Real estate syndication projects are gaining popularity thanks to their high yield potential, mitigated risk, and passive returns for investors. But how do you evaluate a real estate syndication deal to ensure a smart investment?
This article will give you a simple four-step outline for analyzing syndication opportunities. We’ll also list some red flags to watch out for when choosing a syndication project. But first, we should explain what a syndication deal is to make sure we’re on the same page.
What is a Real Estate Syndication Deal?
A real estate syndication deal is a real estate-related project that is crowdfunded by investors who all join the syndicate sponsor as members of the entity that owns the property.
For example, you might find a multi-family development syndication deal that allows you to pool funds with other investors to finance a new construction apartment building. Upon placing your investment with the sponsor, you would become a member of the trust or LLC that owns the project. The sponsor would handle every detail from acquisition to construction to resale, and you would share in the profits!
How to Evaluate a Real Estate Syndication Deal - Step by Step
To make sure you’re investing in sound deals, follow this simple real estate syndication evaluation plan.
Step 1: Consider the Syndication Sponsor
Since the sponsor handles all the details on your behalf, it’s important to join a sponsor you trust. When choosing a real estate syndication and crowdfunding service, consider the following key factors:
Does the sponsor have a proven track record of success? How long have they been in business (keeping in mind that syndication opportunities have only been approved for public offering since the mid-2010s)? How have their projects performed? While past performance doesn’t guarantee future success, it is a good indicator of a solid business operation.
Is their current investment strategy sound? Since markets are always changing, you need to make sure the sponsor’s strategy is working with today’s market conditions.
Does the sponsor offer transparent financial projections? You can’t properly evaluate a syndication deal without access to detailed financial estimates.
Is the fee structure clear? You should be able to see how much the loan fees, upfront construction fees, and sponsor service fees will cost.
We provide details on the financial performance of every deal we’ve completed. So you can see how much our investors have earned on each project. We also provide detailed financial projections, complete with clear fees, for each of our syndication opportunities, so you can make informed investment decisions!
Our strategy is continually evolving to capitalize on changing market conditions. You can explore our blog for current market insights and to get a behind-the-scenes look at our game plan.
Step 2: Check the Investor Requirements
Each syndication project will have certain investor requirements. Here’s what you need to consider:
Do you need to be an accredited investor? SEC requirements reserve many syndication opportunities for accredited investors. This means you would need to meet income or net worth criteria to place an investment in the deal.
Can you meet the minimum investment requirement? Because syndication deals pool funds from multiple investors, the investment minimums are much lower than the cost of investing alone. But you’ll still need $10,000 - $50,000 to invest in a quality syndication deal. If this doesn’t work for your current budget, check out How to Start Investing in Real Estate on Any Budget.
Can you commit to the project’s timeline? Certain syndication projects, like house flips and small multi-family developments can be shorter-term than traditional real estate investments, often only taking 6-24 months. Syndication deals typically require investors to commit to the full project timeline.
Step 3: Understand the Deal Structure
One of the biggest benefits of syndication projects is the stable structure. But it’s important to make sure your chosen deal lines up with your expectations of a syndication structure.
Is the deal equity-based or debt-based? Equity-based deals treat you as an owner, giving you equity in the project and the right to share in the profits generated by the project. Debt-based deals treat you as a lender; you loan money to the project for a set rate of return. Equity deals are generally more lucrative than debt deals.
How is ownership held? A stable syndication deal should be held by a trust or LLC in which the sponsor is the general partner (GP), and the investors are limited partners (LPs). The GP manages the project, but all partners are entitled to a share of the proceeds.
Step 4: Analyze Key Financial Metrics
To evaluate the potential of a real estate syndication deal, you need to review a few investment metrics, the most important of which are the profitability calculations.
Annualized ROI. Annualized ROI presents ROI for a 12-month period. For example, if an 18-month project returns an ROI of 18%, it has an average return of 1% per month, which equals 12% for 12 months. This calculation is useful when comparing investments with different time frames.
Gatsby provides an ROI calculator on each of our investment opportunity pages so you can see how much you stand to make on any investment, based on the amount you invest. Here is an example from a current multi-family development:
Red Flags in Real Estate Syndication Deals
When evaluating real estate syndication deals, pay attention to potential red flags, like:
Lack of transparency. A syndication sponsor who does not share detailed information about their projects could be trying to hide something.
Brand new syndication sponsors. It’s generally better to work with a sponsor who has a solid track record than with an unproven sponsor.
Poor communication. If the sponsor doesn’t communicate with you clearly and promptly when trying to earn your investment, they aren’t likely to communicate well once you’re invested.
Lack of financial oversight. Oversight is critical for financial accountability. If your sponsor isn’t registered with the SEC, you may want to go to a sponsor who is.
Invest in Real Estate Syndication with Gatsby Investment
Gatsby Investment is a California-based syndication sponsor with a proven track record of successful deals with high returns.
When you’re ready to invest in real estate syndication, explore Gatsby’s real estate investment opportunities to find the deal that meets your financial goals!
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