Syndications can be a profitable way to invest in real estate passively. However, before choosing a property, it’s important to conduct your own due diligence to ensure the investment is a good fit for your portfolio and aligns with your investment goals.
Experienced investors understand that due diligence can help you evaluate the opportunity and uncover potential risks. The process involves assessing all aspects of the investment, including the property, the sponsor, and the legal structure. By understanding the critical factors of the deal, you can make a sound investment decision.
When completing due diligence on a real estate syndication, consider the following factors:
- Sponsor track record and experience in real estate. Look at previous syndication deals and the results delivered in relation to the projections.
- Market analysis: Conduct research in the market where the property is located. Analyze factors such as economic indicators, occupancy, rental rates, job growth, population migration, and supply and demand.
- Property analysis includes the property’s physical condition and the potential to force appreciation through improvements. Look for hidden costs or deferred maintenance that could affect profitability.
- Legal and financial review: An attorney or competent professional should review all legal documents, including the sponsor agreement and private placement memorandum. Also, consider the purchase agreement terms, projections, and cash flow.a. Analyze the debt structure of the deal, including the interest rate, loan term, amortization schedule, rate terms, and prepayment penalties. How will rate changes impact cash flow and the overall profitability of the investment?b. What are the projected rent increases during the hold period, along with anticipated occupancy rates? Are these estimates realistic based on market conditions and historical trends? Look for risks like oversupply and changes in the local economy that could impact projected rent growth.
c. Capital improvements that could drive appreciation. Determine the ROI on planned projects and the impact on rental rates and occupancy levels. What is the projected timeline for improvements? Could external factors like supply chain issues or wage growth delay improvement projects or lead to higher-than-projected costs?
d. Operating expenses: Are there ways to reduce costs or increase revenues that will positively impact profits? Will the sponsor retain the current property manager or replace them? How will any change impact costs and performance? Are there possible savings in utilities, insurance, or maintenance costs?
- What is the projected return on investment? Is it consistent with past performance and the current market?
- Exit strategy: Does the exit strategy align with your investment objectives? Is it realistic based on the projected property improvements and economic conditions?
- Investor communication style and frequency. How will the sponsor communicate with investors?
- Fees, expenses, and payout structure: Analyze the fees and costs associated with the deal, including investor distributions and the sponsor compensation structure.
It is possible to find profitable real estate deals in any economic environment. However, the deal structure, goals, and projections can directly impact returns. Due diligence should ensure that you understand the opportunity and risks involved. And confirm the proposed deal aligns with your investment objectives and risk tolerance.
To learn more about how McKee Capital Group vets properties and completes due diligence on a deal before presenting it to investors, watch our introductory video.