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8 Must-Ask Questions Before You Invest in Any Real Estate Syndication or Fund





Whether you're a brand new or seasoned passive real estate investor (also known as a Limited Partner), these questions will help you gain the knowledge you need to feel confident about your investing decisions. 


1. What Are the Sponsor’s / General Partner’s Qualifications? 


A good sponsor is one that has experience in acquiring and managing real estate investments, has taken deals “full cycle” (from acquisition to disposition), and has adeptly managed unforeseen deviations from business plans. 


Look for a local presence and expert property management. A sponsor with “boots on the ground” and a strong property management team is vital, especially for complex properties. 

Research the sponsor’s background and ask for references from previous investors to assess reliability and performance. 


2. How Often Will I Receive Updates about the Investment?


You don’t want to be in the dark about how the property is performing.  The sponsor should be clear about how it communicates with investors and how often it provides investment reports, including financial statements.  Annual audited financial statements are a plus. 


3. For How Long Will My Money Be Tied Up in This Investment? 


Most real estate syndications have a 3- to 7-year hold period to fully execute the business plan and achieve projected returns. It is important to understand how investor returns flow year by year and when you can expect to receive a complete return of capital. 


4. Is There a Preferred Return to Limited Partners (LPs)? 


A preferred return means all profits from operations, sales, and refinancings are distributed to LPs until a certain rate of return on their investment is reached, after which distributions are split between the LPs and the General Partner (GP). A common preferred return is 6% to 12%.  

 

5. What Is the Profit Split Between the LPs and the GP? 


It is common to see 70/30 and 80/20 splits between LPs and the GP. Most of our investment opportunities are split 80/20 with a GP catch-up. This means 80% of the profits go to the LPs (you) and 20% go to the GP (Volhawk), but only if the LPs earn their preferred return and get their original investment capital back (otherwise the GP will take less than its split percentage). 

 

6. What Are the Fees Charged to Investors? 


It's common to see an acquisition fee of 1% to 3% of the purchase price and an asset management fee of 1% to 2% of the property's annual gross revenue. Some sponsors may also charge a refinance fee or disposition fee of 1% to 3% each. The projected investor returns should be net of fees. 


7. What Types of Contingencies and Assumptions Were Made in the Underwriting to Enhance the Probability of the Investment's Performance? 


Conservative underwriting is crucial to ensuring an investment is set up for success. We will dive more deeply into deal underwriting in a future post, but some examples include sufficient reserves for working capital and contingencies, an adequate budget for renovations, realistic assumptions about rent and expense growth, a plan if the debt needs to be refinanced before sale, and a forecasted sale price based on a reasonable cap rate expectation. 


8. When Can I Expect the First Distribution? 


Properties already stabilized with 90%+ occupancy at acquisition can typically make the first distribution in 6 to 9 months. After the first distribution, investors can expect quarterly distributions. 


Properties with a heavier renovation lift and lower occupancy can take up to 36 months to stabilize and make their first investor distribution. A property could achieve stabilization (90% occupancy) by months 12 to 14, but most lenders require occupancy at 90% or more for at least 90 days before the GP may make a distribution. 

 

Conclusion 


Investing in real estate syndications can be a lucrative opportunity, but it requires thorough due diligence to ensure you're making informed decisions. By asking these critical questions about the sponsor's qualifications, investment timelines, profit splits, fees, underwriting assumptions, and distribution schedules, you can better understand the risks and rewards involved. As always, staying informed and partnering with experienced sponsors will enhance your chances of success in the real estate market. 


Ready to take the next step?


If you're interested in exploring profitable real estate investments and want to discuss how to get started, click the button below…

 



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