With the advent of crowd funding, investors are now able to invest as little as $1,000 in "institutional quality" real estate investments. Historically, these investments have been walled-off from the greater investment community and offered only to those ultra-wealthy individuals working directly with a Sponsor, Syndicator or Real Estate Private Equity (REPE) firm. While the various crowd funding platforms promise to vet the Sponsors seeking to fund their deals via the marketplace, individual investors should nevertheless conduct their own due diligence before making an investment. Below are a few questions to ask a Sponsor, whether the investment is offered via a crowd funding platform or a traditional Syndicator:
What is the background of the principals Sponsoring the investment?
How long have they been in business?
Have they experienced prior real estate market cycles?
What did they do before starting their current firm?
How much equity is the Sponsor contributing?
Are the Sponsor's interests aligned with the individual investor?
Ideally, the Sponsor is committing no less than 10% of the required equity in the deal.
Does the business plan include a value-add component and, if so, what is the Sponsor's track record in making such improvements?
Value-add can be driven by either 1) physical renovations to the property or 2) through improved management (leasing, cost controls, etc).
If the former, does the Sponsor have the requisite construction experience to undertake large-scale renovations?
If the latter, what sort of team does the Sponsor have in place to oversee property-level operations?
What fees is the Sponsor charging?
Management fee, acquisition fee, disposition fee, asset management fee? Is their compensation tied to hitting their projected return hurdles, or are they being compensated just for putting the deal together?
What is the depth of the team?
Is the Sponsor a startup that is bootstrapping its way through one of their first "big" investments, or is it a professional operator with a diverse and experienced team of employees supporting all aspects of the deal?
Will the Sponsor self-manage or use a Third Party manager?
The Sponsor should always do what is best for the asset. If they intend to self-manage,
Ask for a referral
My wedding photographer offered referrals, as does my Doctor. Ask to speak with the Sponsor's current/prior investors to understand the level of communication during the ownership period and their overall experiences with that Sponsor. Any hesitation on the Sponsor's part should be met with skepticism.
What does the due diligence process entail?
Various items like a property condition and environmental report are required by a lender when new financing is being issued. However, in the case of recapitalizations, one investor group may simply be replacing an old investor group and these are not needed. Ask to see any and all third party reports.
Is the Sponsor doing a walk-through of the entire community? Are they conducting a lease audit? Are they interviewing the on-site staff prior to acquisition?
What is the Sponsor doing on the front end to avoid any "surprises" post closing?
What are the Sponsor's Core Values?
The manner in which a Sponsor treats its own employees is a good indicator of how it will treat its investors and its tenants.
Does the Sponsor have core values? Does it communicate them with its employees?
Engaged employees will work hard to ensure that your investment is executed to plan, whereas high turnover might put your investment at risk.
Tour the Sponsor's Office
No matter the investment, take a trip to visit the Sponsor. Tour their office and meet their employees.
Investing is real estate is not only about what your investing in, but also who you're investing in.