everything is dependent upon the market.

Now, Let’s Get Back to Value-Adds Value plays and yield plays are the opposite. In a value-add investment, significant work (i.e., renovations) takes place to increase the value of the property and doing such improvements carry a significant level of risk. How