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Investing in multifamily syndications can be an attractive opportunity for limited partners (LPs) looking to diversify their portfolio and generate passive income. However, selecting the right syndication team to invest with is crucial for long-term success. To ensure a well-informed decision, LPs should ask pertinent questions before committing their capital. These questions were comprised mainly through conversations myself or others at JP Acquisitions have had with investors. In this blog post, we will discuss five essential questions that every limited partner should ask a multifamily syndication team before making an investment.
What is the syndication team’s track record and experience?
Before investing in a multifamily syndication, it’s crucial to understand the sponsor team’s track record and experience in the industry. An investor should Inquire about their previous projects, the number of years they have been involved in multifamily investments, and their overall success rate. Look for a team that demonstrates a solid track record of delivering positive returns to investors and has experience navigating different market cycles.
There may come a time when a small syndication team or a company just starting approaches you to invest in their deal. In that case, an investor should focus on what the individuals on the team did previously and why they believe they can be successful. In addition, due to the lack of experience, you’ll want to see that the sponsor team is contributing a significant amount of capital (relative to their overall net worth) to the deal at hand. This shows that the sponsor team is confident in their abilities and has skin in the game. With their capital in the deal, they’ll be even more committed to seeing the deal perform well. Given that you have a solid understanding and are comfortable with the syndicator’s track record and experience, you can then turn your attention to the deal at hand.
How do you source and underwrite potential investment properties?
Understanding the syndication team’s approach to sourcing and underwriting investment properties is essential. Ask about their deal sourcing strategies, whether they have a broad network of brokers, off-market opportunities, or other channels for identifying potential acquisitions. Additionally, inquire about their underwriting (UW) process to evaluate the thoroughness of their financial analysis, market research, and due diligence efforts. If a sponsor team does not provide transparency behind how they underwrite, consider that to be a red flag. The underwriting is what drives the acquisition and without knowing the assumptions behind the sponsor’s UW, you cannot fully vet the deal. Ask yourself, “are these assumptions too aggressive, fair, or too conservative?” Hopefully, the sponsor team is cautious and tends to underwrite conservatively, yet defendable, and not make the deal seem better than it really is.
At JP Acquisitions, not only have we outlined how we underwrite deals in multiple blog posts, but we also include the reasoning behind our underwriting assumptions in our investor pitch decks. We stay as transparent as possible with investors so as to provide them with the level of detail they need to know so as to feel comfortable. When it comes to sourcing deals, we’ve worked with a set of brokers and continue to look at all opportunities (on-market, off-market, etc.).
What is the syndication team’s investment strategy and risk management approach?
Every syndication team may have a different investment strategy and risk management approach. It’s important to ensure their investment strategy aligns with your investment goals. For example, if you’re looking for high-cash-flow deals, you’ll probably want to invest with a syndicator that invests in high-cap rate properties. More so, an investor should inquire about the syndicator’s targeted markets and property types to determine if they match your preferences. You’ll want to know why the syndicator is bullish on a certain market. Could it be that the market is experiencing population growth, job growth, and other positive factors that increase the desirability of the market or perhaps the market is really not as strong as you may have been led to believe? Moreover, ask about their value-add strategies, such as renovations or operational improvements, and how they plan to mitigate risks. You’ll want to know what experience the team has renovating properties, who will be performing the work, and how they’ve budgeted the deal. A well-defined risk management approach, including contingency plans for market fluctuations or property-specific challenges, shows the team’s preparedness for potential obstacles. A final question you’ll want the answer to is who will be managing the property and what is their experience managing similar properties? If it so happens that the syndicator handles the property management in-house and has historically performed well, then you can be relaxed knowing the syndicator has even tighter control on the property. There will undoubtably be a point when something goes wrong (tenant needs to be evicted, fire damage, etc.) and you’ll want to know how those risks will be managed.
How are investor communications and reporting handled?
Transparent communication is crucial for a successful partnership with a syndication team. You should inquire about how the team communicates with investors and the frequency and format of updates and reports. Ask for examples of previous reports to assess the level of detail provided. Understanding the team’s communication practices, including their responsiveness to investor inquiries and their approach to disclosing important information or potential issues, helps build trust and ensures you stay informed about the progress and performance of your investment.
At JP Acquisitions we send out monthly updates that start with a comparison of a property’s actual financials compared to what we had underwritten. From there, we explain all of the operational developments in regard to occupancy, rental income, expenses, cash flow, etc. Any time an investor has questions we prefer to get them answered right away either over the phone or via email. Clear communication is absolutely key in any relationship be it in business or another environment.
What are the fee structures and projected returns for investors?
Understanding the fee structures and projected returns is essential to evaluate the potential profitability of an investment. Ask the syndication team to explain their fee structure, including acquisition fees, asset management fees, and any other charges involved. If you are unaware of the fees that syndicators typically charge, you can refer to this post or look at our glossary page for an explanation of the fees.
Ensure you have a clear understanding of how and when these fees are assessed and how they impact your overall returns. Additionally, inquire about the projected returns and the assumptions or factors that contribute to those projections. It’s important to assess the team’s conservative or realistic approach to projections and have a clear understanding of the potential risks involved in achieving those returns.
Conclusion
As a limited partner (passive investor) in a multifamily syndication, your main priority is to ensure that your capital is being invested carefully and diligently to ensure that the projected returns of the deal are met. The questions we covered in this post will help you access how experienced and careful the sponsor team is. In addition, the answers to some of the questions help you understand the business plan behind the deal and how it will be carried through over the years.
If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
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About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, looking for multifamily deals, and working out.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.
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