“How do I find a deal to invest in?” is the wrong question to ask. The right question is, “How do I find a good sponsor to invest with?”
By Patrick Grimes
A perennial question that’s on the minds of both novice and experienced passive investors:
“What’s more important, the property offered or the deal sponsor?”
Answering this question is undoubtedly essential.
After all, as a passive investor, you want to focus as little of your time and energy on the process of investing in commercial real estate as possible. You want to direct your resources toward the things which help you make the safest, most profitable decisions when it comes time to invest.
Finding a great deal sponsor is critical if you want to become a successful passive investor. With this in mind, here are what I consider to be the essential steps in locating the ideal syndicator, someone with whom you can partner to create more wealth with less stress.
Deal Maker or Deal Breaker?
At the 2020 Masters Golf tournament in Augusta, Georgia, John Rahm pulled off what is arguably the most incredible golf shot of all time.
During practice rounds, on the challenging 16th hole, golfers traditionally attempt shots that skipped the ball across the water, as if they were skimming rocks.
Rahm decided to use the pond to his advantage instead, hitting his shot off the water and into the cup for a hole-in-one that left fans slack-jawed.
The shot video quickly went viral and, for a few days, Rahm was an international hero.
It would have been even more poetic had Rahm gone on to win the coveted green Masters jacket. Instead, the honor went to Dustin Johnson. Still, Rahm got more than his fifteen minutes of fame, shifting fan perceptions of his abilities as a professional.
The reason I bring this up is that just because a syndicator hits a lucky shot or two does not mean that he or she has the chops needed to pull off long-term relationships with investors.
When considering a syndicator, many people tend to focus ONLY on the record of success. That is a massive chunk of the puzzle, to be sure. But, you need to be careful when evaluating what is essentially a sponsor’s glossy PR brochure.
As a passive investor, you do not need to become an expert in a particular asset class or investment. However, it’s easy to become starry-eyed and distracted when you see impressive ROI or split.
As a passive investor, you are, in essence, “hiring” the deal sponsor. A little cynicism, some reading between the lines, and a few key questions are in order if you want to avoid hooking up with the wrong kind of syndicator.
In future articles, I will help you discover which questions you should ask when interviewing a potential syndicator and how to interpret their responses relative to your personality, needs, and goals.
Hey there, you’re an all-star- I guarantee that behind every great syndicator is an even more outstanding team. The deal sponsor is the quarterback, with the intelligence and insights needed to assemble a remarkable group to execute their vision.
Like a quarterback, the sponsor must possess the confidence, drive, and emotional intelligence necessary to locate and motivate people critical to the process. These key team members include property managers, advisory and board members, attorneys, lenders, accountants, cost segregation specialists, etc.
The deal syndicator should also have a top-notch team of experts in marketing, collateral production, video, social media, and other areas of promotion and marketing. Having these highly-trained people available ensures that the project can compete for the highest quality occupants.
“All Hat and No Cattle?”
I have some projects in Texas, so I have had to learn a little Texan. One of my favorite Texas sayings is, “That person is all hat and no cattle.” It’s a colorful way of saying that some people are very good at talking themselves up, but they have little to no substance when the hype and fluff blow away.
Anyone can learn a bit of intelligent-sounding real estate jargon and pull off a decent speech at an event or online presentation. It’s easy to put up some math charts covered with equations and statistics and blind the crowd with data.
As a passive investor, you need to know that your syndicator has absolute mastery of every facet of a deal. While they may not know the answers to every question you pose, they do need in-depth knowledge of the market, the financing, risks, and deal structure.
Passive investors should focus on assessing the deal sponsor’s knowledge. For example, you want to know what they find most attractive about the project. What concerns does your sponsor have, and how will they deal with risks? Do they have strong relationships with other syndicators, property management companies, community agencies, contractors, and other key players? Is your potential syndicator a Lone Ranger, or will they have help if a deal starts going sideways? What is their online reputation?
You must know that your syndicator is on top of things and can safeguard your money as much as possible.
Character counts in the multifamily syndication space.
That’s because, even with as much documentation, records, and oversight as there is in a syndication deal, it takes integrity and trustworthiness to ensure the best outcome.
If your syndicator is motivated by their bottom line more than they are by investor returns, if they lack long term plans or are not transparent, you could find yourself on the losing end of a deal. This area is where you have to trust your gut and ask probing questions if you feel that something about the project is off.
Is this the kind of person with whom you want to go into business? Most importantly, do you feel your potential syndicator respects you and the other investors?
Experienced or not, impressive record of success or not, you won’t enjoy the investing experience if your syndicator is off-putting, self-centered, and not geared toward helping you become the best passive investor you can be.
Choose your sponsor the way you’d hire an employee or find a business partner. They must a trusted expert who is smart enough to know what they don’t know, filling in any gaps with a motivated, creative, and brilliant team.
Your deal sponsor must be someone you know, like, and trust as a human being. They should be forthcoming with their concerns about any project they are promoting and promptly and thoroughly answer all your questions.
In future articles, I will discuss specific questions you can ask when evaluating a deal sponsor. Don’t miss future articles, videos, and webinars. If you haven’t done so opt-in now and get a free copy of my latest report by going here:
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Patrick Grimes is a design engineer and CEO and Founder of Invest on Main Street, LLC. His real estate holdings include general partner ownership of a multifamily and single-family real estate portfolio valued over $146M, including 1,950+ units across the southeastern United States and Texas.
He has been active in real estate investment since 2007, including purchasing land and distressed assets, renovating them, and stabilizing them for long-term cash flow. To scale his real estate portfolio, Patrick moved from single-family to multifamily investing and founded Invest on Main Street, a private equity firm specializing in multifamily value-add projects in emerging markets.