“Finding good partners is the key to success in anything: in business, in marriage and, especially, in investing.”
– Robert Kiyosaki
Being an apartment syndicator and having invested in apartment syndications myself, I frequently get asked:
How do I know if a sponsor is a good sponsor?
How do I know if an investment opportunity is truly good?
As an investor, the most important step in the whole investment process is making sure you’ve selected the right real estate sponsor. It may seem a challenge and a reasonable concern for most investors. There’s no guarantee that if you go with one particular sponsor the outcome of the deal will be perfect. Hence, this blog. Your approach should always remain consistent, uniform and unchanging.
Background, Experience, and Track Record
Ideally, every real estate sponsor would have extensive experience in the niche in which they operate. Ask to look at the previous projects, their locations, their structure, and the financials. It is also important to note their best and worst performing deals. If you can, take some time to look at their prior projects and ask them how they are currently performing.
A good track record of the sponsor’s performance could help you vet the right one. It is the time to be cautious of false promises, and discuss the sponsor’s plan for unforeseen circumstances and risk mitigation. Certain experiences could help them make wise decisions as they face varied unforeseen circumstances. Check also that the Sponsor is consistent with the deals that they do. Frequently jumping from different asset classes eg. Multifamily, Self Storage, Retail, etc. and does different strategies, or even jumps in asset classes is inconsistent and could walk away.
It is also important to know how the Sponsor structures the hold period, fees and share of earnings is aligned with your interests. Do not proceed further with the project until you thoroughly understand all the numbers. Ask the sponsor how they came up with the numbers–what is the basis of their assumptions? There’s a need to be skeptical to make sure you are getting it right.
The FULL Team
Take a good look at all the major players on their team. Make sure their Legal partners, Construction managers, and Property Management Team are entities that are legitimate and have a good reputation and if they complement each other as well.
Conservative underwriting is the rock on which this business is built. Capital preservation is essential. It goes together with conservative underwriting. How do you know if sponsors are making conservative underwriting assumptions? Well, it helps to dive into the deal and start looking at their assumptions. All numbers must be backed by logic and research.
Sponsors should also provide sensitivity analysis alongside the financials. These should be accompanied by commentary on the major drivers – vacancy, rent upside, loan terms and exit valuation. This allows the investor to map out the best, medium and worst-case scenarios to determine if the deal is a good fit for their portfolio. Here’s an important reminder from Warren Buffet.
Warren Buffett’s investing rules:
Rule #1: Never lose money.
Rule #2: Never forget Rule #1.
How does the Sponsor handle communications and distributions? Communications should be of high quality and content, occur on a regular basis, be upfront and not shy away from bad news should there be any, and they should be consistent in timing and formatting. Open communication is the catalyst to long-term relationships.
Also consider it a good thing if a sponsor gets back to you on a question they do not have the answer to. The key is to acknowledge a request, treat it with respect and promptly deal with it in an effective manner.
The last thing we will look into is the sponsor’s character and trustworthiness. They should be willing and happy to help, honored and thrilled that you would consider investing with them. If the sponsor is not genuine, humble, and caring they give off a bad vibe. It’s important to listen to that gut feeling and ask more questions if something feels off.
This list could help investors make sure they cover all their bases, make safe and informed investment choices. The decision to invest with a sponsor should not be taken lightly. Do your homework on the sponsor. Don’t be shy to challenge assumptions to ensure all the angles of an investment opportunity have been investigated. In the end, the opportunity should be mutually beneficial.
Everyone – sponsors, investors, sellers, tenants, property managers, lenders, brokers – should be a winner in a deal.
If you want to learn more about our strategy and how we position our assets, check out www.tbcapitalgroup.com.