Investing in multifamily real estate requires careful consideration and thorough due diligence to ensure the investor understands the sponsor’s experience and track record, that the type of investment is right for their investment goals, and that the properties will be actively managed during the investment period.
It’s no secret that passive investing in multifamily real estate is a proven way to generate and preserve wealth. However, not every real estate investment owner-operator has the experience and track record to generate the returns investors seek. Investing in multifamily real estate requires careful consideration and thorough due diligence to ensure the investor understands the sponsor’s experience and track record, that the type of investment is right for their investment goals, and that the properties will be actively managed during the investment period.
Below, we share five questions every investor should ask before investing in a multifamily real estate syndication or investment fund.
1 | What is your experience investing in multifamily real estate?
Similar to how good real estate owners-operators conduct due diligence on potential investments, investors should perform their own research on the sponsor before investing. Asking questions about the operator’s experience and track record in managing multifamily properties, such as the number of years they have been in the business, the size of their portfolio, and their success rate in achieving their investment objectives will help investors form a better understanding of the sponsor’s experience. Additionally, investors should look closely at the operator’s team and their qualifications, including their experience in multifamily real estate, property management, and other relevant areas.
2 | What is the sponsor’s track record?
A successful track record is one of the most important things to look for in a real estate owner-operator. Ask the sponsor about their past projects and investments and ask for references from previous investors. Look for evidence that the sponsor has consistently delivered on their promises in terms of financial returns and meeting project timelines and other obligations.
3 | What is the investment approach?
Understanding the sponsor’s investment approach is an essential question investors should ask. Some sponsors invest in risky, fix and flip properties that have the potential for generating quick, high returns but also have an equally high risk of underperforming. In comparison, other sponsors invest in high-quality real estate that generates ongoing cash flow and attractive long-term appreciation. Gaining an understanding of this will help investors decide where to invest.
Equally as important, a thorough understanding of the investment strategy should be gained, specifically how the sponsor plans to generate income and appreciation from the properties. Asking questions about how the operator manages investment properties and their strategies for increasing the value of the properties is essential to understand before investing. Investors should also ask about the operator’s exit strategy or how they plan to sell the property and return capital to investors.
4 | How does the sponsor source and evaluate deals?
Another important factor to consider is how the sponsor finds and evaluates investment opportunities. Ask the sponsor about their deal sourcing process and how they assess potential deals. Look for evidence that the sponsor has a strong network of industry contacts and a rigorous due diligence process that includes a thorough analysis of market trends, property conditions, and other relevant factors.
5 | What is the sponsor’s alignment of interests?
Finally, it’s important to consider the sponsor’s alignment of interests with investors. Ask the sponsor whether the general partner has skin in the game by investing in the partnership alongside investors. Additionally, consider whether the sponsor’s compensation structure is tied to the fund’s performance, as this can further align their interests with investors.
By asking these questions and conducting independent research, investors can help ensure that they’re investing with a real estate owner-operator who has a strong track record, a well-defined investment strategy, a robust deal sourcing process, and an alignment of interests with investors.