3 Key Filters to Vetting Your Multifamily Syndicator Successfully

What to look for in a sponsor to partner with

1. They have been in the industry for a long period of time and have a good reputation?

2. They have a large number of units. Just be careful on this metric because many sponsors collect a 1-2% equity split and their main role is raising money. They hop from deal to deal and get a massive unit count.

3. How do they show up in the interviews they do? Are they being interviewed by credible people in the industry?

4. Do you like the sponsor? You’re going to be partners with this person for many years.

5. Are they disciplined with money? Does it seem like they spend all they earn on things like homes and cars? A surprising number of people at a high level match their spending to their income which has more personal risk outside of the deal.

6. Are they a part of credible groups and mentoring programs?

7. Do people you meet at meet up groups say they know and have invested with the sponsor?

8. Do they have a large following?

9. Are they vertically integrated? Do they have their own management and construction company as well?

10. How did they handle a crisis situation in the past?

Filter 1

The most important step to this is to know what you're doing yourself.

Once you've done the work to learn the business, you'll quickly develop a filter of who actually knows what they're talking about and who doesn't.

You'll also learn to notice who is aggressive or unrealistic with their deal underwriting just to make the returns seem favorable.

Filter 2

Experience and team. You're usually not just investing with one person, you're investing in a whole team. You'll want to clearly identify who is the lead sponsor and main decision maker. That's the ideal person you evaluate, even if it's not the partner you personally invest with.

• Most syndications are done with multiple syndicators on the general partner side. Are many of the team apart of a multifamily mentoring group?

• Does this team have a large net worth and liquidity?

• A large portfolio of deals?

• What kind of role did they have on the other deals? Often sponsors boast large unit counts and you learn that they only put up $25,000-$50,000 for a tiny role on an 800 unit deal.

• Who is going to lead the deal on the team? Are they actually the lead person, or are they on the deal just because they've done many deals and they're there for their credibility?

• Are there clearly defined roles within the team? Someone on acquisitions who leads the deal. Someone on investor relations who works with investors, monthly reporting, K1s, etc. Someone on the asset management team with experience overseeing similar projects? Potentially someone with a high net worth to better qualify for the loan.

• Are the sponsors biting off more than they can chew in terms of the size of the deal or a deal outside an asset class they specialize in?

• Are they buying in a market where there are well established vendors, or is it in a secondary or tertiary market with limited options for property management?

Filter 3

Predictors and Emotional Investors

"Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future." -Warren Buffett

Probably my biggest dislike I see in this industry is the tendency to make decisions based on predictions. Part of it is necessary in that most deals are sold off pro forma instead of day one numbers. If you offer based off of day one numbers, you're likely to get outbid.

The danger I see though is when sponsors rely too heavily on predictions like where interest rates or rent growth will go. No data will tell you the future, even if you're paying $1600+ per month for co-star.

If a sponsor is constantly talking about how interest rates are going to change and makes decisions based off of this, it is a total red flag to me. This to me is total speculation and not investing.

The second filter category is the emotionally unfit investor. This can be much harder to determine who can stay calm and composed in chaos and who cannot.

For this, I look at their track record to see how they responded in economic hardships on previous deals. For instance, I know of investors who fear sold their assets during Covid 19 based on nothing but them being able to make a slight profit and get out of the uncertainty of what will happen. They had great interest rates, long term fixed rate debt and the rent collection metrics during covid were almost identical to how they were before covid. It was just the fear that got them. Of course after covid and the money printing, real estate rose 20%...

The other thing I look for in who has emotional fitness is who constantly talks about other people's failures in business or when they're constantly broadcasting negative news. It's been my experience to observe that the people who get a sense of importance from other people's failures are often poor at handling hardship themselves. "Where focus goes, energy flows." -Tony Robbins

Amazon link