Your comprehensive resource for navigating and succeeding in the world of syndication.
When venturing into real estate syndication, it's crucial to conduct thorough due diligence on a syndicator’s strategy. Here are key questions to ask and insights into what effective strategies might entail:
Question: How do you source deals?
Effective Strategy: Look for GPs who explore both on-market and off-market deals. Off-market deals can be less competitive, offering better negotiation terms and potentially higher returns.
Question: What is your reporting or communication schedule?
Effective Strategy: Consistent and transparent communication, including occupancy rates, renovation updates, and financial statements, is vital. Immediate reporting on deviations from the plan is also key.
Question: Can you guarantee a return?
Effective Strategy: Credible GPs will offer projections, not promises, aligning with realistic market expectations.
Question: What is your policy for establishing reserves?
Effective Strategy: A prudent GP will set aside sufficient funds annually to cover unexpected costs or shortfalls, particularly in value-add or distressed deals. Typically, $250-300 per unit per year.
Question: How do you make money on a deal?
Effective Strategy: Fees should reflect the value provided, and a comprehensive list of these should be included in the PPM.
Question: How will you protect investments from a market downturn? What are your policies for reserves?
Effective Strategy: Investing with an experienced team using long-term debt and conservative exit cap rates is key. Adequate reserves at close and regular contributions are essential. The deal should cash flow from day one, and the debt structure should match the business plan.
Question: What assumptions do you use in your underwriting process?
Effective Strategy: Conservative assumptions in rental increases, vacancy rates, and exit cap rates are crucial. Projected rental increases and vacancy rates should be realistic, and the exit cap rate should acknowledge market trends.
Question: What specific measures do you take to protect investments?
Effective Strategy: The right debt structure is essential. For example, short-term loans for long-term holds can be risky. Conservative projections and maintaining sufficient cash reserves to handle unexpected situations are also fundamental.
Understanding a syndicator’s approach and risk management through these questions can provide investors with valuable insights, aiding in more informed investment decisions.