Five Tips To Evaluate A Real Estate Syndications

As a real estate investor, you’re probably already aware that doing your due diligence on any potential investment is one of the most important steps in the process. If you’re investing in a particular property, it’s crucial that you gather as much information as possible about that property, the neighborhood where the property resides and the economic status (both present and future) of the area.

If you’ve made the decision to invest in a real estate syndication, due diligence is just as important. However, instead of doing your homework on a property, you need to evaluate the syndication itself. Here are five tips on how to do that.


Exit Strategy and Investment Duration

A good real estate syndicator should be able to tell you how long the investment will last before the investors get paid. It’s important that you know how long the syndicator plans to hold the property and what kind of principal return he or she is expecting at the end. Since real estate syndicates are illiquid investments, you can’t get paid back in full until the end of the hold period, so you should only work with syndicators who can tell you when that will be and roughly how much of a return you should expect during that period.


The Syndicator’s History

When you invest in a real estate syndication, you’re really investing in the syndicator, or the person (or team of people) who oversees the entire operation. It’s vital that you gather information about the syndicator’s track record. Has he or she led syndications before? Were they profitable? If not, why? If possible, speak to investors who have worked with the syndicator in the past and find out how they treated their investors, how well they communicated, and whether they lived up to their promises. You should know as much about the syndicator as you do about any investment property.


Investor Relations

While we briefly touched on this topic when discussing the syndicator’s history, it’s important that you know what kind of relationship you can expect between the syndicator and you. Unfortunately, some syndicators think they should only interact with their investors when they’re trying to secure funds and when it’s time to send out the dividend checks. That’s simply not the case. Make sure that any syndicator that you’re working with is willing to answer questions and address any concerns that you have during the life of the investment. Good syndication should be in regular contact with its investors, quarterly at a minimum.


Profit Splits

At the end of the day, the only reason that you’re investing in a real estate syndication is to generate a positive return on your investment. Understanding how profits will be split between the syndicate and the investors is ultimately what the entire deal is about. There are several factors that have to be considered when dealing with profit split. The amount of risk involved, the amount of funds raised, the sponsor’s involvement in the deal, the projected duration of the deal, and the agreed-upon structure all must be considered when determining profit splits. If the property is considered high-risk, the syndicator may have to promise investors a larger share of the profits. Make sure that you have a written copy of the profit split so you can fully understand what you’re investing in.


If you’re using real estate syndications as a method of building your own personal wealth, it’s important that you understand how to evaluate them. Doing so can ensure that you’re putting your money to work for you in an investment that meets your own investment standards.