How to Evaluate a Syndicator Like a Pro—Even If You’ve Never Invested Passively

In This Article

I’ve invested in 45 passive real estate deals, most of them syndications. Every month, I invest $5K to $10K in a new one. 

I’ve made plenty of mistakes. But even so, I’ve still done far better with my passive investments than I did when I bought properties directly as an active investor. And I haven’t had to give up my nights and weekends to do it, like I did when buying rentals directly. 

If you’re curious about passive investing in syndications but worry about how to minimize risk, start with these screening criteria. 

Evaluate Experience and Performance

It doesn’t matter how trustworthy an operator is if they don’t have much experience. They can lose your money even with the best of intentions. 

Start by asking how many syndication deals they’ve done. Ask separately about single-family or other real estate investments they’ve made, but don’t let them lump single-family investments with full-blown syndications. 

Then dig in deeper: 

• Of the X syndication deals you’ve done, how many have gone full cycle? 
• What was the average IRR (internal rate of return) you delivered to your passive investors (LPs)? 
• Of the Y syndication deals you currently hold and manage, how are they performing compared to the projections? 
• What’s the cash-on-cash return (yield) that each is currently distributing?  
• Have you ever had to suspend distributions? 
• Have you ever had to do a capital call? If so, why? 

In my co-investing club, we want to invest with operators who have done many deals. I can live with operators who have made mistakes—as long as they’ve learned from them and corrected course. That’s the whole reason you want to invest with experienced syndicators, after all. 

Evaluate Market-Specific Expertise

Even though I want to invest my own money shallowly and widely, I want to do so with syndicators who are narrow and deep. 

What is the sponsor’s niche? What property type do they specialize in? How many units of that particular property type have they bought? How many years have they been buying them? 

Then dig into the geographical market. How many properties and units have they bought there? Why did they choose that market? Do they have their own team on the ground there, or do they outsource everything? 

If they outsource their property management and construction, how many properties have they worked with that third-party outfit on before? 

For multifamily properties, we typically want to see deep geographical expertise. For example, last month our co-investing club invested (for the third time) with an operator who specializes in workforce housing in Cleveland. The principal grew up in and lives in Cleveland, as does all of his leadership team. They have an in-house staff that manages their properties and meets in person. They know the market inside and out and follow the same process with every property they buy. 

For other types of properties, market familiarity matters less. We’ve invested several times with a land flipper who operates in dozens of counties across eight states. In that segment, he’s able to do his due diligence from afar. But he’s also flipped thousands of parcels, so he has asset class expertise. 

Evaluate Trustworthiness

It doesn’t matter how savvy and experienced an operator is if they’re just going to take your money and run off to Guatemala. 

Of course, you can’t just ask them directly if they’re trustworthy the way you can ask about their experience. You have to circle around trustworthiness; come at it from the side. 

I start by asking about their worst-performing deal. What went wrong? How did they handle it? What was the outcome for their investors? 

Drill deeper. What other deals haven’t performed as well as projected? Why? What’s their current status? 

I also ask if they’ve ever lost money on a deal and what happened. Then I ask a follow-up question: Have you ever lost investors’ money on a deal? 

If not, perhaps they haven’t done enough deals. Or perhaps they’re lying. So I don’t mind when an operator admits, “Yes, I lost money on an early deal.” What I would like to hear is, “But we took the hit on it and made our investors whole, so at least they didn’t lose any money.” 

That suggests trustworthiness. It suggests they put their investors’ interests above their own. 

Evaluate Communication

I’ve invested in deals only to have the sponsor disappear with only sporadic, incomplete updates. 

That’s not acceptable, even if the property is performing well and paying distributions. 

I want to know occupancy rates, gross rental income, expenses, net operating income, and other key metrics compared to initial projections. I want to know if they’re offering concessions to lure in renters. I want them to state the current distribution yield, along with the total cash-on-cash return for the previous year. And I want all this every quarter, or, better yet, every month. 

Ask for a copy of their most recent property updates for three to five deals. If you don’t like what you see, consider it a giant red flag. 

Review the Latest Deal and Underwriting

I prefer to get to know sponsors before they have a deal that they’re actively raising money for. They tend to be in “let’s get to know each other” mode instead of “I need to raise $10 million ASAP” mode.

But I still want to review the most recent deal that they closed. I want to look at their pitch deck to review their underwriting. And then I ask:

• What kind of preferred return did they offer? What profit split? Why did they choose those numbers? 
• What fees do they charge? Why? 
• How much skin in the game (their own money) do they have? 
• What loan-to-value ratio did they borrow with? Did they personally guarantee the loan? 
• How fast do they forecast rent growth? Lower growth = more conservative.
• How fast do they forecast expense growth? Higher growth = more conservative. 
• Did they include a sensitivity analysis, breaking down investor returns at different rent growth rates and exit cap rates? 

Every operator will tell you that they underwrite conservatively. Many don’t. It’s up to you to determine that for yourself. 

Get Other Investors’ Opinions

The more feedback you get from other investors, the better. That starts with people who have actually invested with this operator before. Ask the operator to provide you with contact information for a few investors who have invested with them on multiple deals, including their worst deal. 

Call those people and have an actual conversation with them. Try to feel around the edges of how happy they are with the operator. Ask about how many deals they’ve invested in with them and how they’ve performed, the sponsor’s communication, and their plans for investing with that operator in the future. 

Don’t stop there, however. Search the BiggerPockets forums for the operator’s name and company name to see what people are saying about them. Do the same on PassivePockets if you have a membership, and check the sponsor’s reviews on InvestClearly.com. 

Finally, vet deals and operators together with other investors as part of a co-investing club. Having 50 sets of eyeballs on a deal and 50 different investors all grilling the operator on a group video call makes all the difference in the world. 

Start Small

The first time I invest with an operator, I typically invest $5,000. Then I wait. 

In my co-investing club, we have a one-year probation policy. We don’t invest a second time with a sponsor until at least 12 months after our first investment with them. We want to see how that first deal performs, how they handle inevitable curveballs, and how they communicate. If we have a good experience, we’ll invite them back again. 

The second time I invest with a sponsor, I might invest $10K to $20K. The third time, I might invest $20K to $40K or keep it small just to spread my money across more deals. 

The bottom line? Sponsors need to earn your trust. Most of them talk a good game, and some who actually aren’t very articulate end up being the best operators. Due diligence takes you a long way in weeding out inexperienced or untrustworthy operators.

But for me, the proof is in the pudding. I want firsthand experience investing small amounts with an operator before I invest more, and even then, I don’t want to park too much money with any one operator or market. 

If all this sounds like a lot of work, it’s nothing compared to active investing. And it helps to have other investors doing this vetting alongside you, as a team sport, instead of going it alone.