Being a passive investor is a fantastic way to learn the real estate game and earn while minimizing your risk of making mistakes as the lead on a deal. If I could've gone back to 2012 when I first started investing, I wish I would've known about passive investing.
Its August of 2020, we're facing a pandemic, social reform, 10%+ unemployment, and national spending that is surreal. Navigating the real estate market and investing in general will be tricky and challenging to say the least.
From a passive investor perspective the most important thing you can do right now is to thoroughly vet and qualify your deal sponsor. The deal “Sponsor”/ “General partner"/ “Operator”/”Syndicator” is the one who assembles the team to develop the business plan, analyze the market, secure financing, acquire the deal and execute the plan to create a performing asset to achieve your expected returns.
Here are 8 questions you should be asking the Sponsor to make sure that they're the real deal and will take care of your money.
#1 Who's on the team? What is each person's roll on the team?
This is such a valuable question because you want to make sure there isn't a single point of failure on an investment. If it's a one-man show that can lead to a lot of potential points of failure (market research, broker relations, acquisitions, closing, customer relations,operations, property management, etc). The bigger the deal the harder it will be for that single person to manage, one man teams are a red flag. When working on bigger commercial deals it's very common to have teams of 3 to 5 where members divide and conquer the due diligence, acquisitions, operations, sales/investor relations. You want to learn as much as you can about each team member and their experiences that will allow them to perform in their specific role.
#2 Why should I invest with your company when there are other sponsors?
This gives the sponsor an opportunity to build trust and rapport with you, you want to understand what their story is, feel comfortable with the team and have confidence in their company. This is also an opportunity where you can see how transparent, trustworthy, and committed they are to creating value for you! For the most part the sponsor will be biased towards their own capacity and company but it still gives you a chance to better understand who you're investing with!
#3 Track record? Have they gone full cycle?
Track record is key - has the deal sponsor fully taken a project from beginning stages to a sale and made a profit for everyone. That means they’ll have a solid understanding of the entire project life-cycle for this next investment. If they have a bunch of projects mid cycle - you can ask to see the progress (quarterly reports) that has been made towards increasing the net operating income or decreasing expenses to date.
#4 Do they have skin in the game?
Are they personally invested and how much did they invest? You want to know that their compensation is based on performance. You want to make sure the sponsor is putting up money for some of the acquisition costs and ideally they're investing along side of you in the project. If they've put their money in the project that means they believe in it and that's the type of deal that you wanna invest in as well.
Potential warning signs:
High management fees >2%
High acquisition fees >3%
Using their acquisition fees or management fees as their buy in.
#5 Do they have friends/family who've invested in the opportunities?
You want to invest with someone who cares about relationships and their reputation as value creators for their investors. If their family and long term friendships are invested in the projects that's usually a good sign. It's a vote of confidence that the people they are closest with believe in them to grow their hard earned capital. Usually deal sponsors start off with friends and family as Investors, if they're not invested in the project you'd want to ask why they haven't tapped their community first.
#6 What percent of their investors are repeat?
I really love this question because it's an indicator of how the sponsor handles the project and communicates with his clients. If there is a high percentage of people who want to roll over their profits from a previous investment that's a really good sign. Usually people want to stick with a good thing and if you have a ton of repeat investors they were incredibly satisfied with the previous projects and trust in the sponsor to do the right thing.
#7 Have they invested in this asset class?
Sometimes this may be assumed, but if it's a newer sponsor knowing that they've invested in this type of asset class is reassuring because there's nothing like hands-on experience to forecast potential unknown expenses. If they are in too many different asset classes this could be a red flag because their focus may not be on perfecting this particular type of investment.
#8 Value Alignment?
This one is a little underrated but when you invest with some one on their project this is a relationship and a partnership in a sense. It’s so important that their values align with yours so that you know how they will respond if they meet challenges or difficulties. If you're investing with them on larger commercial deals typically the project last 5 to 7 years, which means you're going to have to enjoy your time with that individual over a period of time. It's so much easier to work with somebody when you like who they are as a person and know what they represent as individuals.
Conclusion
There are so many benefits towards investing passively with vetted and experience deal sponsors!
Learn how the sponsor operates
Learn their investment techniques & strategy
Forge relationships and alliances for the future
Make money without all the stress
Just make sure you're asking the right questions so you can have the confidence that you invested your with the right team to help your money grow!