101 Questions to Ask Before Investing in a Real Estate Syndication
Ok, so you have chosen to invest in a real estate syndication, you’ve signed the PPM (private placement memorandum) then you have wired your funds. That’s it, you’re invested now. What you should know before this point.
Beyond this stage, you have no control over the asset’s performance day-to-day. You are officially a passive investor. This is where your upfront due diligence has paid off so that you are completely confident you have made the right decision to invest with this sponsorship team and into this asset type and into this real estate market.
We’re going to dive into the questions that you want to be asking a potential sponsor BEFORE you invest in a real estate syndication deal with them.
The time to roll up your sleeves and tackle any questions you may have about an investment is definitely before you invest. I say that because all too often potential investors aren’t even sure what questions they need to be asking. We want our investors to have the utmost confidence not only in our team but in the market (submarket) they are investing in and the asset itself.
Conduct your due diligence, and ask as many questions as you feel is necessary BEFORE you invest in a real estate syndication with a sponsor you haven’t yet worked with.
Here is a list of questions that we feel are important to ask. Quite a few of these questions can be answered by just reviewing the sponsor’s investment summary about the deal while other answers to various questions are best asked directly to the deal sponsor.
We hope you find this useful as a guide before you make your next investment into a real estate syndication.
101 Questions To Ask The Sponsor Before You Invest In A New Real Estate Syndication
- Why are you choosing this market?
- How long have you been investing in this real estate market?
- Who are the big employers in the area?
- What is the submarket like?
- What are some of the developments going on in the area?
- Have you done other investments in this area?
- What year is this asset?
- What are the things you like about this asset class?
- What are the things you don’t you like about this asset class?
- How many units are there?
- What is the unit mix for this project?
- What is the cost per unit, and how does that compare to other comparable properties in the area?
- What is the current occupancy rate?
- If the property is unstabilized, what will be the stabilized occupancy rate?
- What is the median income for the current residents?
- What is the business plan?
- What are the projected premiums for renovated units?
- How did you come up with the projected premiums?
- How much money are you raising for this project?
- How much of that is for the down payment?
- How much of that is for cap-ex (capital expenditures)?
- What are the projected returns?
- What is the overall equity multiple?
- How is the deal structured?
- What are the equity splits?
- Is there a preferred return? Why or why not?
- How often do you pay out investor distributions – monthly, quarterly?
- What’s the projected hold time for this project?
- How did you come up with that timeline?
- What if the market is soft when the projected hold time ends?
- How are investors kept up with the progress?
- Are you taking an acquisition fee?
- Are you taking an asset management fee?
- Is there a refinance fee?
- Is there a disposition fee?
- What would happen if I had an emergency and needed access to my funds?
- Who is the property manager?
- How many deals have they managed like this?
- Have you worked with this property manager before?
- How did you find this property manager?
- Why is the owner selling?
- How did you find this deal?
- How much experience do you have with this asset class?
- What is the total loan amount?
- What kind of loan are you getting?
- Is the debt recourse or non-recourse?
- What are the terms on the loan?
- What is the LTV (loan-to-value) ratio?
- What is the debt coverage ratio in year 1?
- Did you walk the property?
- Who is on the team?
- What are their roles and responsibilities?
- Have you done deals together as a team before?
- What happens if you get hit by a bus?
- Who is your securities attorney?
- Is this offering open to non-accredited investors?
- Is this a 506(b) offering? 506(c)? Other?
- What will I find when I run your background check?
- Have you ever been a passive investor?
- What’s your ultimate goal with syndications?
- How would you feel about giving me a few references?
- Are you raising enough for cap-ex?
- What are the chances of a capital call (i.e., the sponsors requesting more money from the investors)?
- What’s the purchase cap rate?
- What’s the projected reversion cap rate (i.e., exit cap rate)?
- What did you do to stress test this deal?
- Have you visited, toured, and secret-shopped the comps in the area?
- May I visit the property?
- Do you need a loan guarantor?
- What’s the worst-case scenario?
- How do you do your due diligence?
- How much deferred maintenance is there on this property?
- Are you doing this full time?
- What did you do before this?
- Why did you get into syndications?
- Are you part of a syndication coaching or mentorship program?
- Tell me about a time during a project when things didn’t go according to plan.
- Do you need anyone for the earnest money deposit (EMD)?
- What do we get for helping with EMD?
- When does EMD go hard?
- What happens if you have my EMD, it goes hard, and you can’t perform?
- May I invest with retirement funds?
- What’s the minimum investment?
- What’s the maximum investment?
- Who’s your asset manager?
- Who does your accounting?
- When do you send out Schedule K-1s?
- Will you be doing a cost segregation study?
- What’s the plan if the economy changes and you can’t sell?
- Does your lender offer loan extensions? How much do the extensions cost?
- Are you bringing your own money into the deal?
- How do I send in my funds – wire, check, other?
- What is the deadline for getting my funds in?
- Will you be offering an investor webinar?
- What percentage of the units will be renovated, and why?
- Once the deal closes, what are the first three things you plan to do?
- Are you rebranding the property?
- If you could wave a magic wand and change one thing about this property, what would it be?
- What are the biggest risks of investing in this deal?
- What do you like about the deal?
- What DON’T you like about the deal?
No doubt that these questions have shown you that there is no such thing as limits when asking questions of a deal sponsor before you invest alongside them. It truly is a partnership and should be treated that way. Getting to the bottom of tough questions should be welcomed by the deal sponsor.
If you feel you are getting the brush off or there is hesitancy on the part of the sponsor to directly answer any and all of the questions you pose, then it may be an indication that this sponsor is not going to be a good fit and a good partner to work with going forward.
Remember, there are always other deals and always other sponsors to work with, so take your time, ask a lot of questions, and do your due diligence, and you should find the right investment to invest in with the right sponsor at the right time.
Ready to Learn More?
The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!