Part 4 – How to Evaluate a Deal
So far in our series, Passive Investing Made Simple, you’ve learned a few definitions and key concepts, the framework for a typical deal structure, what to look for in a sponsorship team and how to evaluate a deal. These articles should have provided the framework to find a deal that meets your investment goals. But what happens once you find a deal that you would like to invest in? Part 5 of our series is going to help you understand what to expect once you decide to passively invest in a real estate syndication.
Many specifics related to the investment process will vary from sponsor to sponsor and deal to deal, but the process will generally follow these milestones.
Step 1 – Outreach period
Once a sponsor has a deal under contract that they plan to open to investors, they will begin reaching out to their network. If you are already in their investor database, you may receive an email, text or phone call to let you know that they have an investment opportunity available. During this initial period, sponsors will usually be available to discuss the specifics of the deal and answer any questions that you may have. They may put together a summary of the deal or host a webinar to share the highlights and try to gauge interest.
Step 2 – Soft commitment period
Once the opportunity has been shared, sponsors will start to accept soft commitments to get a feel for who is interested and the amount of capital they are looking to invest. It is good to be transparent with your sponsor and let them understand how likely you are to invest, but there is no binding commitment at this point.
Step 3 – Send out investor documents
During the soft commitment period, the legal team will begin to prepare the Private Placement Memorandum (PPM) and any other subscription documents. The PPM will lay out all the ins and outs of the investment and will serve as the contract that you will need to agree to in order to reserve your spot in the deal. I recommend that you have a lawyer review these documents with you unless you have experience reviewing legal agreements yourself.
Step 4 – Wire the funds
Once you sign the necessary documents, you will be given instructions on where to send your wire transfer. This wire transfer will solidify your investment in the deal. Most sponsors will not consider your equity locked in until these funds are transferred, so make sure to do this in a timely manner once you decide to invest. If you are using a retirement account, there may be a waiting period, so talk to your custodian and the sponsorship team to make sure the timing will work for all parties.
Step 5 – Close on the property
Though not always the case, generally the closing will occur after the deal is fully subscribed. As with any real estate deal, you can never be certain that a deal will go through until closing. There are a lot of pieces that need to fall into place to close on an apartment community and occasionally a deal falls through right before it gets to the finish line. Though nobody wants to be in this situation, fortunately for the Limited Partners, all capital will be wired back to the passive investors and you can begin to search for another investment opportunity. This is very rare, but I want you to understand that it is a possibility.
Step 6 – Regular communication
Congratulations! Once the property closes, you now have ownership in real property. You should now expect to see regular communication from the sponsorship team, generally quarterly or sometimes monthly, depending on the deal and the team. If the communication level is important to you, make sure you discuss this with the sponsorship team before you invest.
Step 7 – Regular disbursements
Many times, a deal will provide quarterly cashflow disbursements, though some deliver monthly disbursements. How and when these occur should be made clearly stated in the investor documents that you will review prior to commitment.
Step 8 – Disposition
The business plan for most real estate syndications will indicate a hold period that ranges from 3 to 7 years. Once the property has been stabilized, NOI has been increased, the value has been driven up, and you’ve reached the end of the business plan, it’s time to sell the property. For most deals, this is when investors can expect to receive the bulk of their returns. Once the sale is finalized, you will receive your final distribution and your involvement in the property will be complete.
Hopefully you now have a good understanding of what to expect as a passive investor in a real estate syndication. If this seems like something you are interested in, it is time to take action. An old Chinese proverb states that “’The best time to plant a tree was 20 years ago. The second best time is now.” It’s never too late to start your journey to financial freedom.
If you’re interested in learning more about anything we’ve covered or would like to get to know what we are up to at Gold Ribbon Investments, visit https://goldribboninvestments.com/ to read about our mission and what we do, and schedule an introduction call to determine if we can help you on the road to financial freedom. You and your loved ones deserve a life filled with Freedom, Wealth and Impact and real estate investing is a great vehicle to help you get there.
Adam Lacey
Managing Member at Gold Ribbon Investments
