The US Securities and Exchange Commission (SEC) has recently changed its rules to make public-private investments more accessible. As a result, firms are keener than ever to secure investment capital — but that doesn’t mean they all make for good partners. If you’re interested in obtaining the best investment opportunities, it’s essential to know how to vet them properly.
We’ll focus specifically on real estate syndication opportunities: deals that involve various investors pooling their funds and resources together to buy a property. Here’s what you need to know to navigate the situation successfully.
Ask the right questions.
Warren Buffet famously has two rules for investing: to never lose money and to never forget the first rule. This might be easier said than done, but taking a cautious approach and asking good questions is a good place to start.
So, let’s begin this article by looking at three key questions to ask yourself and any potential syndication partners you encounter.
Questions to ask yourself
You’ll never be able to find the right syndication partner if you don’t even know what you’re looking for yourself. Before you dive straight in, you need to be sure that you have a clear idea of your approach and objectives — you can achieve that through the following three questions.
What are your goals?
Although everyone invests in the hope of making a good return, we don’t all have the same priorities. Is it more important to you to have a good cash flow over the short term or to preserve your assets over the long term? Or maybe you’re more interested in tax benefits? Or does a commercial refinance quote help with expansion?
Once you know what you want, make sure your goals align with those of your partner.
What timeframe are you working to?
When you start answering the questions above, you’ll probably start to figure out the kind of timeframe you’re investing over. Do you want to know your investment is relatively liquid, or are you happy to shut your assets away for an extended period? Most importantly, does your potential partner feel the same?
How much risk are you willing to accept?
A closely linked question is figuring out your risk tolerance — if you want to stick to a shorter timeframe, your risk tolerance will automatically be lower. But there are also other risks to consider, such as the probability that you recoup your investment, so ensure you’re comfortable with the risk you’re taking on.
Questions to ask a potential partner
Although some of the points above involve you aligning your vision with that of your partner, there are some additional questions you can ask to vet someone. Here are three of the most crucial.
What’s your exit strategy?
This question isn’t just important because of the exit strategy itself, but also because an answer demonstrates how somebody thinks. How many possible outcomes is your partner considering, and how many factors are they accounting for? Which framework are they using to come up with their answer? Are they considering a Commercial Refinance Quote strategy?
If you get a vague, overconfident answer, it’s a clear signal to run a mile.
What’s your investment strategy?
Again, this is a great question to ask if you want to get a grip on how your potential partner thinks. Don’t just ask them what their investment strategy is and take their answer at face value — ask them why they chose that particular approach.
For instance, if they say they want to follow a core strategy, inquire as to whether that’s due to their experience or because they want to take a conservative approach. If the reasoning behind their strategy is based on their resources, infrastructure, connections, or experience, that’s generally a good sign. But if they can only pull together a vague response, you might want to reconsider.
What are you putting into the investment?
Don’t assume that every potential partner wants to put just as much capital on the line as they expect you to. Unfortunately, plenty of people would prefer you to take all the risks — so look for a partner who is willing to put some skin in the game.
Also, ask them if they expect to be paid if the investment underperforms. Partners who will pay investors (aka you) before management are the best to work with. Investors are taking on the bulk of the risk, so they deserve preferential treatment to compensate. If a partner is unwilling to recognize this, you’re right to be wary.
Careful and considered wins the race
It might be tempting to dive straight into a syndication opportunity that looks great on paper, but there’s always a lot to weigh up before you commit to a partnership or investment. The better partner you choose, the lower the risk you’ll take on, so don’t take this lightly.
Asking the right questions will increase your chances of growing your wealth and reduce the likelihood of mistakes. Isn’t that what we’re all aiming for?
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