ASK THESE 3 QUESTIONS

Before Investing with a Multifamily Syndicator

Investing in multifamily syndications can be a great way to diversify your portfolio and achieve passive income. The safety and returns are often superior to many other investments, too.

But, when considering making a significant investment, often $50,000 to $100,000 and beyond, you and I need to be confident in both the deal and the syndicator managing it. The syndicator is more important than the property itself. Think about it.

Sure, ask a lot of questions about the property—where it is, how it was acquired, what assumptions were made about the market, what their plans are, what are the projected returns, how long you will hold the investment, and what is the exit strategy. You may have others.  Answers to these will bring you confidence.

First, ask the right questions to assess the syndicator’s experience, integrity, and ability to deliver those returns.

Here are the three essential areas you might focus on when questioning a multifamily syndicator early in your conversations with them.

#1 TRACK RECORD AND EXPERIENCE

We look at the syndicator’s years of experience, whether they have completed the cycle from purchase to sale, and what they have learned.

The critical question for this first area is: “How many multifamily properties have you syndicated, and what were your responsibilities in each?”

The syndicator’s track record indicates their competence and experience in handling significant, complex investments. Knowing how many properties they’ve successfully syndicated, the size and type of assets they manage, and their level of involvement in previous deals will give you insight into their ability to handle the current offering.

Please be aware that managing an apartment complex is a team sport. The syndicator or operator will likely be part of a team, with different team members having other responsibilities. Often, you and I will initially be talking with someone who focuses on raising the capital to make the deal happen.

Be sure to ask about the other team members, both internal and external.

By internal, I mean the team’s principal or lead member(s).  This can include acquisitions, capital raising, asset management, investor relations, etc.

External would include attorneys, accountants, property managers, insurance brokers, etc.

Here are a couple of follow-up questions:

– How have your previous deals performed compared to projections?

– Can you share examples of how you’ve navigated challenges or setbacks in previous deals?

Mike and I have decades of experience with single-family, mobile home parks, and small multifamily. We have spent almost five years in a large multifamily, our last full-cycle deal, the 128-unit complex in Tallahassee. Through COVID and other challenges, we were able to sell the property after four years and provided a good return for our 17 investors.

These days, Mike and I continue to build deep relationships with several of the best operators in the country. As we get to know them, we ask them questions like the ones above. A couple of times a year, they find a property that we think (by asking other questions) has excellent potential because it is being bought right and is in the right market.

We often partner with these “best of the best” syndicators and make these investment opportunities available to people like you.

Remember to record your conversation, or notes on the call, and their answers to your questions.

Hearing specific examples of successful projects where the syndicator has delivered returns to investors is crucial. Transparency is vital—whether or not past projects met expectations, a trustworthy syndicator will be upfront about the challenges they faced and how they learned from them. This emphasis on transparency will help you gauge the syndicator’s reliability.

#2 FINANCIAL ALIGNMENT AND SKIN IN THE GAME

The second area of question is about the alignment of the syndicator with you as an investor. Some syndicators seem to only think about themselves. They create documents that lean in their favor. Ask the kind of questions in this area that will reveal their priority of taking care of their Limited Partners, of which you will be one.

A key question in this area is: “How much of your own personal money are you investing in this deal?”

Being the General Partner in an apartment complex deal is hard work and takes a lot of time. The fees in the partnership agreement will compensate the operators for their time. Because they have 20%, 30%, or even 50% of the equity in the deal, they will enjoy a big payday when you refinance or sell. This gives them a measure of motivation.

But, when a syndicator has significant personal capital in the deal it shows more than just that they are confident in its success and that their interests align with yours. Investment of capital in addition to time demonstrates a much stronger commitment to success. Their personal financial stake can be a strong motivator for them to manage the property effectively and maximize returns.

If the syndicator is a team, you might ask if everyone has “skin in the game.”

Here are a couple of follow-up questions.

– How do you structure investor payouts, and when do you take your fees?

– What is the percentage of your equity compared to other investors?

A syndicator who is investing their own money demonstrates both confidence in and commitment to the project.

Both Mike and I personally invest our own personal money in our deals. We do this because we are confident they are that good. We also do it to stay motivated for the years of work between the purchase and the exit.

Be cautious of syndicators who charge high upfront fees. They may be more interested in the immediate financial gain than the deal’s long-term success.  Some fees are justified, such as an acquisition fee, as syndicators spend a significant amount of time making offers and doing due diligence.  Make sure the amounts are reasonable.

Alignment of financial interests is critical for building trust.

#3 RISK MANAGEMENT AND CONTINGENCY PLANS

It would be nice if everything went well between purchasing and selling the investment.

But you and I know that is not the reality in much of life, don’t we?

Therefore, ask a question like this to open up a conversation about their risk awareness and their plans to mitigate or address the risks.

“What are the biggest risks in this deal, and how do you plan to mitigate them?”

Every real estate investment comes with risks, but a competent syndicator will not only identify them but also have strategies in place to mitigate potential issues. Talk with them about potential market fluctuations, property vacancies, fires, storms, personnel issues, or unforeseen maintenance costs. Understanding how the syndicator plans to handle these risks will help you gauge their preparedness.

When we put together the financing for our 128-unit property in Tallahassee, we were careful to secure the proper funding 12 years before the note with the bank was due. We didn’t know what might happen in the world, but we wanted plenty of time to adjust if it did. Within three months of closing, Covid hit. Good thing we financed right.

Here are a couple of follow-up questions:

– What contingency plans exist for unexpected market downturns or property-specific issues?

– How much in reserves do you plan to hold for repairs, vacancies, or economic downturns?

Look for syndicators with a well-thought-out strategy for handling worst-case scenarios, including maintaining healthy reserve funds, securing long-term fixed-rate financing, and managing vacancy risks.

They should have realistic risk mitigation plans based on conservative underwriting rather than overly optimistic projections. Ask questions about this to be more confident with your investment decision.

FINAL THOUGHTS

Investing in a multifamily syndication is a significant commitment, and it’s essential to ensure the syndicator you’re partnering with has the experience, integrity, and risk management skills to protect and grow your investment.

Focusing on these three areas—track record, financial alignment, and risk management—can help you make a more informed decision, increase your confidence in the deal, and choose syndications with a higher probability of greater returns.

Knowing the operator well is critical when discerning the potential for a good investment.

Always remember to ask for specifics, and don’t hesitate to seek transparency. It’s your hard-earned money, and thorough due diligence will pay off in the long run.

Focusing on these critical areas can help you assess whether the syndicator is trustworthy and capable of delivering returns, helping you make a well-informed decision about your investment. Talk with your legal and financial advisors as you learn more about your potential syndicator.

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