3 Questions to ask syndicators to not lose money

Investing in real estate syndications can provide diversification and decent returns, but obviously also comes with risks. As a limited partner investing capital into deals sponsored by general partners (GPs), it’s crucial to perform proper due diligence before committing your money.

Consequently, asking the right questions of real estate syndicators is key to assessing if the investment and operators are truly worthy of your trust. It may help avoid situations where you may lose part or all of your invested capital from lack of experience, poor planning, or other operator problems.

In this comprehensive guide, we’ll explore the top questions real estate investors should ask GPs to minimize the chances of losing money in syndicated deals. Mastering these questions helps you find and partner with more capable, trustworthy sponsors to mitigate loss while profiting from value-added and opportunistic projects.

1. Does the team have experience working together?

One of the most important questions to ask is how long the core team members have worked together on previous real estate projects. The length of time they’ve partnered together helps assess:

• How smoothly team dynamics function during challenging situations.
• If they have effective processes and systems in place.
• How portfolio performance has stacked up long term.

Seasoned teams that have worked across multiple deals over 5-10 years typically have proven their ability to navigate tricky real estate cycles together. They’ve already made mistakes earlier on while building operational expertise across different markets and property types.

Having a long track record working together improves the chances the sponsor can actually execute their projected business plan. Of course, you still need to evaluate their experience, but proven teams inspire more investor confidence.

If it’s a new team that came together recently, make sure there are firm reasons why. Perhaps they’ve worked together indirectly before or have referred deals to each other previously. Look for tangible reasons why each key player was brought together under the General Partner entity.

While risky to invest with a new team doing their first deal, it can work out if the other due diligence points check out. Yet expect to see less seasoned teams struggle through operational issues or administration early on. Thoroughly check and verify track records of individual members in the absence of history working together.

2. Have they invested significantly as Limited Partners before?

Many real estate operators choose to invest capital into other people’s deals before launching their own syndications. The best sponsors typically continue investing in peers’ offerings even during later stages.

Asking GPs how many previous investments they’ve made as LPs does two things:

Validates they believe in the asset class

Sponsors should have experience sitting on the LP side of deals first. Investing capital into other people’s projects builds operational empathy that helps them structure better investor offerings themselves later.

It signals they have enough conviction to put their own money behind real estate investments as a part of their asset allocation strategy. Even small check sizes early on can demonstrate initial belief before they raised larger funds.

LLCs and other investment vehicles should be transparently disclosed as well to assess how seriously they take investing capital. You want sponsors who think like institutional investors even during earlier phases of their journey.

Gains access to previous return history

A valuable yet overlooked byproduct benefit of this question is transparency into their previous return results.

Ask sponsors to share some LP return history examples from participating in other projects in the past. Evaluate the actual returns they achieved helping to set realistic expectations they can replicate going forward.

Of course, past performance does not guarantee future success. But ROI figures can reveal their rough success being on the investor side previously.

Aim for sponsors who’ve invested in 3-5+ projects at minimum in order to analyze their success rates objectively. Since real estate investing takes years to fully play out, designed investments may still be unfolding. But past examples demonstrate their capabilities and instincts better.

The importance of their sharing LP histories signals their openness and integrity with investors whom they intend to partner with.

3. How do they communicate with investors during problems?

Another key evaluation point is assessing transparency by requesting examples of how they communicate with investors when things go wrong.

Assumptions around cost, timing, enrollment rates and other variables get impacted regularly requiring updates to the investing group.

Therefore, experienced real estate syndicators share frequent communications to keep LPs updated on material changes affecting projected returns. Over-communication establishes layers of trust and accountability between both parties throughout the life cycle.

Key points to look out for in investor communication during difficult times

Real estate investing never goes 100% according to pre-modeled projections even under the best sponsors. Consequently, be prepared to assess the communication of your sponsors in hard times of a real-estate crisis and have an eye out for the following: 

• Assess transparency by requesting examples of how sponsors communicate with investors when things go wrong in past deals.
• Experienced sponsors over-communicate updates on material changes affecting projected returns
• Ask sponsors to share emails or letters related to a problem that came up previously.
• Evaluate tone, timing and transparency applied in the sample communications.
• Look for sponsors taking responsibility rather than making excuses or confusing jargon.
• High integrity sponsors admit mistakes and focus on solutions for impacted investors.
• Overly polished answers may indicate doubt about true transparency.

Request access to sample email communication

One of the main aspects of this part of due diligence is to ask sponsors straight up to share samples of email correspondence or investor letters related to some problem that came up in a previous project with their LPs.

The most insightful part is understanding the tone, timing, and level of transparency applied during a failed pro forma assumption, legal issue, or area they underestimated.

You want to gain visibility on how they take responsibility vs excuses communicated or using overly technical real estate jargon to confuse. High-integrity GPs admit to mistakes outlining the lesson learned while remaining solution-oriented for investors relying on their expertise.

Of course, an overly polished answer raises doubt if they are that open normally. Evaluate their willingness to discuss actual problems that transpired and how they made investors feel during the process.

The reality is something always comes up forcing adjustments from original plans. Sponsor communication and response prove their priorities when issues emerge.

Apart from these three core questions, there are a few additional points that can help you optimize your selection of suitable GP you may want to invest in, which we share in our video and below:

Vetting operators thoroughly — be willing to pass on deals

Gaining comfort by asking syndicators insightful questions outlined above helps assess alignment and trust before moving forward. But even after, continue vetting everything from their capabilities, deal flow, readiness levels, and investor communications with immense scrutiny.

Your overall approach mindset becomes the right deal, right sponsor, right time – in that order. For less experienced sponsors, maybe everything checks out except realizing they may still be early on their journey. That translates into letting certain deals pass by rather than focusing on protecting your capital until finding the optimal match between team and project.

Of course, the deal always seems “once in a lifetime” under selling pressure by the listing broker, real estate agent, or whoever stands to gain from the transaction. The reality is great deals keep recycling every 6-12 months after others pass on opportunities that do not fit their criteria. Private lenders may get involved allowing you time to evaluate for the next round.

Letting fear of missing out (FOMO) dictate your investing decisions leads to trouble long term. If something feels off during the sponsor evaluation or business plan review, be willing to pass completely even if it means losing that particular deal.

Preserving your investing capital and reputation should be a top priority over chasing deals or trophy-hunting specific areas. The data shows your lifetime returns often boil down to a handful of great deals out of dozens you may participate in over time.

Understanding quarterly financial reports

As a passive LP investor without direct property access, your visibility into operations gets limited to quarterly or annual reports distributed. So reading these documents correctly becomes vital to tracking actual performance relative to the original assumptions.

Make sure syndication contributors explain various components of the packaged reports to fully comprehend each section:

• Executive summary: A basic snapshot of property highlights and financial metrics.
• Units and leasing status: Occupancy details and rent roll changes.
• Income statement (P&L): Detailed revenues, expenses, and NOI over time.
• Capital expenditures: Future capex projects, status updates.
• Acquisition updates: Business plan progress, milestones achieved.
• Market and submarket updates: Local trends affecting property operations.

Compare current figures to original underwriting projections to analyze variances or early signals of problems that may require addressing. Of course, sponsors model deals conservatively but still account for best-case scenarios that might not materialize so tracking helps investors foresee issues.

Major red flags include sustained negative variance in rental income or much higher expenditures than forecasted. Both directly hit net operating income (NOI) reducing cash flow available to distribute — so material discrepancies need to be explained properly.

Look out for the overuse of creative accounting tactics like including one-time legal fee reimbursements as income to boost rental revenues. This masks true property performance which should exclude one-off amounts.

While trusting your chosen sponsor, verifying reports independently remains a prudent safeguard by asking the right clarifying questions. Never feel shy to call out oddities from original modeled expectations and forecasts.

To sum up

This guide summarizes the most insightful sponsor questions investors should ask real estate syndicators before funding capital into new deals. Both operational experience and transparency regarding previous investments offer glimpses into their actual priorities in managing projects and investor communications.

Of course, assessing team dynamics, deal merits, and various due diligence items also play roles in influencing risk levels. But circling back to evaluating general partners first helps reveal competency levels to execute stated business plans.

Skipping over these important evaluations risks learning difficult lessons later once capital gets tied up for 5-7 years in deals not delivering targeted returns. But asking these questions diligently on the front end helps you as a real estate investor find and partner with more capable sponsors for the long run. Over time, working with proven best-in-class operators is usually a good indication that a project will succeed in the long run.