Have you decided that you are ready to take advantage of the passive, tax-efficient income that comes from commercial real estate investment?
Great!
Now take this quick pop quiz on what to do next:
Which should you start researching first?
- Markets
- Deals
- Sponsors
Unless you answered C, you are in for a very long and possibly disastrous time.
So we are going to focus on finding, talking to, and understanding sponsors in this article. Because once you can determine a match with their investment thesis, then the types of markets and deals will naturally follow.
One note: we use the words Sponsor, Syndicator, and General Partner interchangeably.
When Is The Best Time To Vet A Sponsor?
You don’t want to be in a position where you discover a “good” deal and then have to begin a relationship with a sponsor. When a deal looks exciting it may cloud your judgement about the sponsor.
So the best time to vet a sponsor is in-between deals.
In fact, why would you even pay attention to their offers if you weren’t convinced they were running a trustworthy, organized team whose process matched your investment goals?
You want to view real estate syndications through the lens that a good sponsor is going to have a handful of deals throughout the year. And at least one of those deals is going to be a good fit for you. So it’s not ever about this or that deal. It’s always about this or that sponsor.
You’re spending time up front to save it later.
After all, you can hardly call it a “passive investment” if you have to do a bunch of vetting work every time you’re offered a deal.
So get started today.
Look into some sponsors. Make a short list. And once you get a few on your radar that you have a good feeling about, undergo the vetting process to figure out which jockey (not horse) you are going to bet on.
But just how do you compile a list?
Tips For Researching A Syndicator
Begin close and work your way out.
Tap your friends and family, and then your acquaintance network. Ask if they’ve ever invested with a syndicator that produced solid returns.
After that you can start searching online.
For positives, you can see what syndicators are saying on their website and on their social media accounts. Does it make sense? Does it look professional? Try not to be too influenced by emotions here; it doesn’t matter if they pick a blue background color or a brown background color, nor how good their photo looks. It’s more about what they are saying consistently, over time, and if it resonates with your investment goals.
But online searches are also good to ferret out negative info:
Stuff like lawsuits, bankruptcies, or just bad reviews in general.
From this surface level, you can begin to drill down in more detail. An excellent way to do this is to listen to podcasts that feature the sponsor. Have they been around for a while? It’s interesting to compare what they said a year or two ago to what they are doing now.
This brings us back to their website.
You are going to want to take a look at their portfolio. What sort of deals have they done in the past? What kinds of returns did they project? And if they have exited deals, then did the final returns live up to the projections?
The easiest way to do that is to compare an initial Investor Presentation document with the results at exit.
Often the full details of an existing or past portfolio won’t be available on a public website. But you’ll find if you reach out to the syndicator they’ll usually be happy to provide you with more info.
Another easy way to get a feel for a syndicator is to simply join their email list.
See what they send you over a few weeks. Maybe they keep in touch with helpful and informative info, or maybe they have an army of virtual assistants and sales staff who high-pressure pester you from minute one.
You can learn quite a bit about any business by seeing how they treat newcomers to their funnel.
Interviewing A Real Estate Sponsor
Okay, let’s say you have narrowed down your list.
You’ve done your online due diligence, and maybe gotten some feedback from your network on a handful of sponsors.
Now it’s time to prepare some questions and call them.
For some reason, in this internet age, people will avoid actually talking to or meeting the potential sponsor. You are considering giving them your hard-earned money! At least hear their voice in real time and take your measure of them.
Real talk:
You’re not going through all this for just one deal. You want to build a relationship that will last a lifetime (and hopefully alter your family’s future for the better). That sort of sounds like a marriage and you ought to treat it almost as serious. So get them on the phone or meet in person and just see if you are compatible.
It’s almost too simple a tip, so people overlook it or downplay its importance… yet it is the most valuable thing you can do.
Once you have them on the phone and have done some small talk, here are a few ideas for questions to ask:
- What is their investment strategy, and do they focus on a specific niche?
- What type of fees do they typically charge, and what are the rates?
- Does the sponsor run property management in-house (vertically integrated) or do they have one or two trusted companies they typically work with?
- Can they give an example of a negative event that happened in a past deal and how they dealt with it?
- How do they approach underwriting, and can they give you an example from a previous deal?
- What are their typical exit strategies, and what kind of Plan B do they have if the ideal does not present itself?
That is not a comprehensive list of all questions you could ask. Nor should you ask each and every one on the list. But hopefully it will get you thinking.
You’re essentially looking for them to calmly and confidently answer in detail. You’re also looking for candor.
Some people will say you should insist on video because you need to see the person. To be honest, there are some highly intelligent and capable people who stumble over their words or who look less than cool on video. And on the other side, there are some total scammers who look and sound great. So the bottom line here is that the sponsor interview isn’t a perfect measurement, but at least you can see if you’re having a conversation with a future partner who is on your team, or if it’s a one-way performance.
Finally, you can ask them for references to talk to a few satisfied investors.
With the references, you’ll want to ask some things that go beyond simple returns. In this case we feel the three most important questions to ask are:
- Did they do what they said they were going to do?
- Do they effectively and consistently communicate what is going on with the asset?
- Are they available to answer questions and quick to fix errors?
So there you have it.
Time to start building your sponsor list sooner rather than later.
And in our case, you can browse our investor portal for our past portfolio, and we would be very happy to answer any questions you have over the phone.
