January 7


49+ Questions When Investing in Real Estate Syndication

The process for investing in a syndication is simple. As a passive investor, the most important phase of your investment is the due diligence phase. It’s the time spent upfront getting to know the deal sponsor, team, market, and of course the deal itself. This process doesn’t need to be overwhelming, rather it’s a process of discovery.

This list is a guide of questions you’ll answer yourself in the discovery process and through speaking with the operator.

You’ll find the answers on the sponsors website, in the marketing materials and in the investment summary. This process will prepare you for your Due Diligence(s) where you’ll be able to cover all the questions you have remaining, saving some of the best for that personalized 1-1 conversation.

Remember, this process is exciting. As you’re discovering the right deals to invest in for your financial independence and freedom! What’s more fun than that?

Top 10 Key Due Diligence Questions:

  1. Who are the lead sponsors and what is their track record?

I’d highlight the importance of having experienced and reliable sponsors leading the syndication. You’ll want to look into their previous track record, the number of successful deals they’ve closed, the returns they’ve generated, and their experience with the type of property you’re looking at. If they’ve had consistent successes and have shown a capacity for effective management and problem-solving, they’re more likely to navigate potential challenges successfully.

  1. What is the overall business plan and how will you effectively implement it?

The business plan should be clear, specific, and realistic. It needs to articulate the strategy for acquiring the property, managing it, and eventually selling it. You should understand how they intend to add value to the property and how that aligns with the current market trends. If their plan involves substantial renovation or changes in property management, ask how they plan to implement those changes and manage associated risks.

  1. What are the projected returns to investors and how is the management team compensated?

Projected returns are critical to understand and should align with the level of risk in the investment. You also need to understand how the management team is compensated. Is their compensation tied to performance, ensuring that their interests align with yours?

  1. What is the biggest project risk and how will they be mitigated?

Every investment carries risk. A trustworthy sponsor should openly discuss the risks of the project and have a plan to mitigate them. This may include things like unexpected renovation costs, fluctuations in the market, or potential vacancies.

  1. What is the projected hold time and what are the terms on the loan?

Understanding the timeline for your investment return is crucial. Typically, a syndication deal might range between 5-10 years. Furthermore, understanding the loan terms is important as it affects the cash flow and return on investment.

  1. What are the key metrics of the market and submarket, and why did you select it?

Understanding why a particular market was chosen is crucial. Key metrics to consider include job growth, population growth, and other indicators of a strong and growing market. A good sponsor should provide you with these data points and explain why they believe in the potential of this market.

  1. Who will be managing the property and what is their track record?

Property management can make or break your investment. Ask about who will be handling the day-to-day operations, their experience, how they handle vacancies, maintenance, and tenant issues.

  1. What are your assumptions that went into your underwriting and business plan?

This will give you an idea of how conservative or aggressive the sponsors are. Pay attention to their projected growth rates, expense ratios, and exit cap rates.

  1. What would be any reasons someone wouldn’t want to invest in this deal?

This question can help highlight any potential red flags that haven’t been discussed. The sponsor’s response will give you insight into their transparency and ability to assess the investment critically.

  1. Why do you think this is a great deal?

The answer should tie together all aspects of the deal: the property, the market, the plan, and the team. Their conviction can give you confidence, but it should be backed by hard data and a sound strategy.

Questions To Ask The Sponsor Team

  1. Who are the lead sponsors?

Consider the lead sponsors’ reputation, track record, and their expertise in managing the type of property under consideration. You should evaluate their overall business acumen and their ability to operate successfully in different market conditions.

  1. What are their roles and responsibilities?

The roles of the sponsors usually involve identifying the property, raising capital, securing financing, managing the property, and eventually coordinating its sale. Understanding their specific roles can provide insights into their expertise and how they contribute to the syndicate’s success.

  1. How long have the sponsors known each other?

Long-term relationships can imply trust, rapport, and better coordination among the sponsors, potentially leading to more efficient decision-making. However, new teams can bring together complementary skill sets and fresh perspectives.

  1. Have they done a deal together?

If they’ve successfully completed deals together, it indicates that they can work well as a team, manage conflicts, and navigate through the challenges that inevitably arise during real estate projects.

  1. What is the sponsorship team’s track record?

Assess their past performance, including returns generated, consistency of success, management of any problem situations, and their investors’ feedback.

  1. Are they each investing in the deal?

If the sponsors have personal capital invested in the deal, it can indicate a higher degree of confidence in the project and align their interests with those of the investors.

  1. Who is the Property Manager and how were they selected?

Property managers play a critical role in the day-to-day operation of the property. Understand why they were chosen, their track record, their strategy for managing the property, and their experience with similar properties.

  1. How many units do they manage?

The number of units managed can give you a sense of the scale at which the property manager operates. Make sure they’re not stretched too thin, which could potentially impact the quality of management.

  1. Who will manage the Asset?

Knowing who will be the key decision-maker for the asset is important. They should have a solid understanding of the market, be experienced in managing similar assets, and be readily available to handle any issues that arise. Check on their track record for asset management and their approach towards value creation.

Questions To Ask About The Market

  1. What is the population growth of the MSA (Metropolitan Statistical Area)?

Higher population growth often suggests a strong demand for housing, which could drive rental prices up. Consider whether this growth is due to an increase in job opportunities, improved quality of life, or other factors.

  1. Is there job growth?

Job growth is a key indicator of a healthy real estate market. More jobs mean more potential renters or buyers. Also, consider the types of jobs being added. High-paying jobs could lead to higher rents and home values.

3. What is the median household income? How is it trending?

The median household income of a particular area can indicate the buying power of the local population and thus, the potential rental income you could expect from a property. If the median household income is rising, it could indicate a growing economy and potentially, higher rental rates in the future. Conversely, if it’s falling or stagnant, it could signify economic troubles that could negatively impact rental rates or lead to higher vacancy rates.

4. What is the unemployment rate?

The unemployment rate is a critical indicator of the health of a local economy. High unemployment rates can lead to higher vacancy rates, lower rental rates, and increased risk of non-payment of rent. On the other hand, a low unemployment rate can indicate a robust job market, which can attract more potential renters and justify higher rental rates.

5. Is there economic and industry diversity? Wide range of industries and employers?

Economic diversity is key in evaluating the stability and potential growth of a market. A city or region that relies heavily on a single industry (e.g., auto manufacturing, oil, tourism, etc.) can be risky as it’s more vulnerable to industry-specific downturns. In contrast, a market with a broad mix of industries and employers is more resilient to economic shocks and typically has a healthier and more stable rental market.

Also, the presence of large, stable employers (such as government offices, universities, or hospitals) can provide a steady demand for housing, contributing to a stable rental market. Reviewing this can give you insight into the market’s resilience in the face of economic downturns and its capacity for growth.

6. Wide range of industries and employers

This reinforces the previous point about economic diversity. A single dominant industry could leave the area vulnerable if that industry faces difficulties.

7. Who is the biggest employer in the area?

This information can give you an idea of job stability in the area. If the biggest employer is in a stable industry, it may provide some level of economic stability for the region.

8. Is the crime rate declining or increasing?

The crime rate can directly impact the desirability of an area. If it’s high or increasing, potential tenants or buyers might be deterred. If it’s low or decreasing, the area may be more appealing.

9. What class is the neighborhood?

The neighborhood class (A, B, C, or D) can impact the type of tenants you attract, the amount of rent you can charge, and the potential for appreciation. Make sure this aligns with your overall investment strategy.

10. What are major economic anchors near the asset?

Economic anchors such as universities, hospitals, or major corporations can provide stability to a real estate market. They tend to provide steady employment and can attract a consistent pool of renters.

Questions To Ask About The Property

  1. What year was it built?

The year the property was built can provide information about its condition, the quality and safety of its construction, and the potential for necessary repairs or updates. Older buildings may require more maintenance or have outdated features, whereas newer buildings might command higher rents but also come with higher purchase prices.

  1. How many units?

The number of units in the property can affect its management complexity, potential for income, and appeal to certain types of tenants. Larger buildings can offer economies of scale in property management but might also present greater financial risk.

  1. What is the unit mix? (1, 2, 3 bedroom units)

The mix of units (studios, one-bedroom, two-bedroom, etc.) can influence the demographic appeal of the property. For example, properties with more one-bedroom units might be more appealing to singles or young professionals, while those with more two- or three-bedroom units may attract families.

  1. What class is the property? (Class A, B, C, D or 1-5 Star)

Property class can provide insight into the quality of the building and its potential tenant base. Class A properties are typically newer, high-quality buildings that attract higher-income tenants. Class B and C properties may be older and require more maintenance, but they can offer higher potential returns. Understanding the property class can help you gauge potential risks and returns.

  1. What is the cost per unit?

The cost per unit gives you a way to compare the price of different properties. This number, coupled with understanding of the market and property class, can help you assess whether the property is priced appropriately.

  1. What is the current average rent?

Knowing the current average rent can help you assess the property’s income potential and compare it with other similar properties in the area. This can also provide insight into the property’s performance and the local rental market.

  1. What is the projected average rent?

Projected average rent gives you an idea of the potential income if rents are increased or if improvements are made to the property. Be sure to understand the assumptions behind these projections, and consider whether they are realistic given market conditions.

  1. What is the current occupancy?

Current occupancy rates can tell you about the property’s performance and demand for rental space. A lower occupancy rate could indicate problems with the property or rental market, whereas a high occupancy rate could suggest strong demand.

  1. Why is the owner selling?

Understanding why the owner is selling can provide insight into potential issues with the property or opportunities for improvement.

  1. How does the property compare to others on sale comps?

Sale comps help determine whether the property is priced appropriately compared to similar properties that have recently sold in the same market.

  1. How does the property compare to others on rent comps?

Rent comps can tell you whether the property’s rents are in line with the market, or if there’s potential to increase rents. They can also provide insight into the rental market’s performance and trends.

 Questions To Ask About Financing

  1. What is the loan amount?

Knowing the loan amount gives you an idea of the debt the property will carry. This is important because it affects the cash flow available to investors after loan payments.

  1. What is the amount of capital being raised?
    • How much of that is for down payment?
    • Are you raising enough for CapEx?

The amount of capital being raised gives you an idea of the total equity needed for the project. Understanding how much is being allocated to the down payment versus capital expenditures (CapEx) helps you assess the deal’s financial structure and the planned property improvements.

  1. What is the loan to value (LTV)?

The LTV ratio provides insight into the risk associated with the investment. Higher LTV ratios may indicate higher risk, as they can lead to higher debt payments and leave less room for error in the property’s financial performance.

  1. What is the debt service coverage ratio (DSCR) in year 1?

The DSCR is the ratio of net operating income to debt service. It’s a measure of the cash flow available to pay current debt obligations. A higher ratio indicates a lower risk investment.

  1. Do you have a term sheet?

A term sheet gives the details of the proposed loan, including interest rate, amortization period, loan term, and other important data. This document will help you understand the proposed financing structure and costs.

  1. What kind of loan terms are expected?
    • What type of loan is it? (Agency or Bridge)
    • Is it a recourse loan?
    • Does your lender offer loan extensions? How much do the extensions cost?

These details provide insight into the risk and cost associated with the property’s financing. For instance, a recourse loan would hold the borrower personally liable in the event of default, increasing risk.

  1. What is the CapEx budget and how is it being funded?

The CapEx budget details the funds allocated for major repairs and improvements to the property. It’s crucial for maintaining and enhancing the property’s value. Understanding how it is funded (e.g., through raised capital, operational cash flow, a reserve fund, etc.) helps you assess the deal’s financial health and sustainability.

Additional Questions For Due Diligence

  1. Is there a Financial Audit Report?

A Financial Audit Report provides an independent review of the syndicate’s financial statements. It’s important to ensure the accuracy of the reported financial information and the proper use of funds.

  1. Has the Internal Property Condition Assessment been completed?

An Internal Property Condition Assessment offers insights into the physical condition of the property, including its current state of repair and potential maintenance issues. As an investor, you want to know about any major repairs or upgrades that might be needed.

  1. Has the Lease Audit been completed?

A Lease Audit verifies the accuracy of the rental income reported and ensures that all lease agreements comply with applicable laws and regulations. This audit can help ensure that the income projections are based on solid data.

  1. What does the tenant profile look like?

Understanding the tenant profile, including demographics, income levels, occupation types, and lease lengths, can give you insights into the potential risks and returns of the property.

  1. Is there a Unit Walk Report?

A Unit Walk Report details the condition of each unit in the property. It can help identify any repairs or upgrades needed at the unit level, which can impact the overall investment return.

  1. Is the Site Survey done?

A Site Survey verifies the boundaries, easements, and potential encroachments on the property. It’s crucial to ensure there are no legal issues that could affect the ownership or use of the property.

  1. Has Property Condition Assessment been done?

A Property Condition Assessment is a detailed report on the condition of the property. It covers structural components, roofing, mechanical systems, electrical systems, plumbing, and other aspects of the building.

  1. Has the Environmental Site Assessment been completed?

An Environmental Site Assessment identifies potential or existing environmental contamination liabilities. It’s important to be aware of these liabilities as they could lead to substantial costs and potential legal issues.

  1. Is the Appraisal complete?

An appraisal provides an independent estimate of the property’s market value. This is important for ensuring that the syndicate isn’t overpaying for the property and that the loan-to-value ratio is appropriate.

Questions To Ask About The Investment Summary

  1. How is the deal structured?

This is a fundamental question because it outlines how profits will be shared among the investors and the sponsors. Within this, the specific elements to consider are:

  • Preferred rate: This is a guaranteed return that investors receive before the sponsors start making profits. If a preferred rate is offered, it represents an initial degree of safety for your investment.
  • Tiers of preferred rates: Some syndications may have different levels or tiers, with each tier having a different preferred return rate. Knowing this can help you decide which tier best suits your risk profile and income expectations.
  • Equity split: This represents the proportion of ownership that will be allocated to investors. A larger equity share for investors typically means a larger proportion of the profits.
  1. What is the cash on cash return?

This measures the annual income of the property as a percentage of the amount of cash invested. It’s a crucial metric to understand the property’s income-generating potential and your expected returns.

  1. What is the average annualized return?

This provides an overview of the investment’s profitability over time, and helps compare this opportunity to other potential investments.

  1. What is the IRR (Internal Rate of Return)?

IRR is a measure of the estimated profitability of the potential investment. A higher IRR generally indicates a more profitable investment, all other things being equal.

  1. What is the Equity Multiple?

This number shows how much total cash is returned to investors relative to the total equity invested. It’s a simple way to compare different investment opportunities.

  1. How long is the expected hold?

The hold period is how long the syndicator intends to hold the property before selling it. This impacts when you can expect to get your initial investment back, along with any profits.

  1. Is there a waterfall structure?

A waterfall structure is a method for splitting profits among investors and sponsors that may change as certain return thresholds are met. It’s important to understand how this could affect your return.

  1. Can I invest with my retirement funds?

Some syndications allow investment through self-directed retirement accounts, which can have significant tax advantages.

  1. What is the minimum investment?

This is the smallest amount of money that you can invest in the deal, determining the entry level for potential investors.

  1. What is the maximum investment?

This is relevant if you’re a large investor and want to make sure that the deal can accommodate your investment.

  1. Is there a webinar or pre-recorded presentation?

These can offer more details about the deal and give you a chance to ask questions or clarify any doubts you may have.

  1. What is the soft commit deadline?

This is the deadline by which you need to express initial interest in the deal. Missing this deadline could exclude you from the investment.

  1. When does the deal expect to close?

Knowing the closing date helps you understand when your investment capital will start being put to use.

  1. What is the wiring deadline?

This is the deadline for transferring your funds into the deal. Late transfers might exclude you from participation.

  1. What are my liquidity options?

Liquidity refers to how easily you can sell your stake in the investment. Since real estate syndications are generally not liquid, it’s important to understand if there are any provisions for early exit.

  1. What are the project fees?

These are expenses charged by the syndication, which can impact your returns. The fees could include:

  • Acquisition fees for purchasing the property
  • Asset management fees for ongoing management
  • Fees related to capital events such as refinancing
  • Disposition fees when the property is sold
  • Construction management fees if significant rehab is planned
  1. What is my biggest risk?

Every investment carries risk, and it’s essential to understand what the main risk factors are for this specific deal. For instance, is there a risk of not being able to increase rents as projected, a risk of higher vacancies than expected, or a risk of unexpected expenses or delays in property improvements? How is the sponsor mitigating these risks?

Also, understand the risk in terms of market fluctuations, economic downturns, or changes in interest rates.

Evaluating the biggest risk is about weighing these potential negatives against the positives of projected returns to make a balanced investment decision.

Questions To Ask About The Business Plan

  1. What is the business plan?
    – Is it Value-add?
    – Or is it Yield play?

This can help you understand the syndicate’s strategy. Value-add deals involve improving the property and increasing its value, often through renovations or better management. Yield play deals are more about generating ongoing income, typically from a property that is already in good condition and well-managed.

  1. What are the first 3 things to be done after the close?

The immediate priorities can give you a sense of the current state of the property and the syndicate’s approach to managing it.

  1. How many units are you planning to renovate and why?

Renovations can increase the value of the property and the rent it can command. However, they also involve costs and potential disruptions to rental income.

  1. What are the projected premiums for renovated units?

These are the additional rent the syndicate expects to charge for the renovated units. This can be a major factor in the return on investment.

  1. Are you going to do a Cost Segregation Study?

A Cost Segregation Study can identify assets within the property that can be depreciated more rapidly, potentially providing tax benefits to the investors.

  1. Will you rebrand the property?

Rebranding can help to reposition the property in the market, attracting a different tenant base and potentially commanding higher rents.

  1. Do you plan to refinance the property?

Refinancing can potentially lower the syndicate’s borrowing costs and increase the cash available for distributions to investors.

  1. What % of investor capital would be returned at re-financing?

Refinancing can sometimes allow the syndicate to return some or all of the investors’ capital, while still maintaining control of the property.

  1. What are the CapRate assumptions?

CapRate, or capitalization rate, is a measure of the potential return on a real estate investment. It’s calculated as the net operating income divided by the property’s market value.

  1. What is the Market CapRate?
    – What is going in CapRate?
    – What is exit CapRate assumption?

The Market CapRate is the average CapRate for similar properties in the same market. The “going in” CapRate is the CapRate at the time of purchase, while the exit CapRate is the anticipated CapRate at the time of sale.

  1. How is the property management company vested in the deal?

If the property management company has an equity stake in the deal, they may be more motivated to ensure the property performs well.

  1. What is the marketing plan?

The marketing plan can have a major impact on the property’s ability to attract and retain tenants.

  1. How are you going to advertise this property?

The advertising strategy can be important, particularly for a property that needs to improve its occupancy or change its tenant base.

  1. Are there plans to leverage local societies, clubs or teams to improve visibility and rentals?

Partnerships with local organizations can help to attract tenants and integrate the property into the community.

  1. How are you going to make sure the leasing is up?

A proactive approach to leasing, including prompt responses to inquiries, regular open houses, and effective tenant retention programs, can help to keep the property fully occupied and generating income.

Questions To Ask Yourself About Investor Expectations

  1. What if the distributions are delayed or missed?

Real estate syndications are complex investments and there may be periods when distributions are delayed or missed. It’s important to understand the reasons why this might happen and what the implications are for your investment. It might be due to unexpected expenses, a slowdown in the market, or a variety of other factors.

  1. How are the missed preferred returns made up?

Preferred returns are a feature of many real estate syndications. This is the return that is promised to investors before the syndicate’s sponsors take any profit. If these returns are missed, they are often accrued and paid out once the property is profitable again, or upon sale of the property.

  1. Who can I contact if I have questions?

Most syndications will have a point of contact for investors. This may be a member of the sponsor team or a designated investor relations person. It’s important to know who to reach out to with any questions or concerns you have about your investment.

  1. How are investors kept up with the progress?

Sponsors should regularly communicate with investors about the progress of the investment. This can be done through periodic reports, updates, or meetings. Knowing how and when these updates will happen can help you stay informed and confident in your investment.

  1. How frequently do I get reports?

Investors typically receive regular reports about the performance of their investment. The frequency of these reports can vary, but they often occur on a quarterly or annual basis.

  1. Is there a detailed quarterly update?

A detailed quarterly update can provide a comprehensive look at the property’s financial performance, the status of any improvements or repairs, changes in occupancy, and other relevant information.

  1. When do I get tax reporting?

As an investor in a real estate syndication, you’ll need information about the property’s income and expenses for your own tax reporting. This is typically provided on a yearly basis, but the timing can vary depending on the syndicate’s fiscal year and accounting practices. Be sure to ask this question so you can be prepared for your own tax planning and reporting.

You can begin Investing in Multi-Family Real Estate today, just signup to VonFinch Capital, schedule a call with Investor Relations and you too, can become a Real Estate Investor.

Wants to learn more about Passive Investing? Grab a copy of our no cost Ultimate Guide To Passive Investing. You can download the full guide here.


Active Investing, Financial Freedom, Investing, Investment Strategies, Passive Investing, Real Estate, Real Estate Investing, Syndication, Vision

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