Real estate syndications allow investors of varying asset levels to pool funds and participate in large commercial or development deals through a partnership structure. While these offerings provide access to high-yield assets, certain precautions must be exercised to avert pitfalls. This article outlines 7 common mistakes syndicate investors should avoid when evaluating such propositions.
1. Adopting Herd Mentality
Following the crowd and mainstream hype without independent due diligence is risky. Promoters often highlight past successes ignoring market cycles. Beyond pitchbooks and sales patterns, a prudent look at deal fundamentals, location economics, and exit plans spotlights realistic potential. Custom research mitigates blind optimism. Thoroughly evaluating deals based on their own merit rather than how popular they seem is important. Investors must think independently and avoid simply following the herd.
2. Overlooking Fees And Carry
Syndications deduct hefty fees from cashflows for origination, asset/property management, and incentives. Add legal/accounting costs and the promoter’s lucrative carried interest share, actual investor returns reduce significantly. Comprehend fee structures upfront. It is crucial to understand all fees involved and how they impact potential returns to investors. A detailed review and comparison of fee structures is necessary.
3. Ignoring Liquidity Aspects
Long investment horizons restricting access to committed capital for 5-10 years till sale or refinance strikes concern. Evaluate back-end liquidity from pre-leasing milestones or management quality ensuring holding periods meet projections avoiding sudden distress sales. Liquidity risks should be a major consideration, particularly for investors who may need access to their funds before the projected hold period. The lack of liquidity requires extra scrutiny of downside protection.
4. Lacking Experience Evaluating Sponsors
Track records encompass multiple variables. Stay prudent in weighing a sponsor’s domain expertise, regional network, financial capacity for problems, and professionalism. Read past investors’ feedback online to gauge dispute resolution skills safeguarding commitments. Thorough sponsor due diligence is equally important as deal-level diligence. It is important to assess a sponsor’s true capabilities rather than just their marketing rhetoric.
5. Neglecting Underwriting Rigor
Forecasts understating vacancy periods, capex outlays, or overestimating rental appreciation seem suspicious. Scrutinize lease expiry distribution, tenant quality, rent rolls minutely with an expert’s guidance. Sound underwriting forms the bedrock of success. Conservative and realistic underwriting assumptions are key to determining a deal’s true potential and risks. Underwriting is critical and deserves as much focus as other aspects of due diligence.
6. Misjudging Macroeconomic Sensitivities
Economic cycles impact real estate syndicates as properties in regions vulnerable to tech layoffs, changing demographics or infrastructure issues become risky. Evaluate the area’s growth drivers supporting cashflows throughout different business environments. Macroeconomic trends should also be considered in determining the overall risk profile of a particular region or market. The macro-outlook needs active consideration.
7. Having Unrealistic Return Expectations
Target returns upwards of 20% appear too good to be true necessitating diligence given 8-12% is the safer norm. Factor all costs, and promote share realistically when assessing risk-adjusted downside-protected returns justifying capital deployment over other options. Balance the potential pros and cons of real estate syndication carefully. Returns promised need to pass a reality check with benchmark returns for similar risk investments. Outsized return promises deserve strict scrutiny.
To Wrap Up
While syndication investments open passive participation in institutional assets, prudent diligence evaluating credentials, strategy, risks, and structuring secures quality outcomes. Comprehensive due diligence guided by expert opinions shields against unwarranted optimism unveiling quality sponsors and projects realistically meeting financial goals. Thorough due diligence is essential to avoid common pitfalls in these offerings. Investors must proactively guard themselves against mistakes through preparation and skepticism.