Learn how to evaluate sponsors for success.
Are you looking to broaden your investment horizons and boost your returns?
Commercial real estate could be the perfect addition to your portfolio. With its distinctive features and the potential for significant profits, commercial real estate offers an exciting opportunity to diversify your investments and reach your financial objectives.
But before you jump in, it’s important to equip yourself with some essential knowledge. You’ll want to familiarize yourself with the various types of opportunities in the commercial real estate market, discover effective ways to identify them and , most importantly, learn how to thoroughly evaluate them. This way, you can ensure your investments are in line with your financial goals and make informed decisions that pave the way for your success.
Types of Commercial Real Estate Partners
The first step in your quest for successful commercial real estate investment deals should be to understand the different roles:
Passive Investor or Limited Partner (LP). In real estate syndications, the LP funds a portion of the equity investment but does not actively manage the properties or deals. The LP’s liability is limited to the extent of their share of ownership.
Active Investor or General Partner (GP). The GP is a managing partner with unlimited liability who is active in the day-to-day operations of the business. In real estate syndications, the GP is also referred to as the sponsor or syndicator.
Identifying Potential Sponsors
Before you begin your search for potential sponsors, you must understand your personal goals and values. That way, you can create a list of potential sponsors that align with them.
Fortunately, there are many ways to compile a prospective list, including online platforms where you can research multiple companies and deals (e.g., Fundrise to LinkedIn).
Nothing beats in-person events as a way to secure recommendations from other investors, gain access to a variety of CRE sponsors and their deals, and quickly determine who makes it to your list and who doesn’t.
Building Your Process: Be Consistent and Thorough
Once you’ve compiled your list, do your due diligence and start interviewing. As a passive investor, it’s essential to develop a systematic approach and to take notes so you’re evaluating sponsors consistently.
- Start with open-ended questions. Ask potential sponsors about their best deal or a deal that went wrong.
- Ask for their mission, values, and vision. Make sure they align with yours.
- Review their portfolio. Analyze their past projects to assess their track record.
- Compare returns. How do their projected returns compare with the actual results from previous deals?
- Get referrals. Ask for referrals from other investors who have worked with them.
- Understand their communication plan/policy. How often do they communicate? Do they share financials regularly? How do they share good and bad news?
- Understand their process for due diligence. What is their process for conducting property due diligence?
- Make sure they’re covered. Do they have title insurance, property insurance, personal liability, and key person insurance?
Navigating the real estate market as a passive investor starts with choosing the right sponsor who aligns with your investment goals. Finding them requires a little time and effort. But if you leverage online resources, attend events, and develop a methodical approach to evaluating them, you’ll quickly find the right sponsors to help you grow your portfolio and wealth.
Attend the 2024 Best Ever Conference April 9-12 to get access to a multitude of sponsors representing diverse asset classes and sharing never-before-seen deals in a pressure-free (and fun!) environment.