So far in our series, Passive Investing Made Simple, you’ve learned a few definitions and key concepts, as well as the framework for a typical deal structure. Part 3 of our series is going to help you determine what to look for in a sponsor and where to find them.
There are many traits and skills that can be helpful to have on a sponsorship team, but there are a few important things that are critical to consider before investing with a sponsor (or GP).
The first thing to consider when evaluating a sponsorship team is their track record. Have they done deals before? Have they done deals that are similar in size and business plan? It is important that the sponsorship team that you invest with has experience doing deals similar to the current opportunity. If you plan to invest in an apartment community, for example, it is important to make sure that the team has experience acquiring apartments, overseeing rehab work, and managing similar assets. Now, it is not necessary that everyone on the team has experience in all facets of the business, but investing with a team that has a track record of success is a great way to protect your investment.
In addition to having a track record in a particular asset class, it is also important that the team has an intimate knowledge of the market. Real estate trends vary from market to market and even sub-market to sub-market. Therefore, having a sponsor that understands the ins and outs of a particular sub-market is crucial to being able to properly analyze an investment opportunity in that market. Understanding a sponsor’s knowledge of a particular market can be difficult to fully understand from afar, so be sure to ask the sponsor questions to test his or her knowledge of the market. You might ask if they have done deals in the area before or if somebody on the team lives nearby. You might ask why they like that particular market and what the economic outlook is in the area for the next ten years. Is population expected in increase? Do they expect additional jobs added to the area? Are there new businesses moving to town? Are there nearby colleges or hospitals that will provide steady demand for renters? These are just a few of the many questions that you can ask to help understand the sponsor’s knowledge of the market and determine if it is a market that you would like to invest in.
In addition to being familiar with economic drivers such as population growth, job growth…etc, you should determine how the sponsorship team will operate the business. If they plan to hire a third-party property manager, find out if they have worked with the identified property manager before or why they decided to add them to the team. You may want to ask similar questions about maintenance personnel and onsite property management as well. These members of the team are going to be the boots on the ground for a property and play an integral role in the performance of the property.
Understanding the sponsorship team’s track record and market knowledge are important factors, but perhaps the most important factor in identifying a sponsor to invest with is whether or not you trust them. This is a very subjective and unquantifiable factor, but one I can not stress the importance of enough. Most syndications are going to have a projected 3-to-10-year business plan, so it is important to invest with a sponsor that you feel comfortable partnering with for the long haul. The sponsorship team is going to be operating the business throughout the highs and the lows of the business plan. They will be making decisions on a regular basis that will affect the performance of the property and in turn, your return on investment. Everything will not go according to the initial plan, so you should feel comfortable that your sponsor will have your back and do what it takes to maximize your returns. Developing trust with a sponsor can be a difficult and time-consuming task, so spend time getting to know them. You can do this through email or phone communication, reading their articles or books, listening to podcasts, attending the same meetups or any other way that you can gain exposure and comfort with them.
So now that you know what to look for, where do you find these trustworthy sponsors working with experienced teams that have intimate knowledge of their markets? Fortunately, with the widespread use of the internet and insurgence of virtual platforms, it is easier now than ever. Meeting them in person at a local real estate meetup is still probably the best way to get to know a sponsor, but these days you can get exposure without even leaving your house. Many of these real estate investors have blogs, virtual meetups, and podcasts that you can use as a tool to get to know them. I suggest spending time researching a variety of sponsors to get a feel for a few that you think you would like to partner with. Find out who they are, their strategy, their values, and once you have identified them as a potential partner, reach out to them. You should be able to get in contact with most sponsors through their website or email address. I suggest you reach out and have an introductory call just to get to know them. For many investment opportunities, it is required by the SEC that you have a pre-existing relationship with your investors, so sponsors are usually more than happy to schedule a call with you to develop those relationships.
There are many sponsors out there and even more investment opportunities. Make sure that the team you invest your capital with is experienced, knowledgeable, and trustworthy. These factors can help mitigate risk and put your investments on track to success.
We hope you have enjoyed this article. In Part 4 of our Passive Investing Made Simple series, we will discuss how to evaluate a deal as a passive investor.
If you’ve found this helpful, visit https://goldribboninvestments.com/ to learn more about how we help others invest in real estate without the headaches of becoming a landlord. We genuinely hope you start your journey for financial freedom today. You and your family deserve to live a life that provides unlimited amounts of joy, and real estate can help you get there if you take action. Your dreams can be your reality. Don’t let the opportunity pass you by.
Adam Lacey
Managing Member at Gold Ribbon Investments
