1. Who Is the Sponsor—and What’s Their Track Record?
The sponsor is the person or team responsible for sourcing the deal, managing the property, and executing the business plan. In syndications, you're not just betting on the property—you’re betting on the sponsor.
Key questions to ask:
- How many deals have they completed?
- Have they navigated a market downturn before?
- Can they provide references or past performance reports?
A good sponsor will welcome your due diligence and offer transparent, detailed responses.
2. What Are the Terms of the Deal—Especially the Preferred Return and Fee Structure?
Every syndication has a deal structure outlining how profits are split between the sponsor and investors. One important component is the preferred return—the minimum annual return that investors receive before the sponsor shares in the profits.
Things to clarify:
- Is there a preferred return? If so, what is it?
- When and how are returns distributed?
- What fees does the sponsor earn (acquisition, asset management, disposition, etc.)?
Read the fine print. A deal with a high projected return but loaded with fees may not serve you in the long run.
3. What’s the Return of Capital Policy?
Not all deals return capital in the same way. Some structures favor early payouts of capital before profits, while others distribute returns but delay the return of your principal until a sale or refinance.
Important points to understand:
- Will capital be returned before or after profit sharing begins?
- Is your investment tied up for a specific term, or is there flexibility?
- What happens in a worst-case scenario?
The return of capital structure impacts your risk, liquidity, and tax implications—don’t skip this detail.
4. How Are Risk and Downside Handled?
Real estate investing always involves some risk—but a thoughtful sponsor should have a clear strategy for mitigating it.
Ask:
- What’s the break-even occupancy rate?
- What assumptions were used in the underwriting?
- How does the deal perform if rent growth slows or interest rates rise?
The best deals have contingency plans, not just rosy projections. You want to know how the investment holds up under pressure, not just in perfect conditions.
5. Does This Deal Fit My Personal Investment Goals?
Even the best deal might not be the right one for you.
Consider:
- Does the timeline align with when you might need access to funds?
- Are you investing for cash flow, appreciation, or both?
- How does this opportunity balance your broader portfolio?
Avoid investing just because others are. Know your objectives, then choose syndications that support them.
You don’t need to be a professional investor to thrive in real estate syndications—but you do need to be thoughtful. Asking the right questions upfront protects your capital, aligns your expectations, and helps you grow your wealth on your terms.
🎧 For more insights into smarter syndication strategies and investor due diligence, check out Episode 306 of The Build Up Podcast, where we break down what every LP needs to know before diving in.
This content is for informational purposes only and should not be considered financial, legal, or investment advice. Always consult with a qualified professional before making investment decisions.
