Track Record
-Does the Sponsor have a proven track record? Ask the Sponsor to provide you with past investment performance. Remember, past performance does not dictate future success. However, having someone with experience who has been successful in the past is a positive sign. Note: If a Sponsor tells you that they cannot provide you with any information on past performance that is a sign! Transparency, communication and trust are key! Know who you are investing with. Anyone can make the numbers on an excel spreadsheet or a PowerPoint presentation look great, the real key is who the person executing on the business plan is. Always do your due diligence on the Sponsor and key operators of a deal.
-What if this is the Sponsors first deal? This is not necessarily a deal breaker but here are a few things to look for if this is the case.
1.) Are there other people on the Sponsors team that does have Multifamily experience and if so, what is the source of that experience? Experience can come in many forms. Passively, raising money, putting up earnest money and/or due diligence funds, signing on the loan. However, the real source of where you want to see that someone in the deal has experience is in operating a Multifamily property of about the same size and scope as the subject property. There is a huge difference between owning a 15 unit Multifamily that is turnkey in a A class neighborhood vs. a 120 unit Multifamily that needs $10k/door in rehab and in a C class neighborhood. Make sure the experience level lines up with the deal.
2.) Does the group have an Advisory board and if so, who are they? This is not necessarily the best option but if there is experience on the Advisory board in the form of mentorship, it is better than having a first timer Sponsor with no guidance.
3.) What is your level of trust with this person and how well do you know them? Regardless of these factors, if you do decide to move forward with a first time deal Sponsor it is highly suggested you invest the minimum amount to start until the Sponsor gains your full trust and proves that he/she knows what they are doing.
Team
-Here are some important team members and their roles:
-Property Management – By far one of the most important roles on the team. Property management is the team who executes the business plan and either guides it to success or inevitably steers it to failure. Be sure to do your due diligence on the property management team that has been selected to run the subject property. More on property management later.
-Contractors – There are times when the property management company will have an in house team who does all of the rehab but this is another extremely important team member who will help in executing the business plan.
-SEC Attorney – This is the attorney that will be drafting up all of the documents including the operating and subscription agreements and most importantly the Private Placement Memorandum (PPM).
-Commercial Lender – Responsible for the lending activities in banks, credit unions and other financial institutions. Sometimes referred to as commercial loan officers, these banking professionals work almost exclusively with businesses, reviewing the very complex financial activities of these lending applicants. In many cases they also serve as an advisor to the Sponsor.
-Please note that due diligence on all of these team members may not be necessary, as the Sponsor needs to have these people on his/her team and needs to be able to explain who they are.
Due Diligence
-For one reason or another, passive investors tend to shy away from requiring the person who is going to handle their money for the next 3-7 years to tell them who they really are. Why?!?! This is your hard earned money we are talking about here, you have every right to perform due diligence and request for references and a background check. Remember, once you build trust with this Sponsor this becomes less and less a requirement, always remember to trust but verify.
Communication
-As I mentioned earlier, communication is key. Here are just a few of the questions you should be asking yourself as it relates to communication.
-Does the Sponsor take several days or longer to get back to you? Or maybe they don’t get back to you at all?
-Do they answer your questions with full transparency or are they beating around the bush?
-Do they know the answers to the majority of your questions? Does it sound like they know what they are talking about?
-These are all signs and if this is how they present themselves before they have your money, you can bet that it will be the same or even worse after. Make sure you are receiving the kind of communication that you expect and that the Sponsor knows what they are talking about.
-Investing in real estate is not difficult. And you can build great wealth with it as a vehicle. However, you need to be educated and prepared just like you would with any other investment. Otherwise, it is just speculation and gambling. And when you play that game the house always wins!
Key Takeaways
-Be sure you know who are you investing with
-Be sure the Sponsor has a solid and trustworthy team with a positive track record
-Be sure your goals align with both the Sponsors and the investment itself
-Educate yourself
-Do your own due diligence, trust but verify!
