We always preach to know, like, and trust who you’re investing with, but it may be more important to understand what you are investing in and how the business plan can succeed. In a real estate syndication, just because the sponsor says it’s a good deal doesn’t make it a good deal. You need to understand the numbers and what makes it a good investment. What should you look for? 1. Location - check the location and compare it to what the sponsor calls it. Is it really A class? I recently saw a deal touting an A class, but in fact it was B class at best. $77k median household income, $250k median home price 2. Income growth vs expense growth. Is it realistic and sustainable? Does it match with today's market? 3. Cap rate at purchase and sale compared to the market. This can make or break an investment! Example: Sponsor shows an exit cap rate of 5% in a market currently selling for 6% cap rates. This creates a huge difference and could mean a total loss of equity. 4. Reserve account - minimum of 6 months worth of P&I payments. 10%+ on renovation funds. 5. Does it actually cash flow on it's own? Sponsors sometimes say they're paying investors monthly, but they're using reserve funds to do that. Dangerous! 6. Financing - You want low LTV and more importantly high Debt Service Coverage Ratio (DSCR). DSCR of 1.25 or less is risky! Also understand the debt the sponsor is using. Bridge debt is highly risky, but a great tool for flipping. Long term fixed rate carries much less risk, with less flexibility. 7. Length of investment - does it align with your goals? I hear a ton of passive investors that love real estate because of the cash flow and tax benefits, yet they invest with apartment flippers that create no cash flow and lots of tax burden. Warren Buffett doesn’t just invest in companies because he likes the CEO and neither should you. What else do you look for? #syndication #passiveinvesting #realestateinvesting #multifamilyinvesting
Eric Hempler
7mo
Fantastic points! Understanding the details of an investment is crucial, especially in real estate syndication. Digging deep into factors like location, income versus expense growth, cap rates, and financing terms is vital. Blindly trusting a sponsor can lead to risky investments. Your checklist is an excellent resource for making informed decisions. Thanks for sharing such valuable insights!
John Retka
6mo
Thanks for sharing
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7moGreat breakdown Todd Dexheimer. What's the best way to know the market cap rate? Do I need to underwrite deals enough times to figure this out on my own, or would you typically explain this to me when you present a deal? How can I know what's normal for location and asset class?