How to select the right syndicator for your investment goals and personal expectations

Finding and selecting the right syndicator is tantamount to picking a business partner.  At the end of the day, while you are indeed investing in a piece of real estate, the larger truth is that you are selecting an asset manager who will make all the decisions. Down at the racetrack every jockey will run a different race. Similarly, every manager will contribute her skills uniquely and deliver different financial results. These results are necessarily anchored in a business plan created by the manager. So it is essential to understand that you are investing in two things: The asset, and the manager. What do you need to understand before you invest? Here are 5 factors to consider.

Timeline

What is the planned time horizon? Not all sponsors seek to get in and out of an investment as rapidly as possible. It depends on the earning expectations inferred by the business plan. If the asset is a new-construction 5-star mid-rise in an urban submarket with an abundance of community amenities, the planned time horizon will be different than a 40-year old 2-star garden-style workforce housing community in an aging suburb. Why? There is little a manager can do to improve rents - and therefore increase value - in a new high-end property in the near term. The endeavor will be centered on the expectation that market rents will rise organically over time. On the other hand, a 40-year old property that, through capital investment in renovation of units and/or polishing up a tired exterior, can achieve higher rents almost immediately. This is known as forced appreciation. Neither endeavor is right or wrong. Forced appreciation requires a certain blend of strengths such as design, construction management, and logistics. Organic appreciation requires a deeper understanding of the local market and long-run submarket trajectories. An investor can and should diversify his investment dollars into a range of endeavors, some seeking high returns and some seeking more modest returns. Time is money. Therefore another way to express high returns versus more modest returns is to say faster returns versus slower returns. The difference is yield.  

Yield

The faster the profit is earned, the higher the yield for the investor. Syndicators do their best to deliver the kind of returns their investors are looking for. So the first thing to establish for yourself is your personal yield requirement. This can (and should) vary from endeavor to endeavor in order to diversify your risk. For example, do you intend to double your investment in 3 years? if so, you are going to seek rare opportunities with more inherent risk because the management objectives will require more active "hand-on" activities. On the other hand, if your objective is to preserve the capital you've accumulated and "park" your money in order to keep up with inflation, then this less risky objective will infer a different business plan and holding period.  

Cash flow

How important is gaining constant cash flow from the investment? In high-interest rate periods floating-rate loans can completely wash away operational cash flow. If cash flow is important to you then the endeavor you choose may need a fixed rate loan. The downside of a fixed rate loan is various types of prepayment penalties. These penalties diminish over time so it is rational to expect that with a fixed rate loan comes a longer hold period. 

Underwriting

Every business plan is based on practical and economic assumptions. How many units will turn over (tenant trade-out) in a given period? By what percentage will expenses rise from year to year? What about rent increase percentages and vacancy percentages? All these inputs affect the financial results. How certain are you of what these assumptions should be?We function in a syndicate of about 600 GPs across the country that use a central underwriting platform known as the Brad Sumrok Apartment Investor Mastery Network. The founder, Brad Sumrok, has built a common underwriting criteria and methodology plus a network of underwriting coaches that review all of our offerings prior to releasing them to any investors. The criteria is embedded in the Property Analyzer Spreadsheet, a multi-tabbed spreadsheet that allows every deal to be measured consistently against all other opportunities in the Sumrok universe. Once two or more coaches approve the underwriting the opportunity is available for release to all Sumrok subscribers for investment.

Reporting 

What is your personal need for time-sensitive data? We believe periodic financial reporting is essential. It may surprise you to learn that sponsors vary widely on this tenet. Know the reporting characteristics of a sponsor before you commit: not only their named objectives, but find out what their reporting "habits" have been by chatting with previous investors. If they claim to be unable to refer any previous or current investors for you to vet, consider eliminating that sponsor from your list.