005: The GOLDEN Rule of Syndication Investments
Today, we're going to talk about how to evaluate a syndicated deal.
When I started out, I got this more wrong than anything else. Being an engineer by trade, I love numbers and would go straight to evaluating deals based on them. I would look at the pro forma which explains the sponsor's expectations for the deal. I'd pay a little attention to the sponsor's track record. If everything looked good, I would invest. But over time, I realized I had much of it backwards.
The Golden Rule of Syndications
The most important lesson I've learned is that there is no such thing as a good deal with a bad sponsor.
The Three Essential Questions
Are they good human beings?
To determine this, you need to get to know the sponsor. Remember, there are no good deals with a bad sponsor.
Do they know what they're doing?
Some jump to this question, overlooking the importance of the sponsor's character. It's essential to understand both their expertise and their ethics.
Is it a good deal?
This was always my starting point, but it should be the last question you ask.
If the answer to any of these questions is "no", pass on the deal. Why? Because of the silver rule of syndicated investing: there are always more deals and more sponsors. Don't fall in love with a deal, as it won't love you back.
Evaluating the Sponsor
Are they good human beings?
Think of your relationship with the sponsor as a long-term commitment, similar to a marriage. With most deals lasting around five years (or even up to 10), there are high chances things could go sideways.
For instance, I invested in many deals a few years ago that experienced the challenges of COVID-19. With eviction moratoriums in place, sponsors had to handle situations ethically, treating both tenants and investors right.
To trust a sponsor:
Ensure you have substantial history with them.
Research their past involvements online.
Talk to their past investors.
Research their historic properties.
Check their social media presence.
Engage in online communities, such as BiggerPockets, for word-of-mouth feedback.
Do they know what they're doing?
Analyze their historic performance. Ensure it aligns with the pro forma of the current deal. Discuss any discrepancies or improvements. Understand their past challenges and how they overcame them. Make sure they can explain every aspect of the deal, from assumptions about cap rates and rent growth to their plans for handling debt.
Evaluating the Deal
This is my favorite part. Before diving deep into the details:
Determine your investment goal. Are you seeking high cash flow or long-term growth?
Understand the tax implications. Are there benefits like bonus depreciation that can offset other passive income?
Consider the velocity of money. How quickly will you receive returns on your initial investment?
Evaluate the asset type and location. Consider diversifying your portfolio across different cities or asset types.
Understand the value addition strategy. Is it an institutional deal that may attract larger players like REITs?
