How to Analyze a Passive Investment Opportunity in Real Estate Syndication

Passive investment opportunities in real estate syndication can provide outstanding ways to generate attractive financial returns. In the very best scenarios, you and your fellow passive investors can earn consistent income with few of the headaches that come from other types of investments. Simply put, these passive investment opportunities offer great chances to build real wealth.

That being said, getting to these ideal scenarios doesn’t automatically happen. They require some diligence from your end. Because of this, it is worthwhile to explore some of the things that you should consider when analyzing a passive investment opportunity. By doing your homework now, you can avoid mistakes and find the best passive investment opportunity for you.

First Principles in Analyzing Passive Investment Opportunities

To be clear, these are several first principles that you should follow when considering a syndication opportunity. They aren’t the only things that you should consider. Generally speaking, by being measured, reserved, and rational, you will make great decisions.

One of the first things that you can do is research specific asset classes and markets. There are plenty of multifamily asset class types, ranging from new upscale luxury buildings to 40-year-old buildings that were built for low-income residents. Each asset class provides its challenges and opportunities, so you’ll need to evaluate your risk profile before proceeding. The same is true of markets. You may have some more familiarity with a local market, but there may be greater opportunities elsewhere. Make sure that you are soberly thinking about your opportunity set before proceeding.

As with any type of investment, another one of the first things that you should do is research your potential partners. Naturally, much of the attention will veer toward the sponsor or general partner. This is for good reason, as the sponsor is active in the day-to-day operations of the syndicate. But beyond the sponsor’s experience and background, you will also want to evaluate the relevant property management company, commercial real estate broker, and any real estate and securities attorneys. See how they evaluate potential deals and how quickly they can close potential deals.

It takes a team to create and run a real estate syndicate, so you want to have a good understanding of your new partners. Beyond doing simple Internet research, don’t hesitate to make some reference checks. Speak with other limited partners who have worked with any of these individuals or entities. Completing this primary research will give you the confidence that your partners will maximize the value of your investment.

From there, you will need to closely scrutinize your potential returns. After all, much of your interest in real estate syndicates likely comes from the fact that you can earn outsized returns. As a limited partner, you can be compensated in several different ways, including a preferred return, a profit split, or supplemental loan proceeds. Preferred returns and profit splits are more common, but you’ll want to read the fine print for more. For instance, you may discover that your preferred return is 8% before the general partner is paid. Or you may discover an unequal profit split in your favor after that preferred return. Make sure you understand your potential profit before entering the syndicate.

Finally, you will want to examine the opportunity’s underlying fee structure. Sponsors, real estate attorneys, property management companies, and others provide significant value to the overall syndicate. Because of this, they receive compensation for completing their work. This compensation may impact your overall return on the property. For instance, your sponsor may take a profit split on an ongoing basis or upon the sale of your property. Your property manager may take a 10% management fee on the collected income. Whatever the case may be, have a good understanding of how your partners are being compensated. No fee structure, in and of itself, is good or bad. It depends on the value you are getting from your partners and how those fees impact your total returns.

Get Started Today

Whether you are new to passive investment opportunities or have been making investments for some time, it is critical to keep these first principles in mind. They can both help you find attractive investment opportunities and avoid those that are less attractive to your financial goals. Ultimately, the best time to get started is today.