How To Vet A Real Estate Syndication Opportunity

The overall percentage of physicians experiencing physician burnout has remained moderately consistent but has been increasing in recent years.  In most cases, burnout is actually caused by a broken system. However, we simply can’t wait for the system to fix itself. Physicians need a solution now that can help them prevent burnout and live and work on their terms.

The solution to burnout is certainly multifactorial, but securing financial freedom is a good start. 

There are numerous investment vehicles available in the “investable universe” that can help you achieve your financial and lifestyle goals. Not all investment opportunities require you to maintain an active role. There are passive investing options that are optimal for most busy physicians, such as real estate syndications.

Investing in real estate syndications is ideal for physicians who want to maintain their current clinical hours and want to be passive investors in their investment activities. In actuality, most physicians don’t necessarily have the time or expertise to do all the important tasks of acquiring and managing a real estate investment.

In short, for physicians who want to enjoy spending their non-clinical hours with family and benefitting from a high return on investment, real estate syndications are an excellent investment vehicle.

What is Real Estate Syndication?

In simple terms, a real estate syndication is an effective way for a group of investors to combine their capital and resources to invest in larger properties than they could as individual investors. Traditionally, the common form of passive real estate investing is through a limited partnership in a real estate syndication. Real estate syndications can be formed in many subclasses of real estate including multifamily, mobile home parks, self-storage, single family homes, residential assisted living, and build to rent to name a few.

There are generally two types of roles in a real estate syndication:

Sponsor or Syndicator –  An important role in a real estate syndication is the sponsor or syndicator. The sponsor, who is usually made up of a team, handles all the work of due diligence, acquiring, implementing the value add strategy, overseeing the management, and finally disposition or exit of the asset. They have working experience within real estate and are well-versed in what it takes to properly operate and manage an investment property.

The real estate sponsor is one who puts together the whole deal and arranges the involvement of all legal parties and operates as the General Partner for the contract. Since they handle all the management aspects and day-to-day operations of the investment property, sponsors generally have different types of fees that depend on the nature of the deal. However, they often will invest their own funds into the investment. Regardless of their specific arrangements in the deal, the sponsor plays an essential role in the success of any real estate syndication.

Investor or Limited Partner – The other main player in a real estate syndication is the investor, or investors, that are commonly referred to as Limited Partners (LPs). LPs are attracted to real estate because they want to take advantage of favorable cash flow, tax treatment, and the ability to jump into much larger deals by pooling capital with other LPs. They participate in a percentage of the investment properties’ profits based on their investment amount.

How To Vet A Real Estate Syndication Opportunity

Whether you’re just starting to get your feet wet as an investor or have some level of sophistication, it’s very important to educate yourself on the key facets of the investment and who is sponsoring the investment.

Even though you’ll have a passive role as a limited partner it’s super important to do your due diligence to evaluate both the asset and the sponsor.

Warren Buffet has two well-known rules about investing: “Rule No.1: Never lose money. Rule No. 2: Never forget rule No.1.”

This is certainly easier said than done, but doing your homework and asking the right questions of your sponsors is an excellent way to start.

Asking The Right Questions

As with any kind of investment opportunity, it’s crucial you take the time to ask the sponsor, also commonly referred to as the general partner, the right questions.

To begin, you want to know about their fees and if they have skin in the game. In other words, how much of their own money will the sponsor be putting into the investment? It’s fairly common for a sponsor to put in 3% to 15% based on the size of the deal. 

What type of fees are they charging? Sponsor fees can range from deal to deal and there are numerous different types of fees, which include acquisition fees, organizational and operation fees, loan or debt signing fees, disposition fees, construction management fees, asset management fees, and more. The type of fees the sponsor has will often depend on the nature of the deal, but the fees should always align with the specifics and the scope of what the sponsor is responsible for.

Evaluating the Sponsor or General Partner

While it’s crucial you pick the right asset, it’s even more important you do your due diligence to evaluate the sponsor or general partner.

In interviewing the sponsor, there are a few key questions you’ll want to bring up.

  • How many deals have they gone full cycle/exited? 
  • How long have they been operating? Have they been through several market cycles?
  • Did they meet their proforma expectations on exit? 
  • Are they willing to show you past P&Ls in order to see the returns yourself? 
  • What were their worst deals and what safeguards do they have in place so they don’t repeat them in the future?
  • Do they offer a preferred return?
  • Do they distribute monthly or quarterly and have they ever missed a distribution (especially during Covid)?

In evaluating their proforma or numbers, ask yourself.

  • Is their underwriting realistic?
  • Do they have a clear plan for value add and how that’s going to create margin or equity in the deal?
  • Are they planning for a lower exit cap rate? Is it realistic in this rising interest rate environment?
  • Are their comps for market rents similar to the asset being offered?
  • What is their waterfall structure? Once hurdles are met, does it change significantly?
  • Does the preferred return come to you as a return of capital or as a distribution?

There are also some general and legal questions to ask the sponsor.

  • Do you have any voting rights? 
  • Are there different classes of shares? If so, are your shares subordinate to them? 
  • Are there bad boy clauses if the sponsor goes off the rails and doesn’t do the job properly to be able to remove them?

Don’t Hold Yourself Back

There’s one more piece of advice I want to leave you with:

Learn the concept, ask the right questions and jump in.

Personally, I’ve fought against “analysis paralysis” my whole life. As physicians, we’re trained to really interrogate all aspects of a situation. Although it’s something we’re trained to do in order to avoid bad outcomes for patients, it can hurt us as investors. 

You don’t want to miss out on a good investment opportunity because you want to be 100% about every investment. The list above is by no means exhaustive, but if you get positive answers to all of them, it’s most likely a good investment to consider. 

If you’ve spent the time asking the right questions and educating yourself on the deal but don’t take action, then nothing changes. 

Once you have gained the knowledge and have a solid idea about what’s going on in the space, then jump in. Physicians are all experiential learners to some degree. Where did you learn more; in medical school or residency?  

Accelerate Your Journey

There are too many physicians today who are not living life on their terms. They’re struggling to handle their finances which often translates to them being unhappy in their careers.

As a physician and entrepreneur, I know how freeing it can be for doctors to find their path toward financial independence. It’s much more than simply earning more income, however.  It’s about having money work for you instead of the other way around so you are able to live a life of purpose and practice medicine on your own terms.

If you’re interested in learning more about real estate syndications or any other type of investment in the investable universe, click here to schedule a free 30-minute call with me.

I look forward to helping you create your path toward winning back your time!

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