The process for investing in a syndication is simple. As a passive investor, the most important phase of your investment is the due diligence phase. It’s the time spent upfront getting to know the deal sponsor, team, market, and of course the deal itself. This process doesn’t need to be overwhelming, rather it’s a process of discovery.
This list is a guide of questions you’ll answer yourself in the discovery process and through speaking with the operator.
You’ll find the answers on the sponsors website, in the marketing materials and in the investment summary. This process will prepare you for your Due Diligence(s) where you’ll be able to cover all the questions you have remaining, saving some of the best for that personalized 1-1 conversation.
Remember, this process is exciting. As you’re discovering the right deals to invest in for your financial independence and freedom! What’s more fun than that?
Top 10 Key Due Diligence Questions:
- Who are the lead sponsors & what is their track record?
- What is the overall business plan & how will you effectively implement it?
- What are the projected returns to investors & how is the management team compensated?
- What is the biggest project risk & how will they be mitigated?
- What is the projected hold time & what are the terms on the loan?
- What are the key metrics of the market & submarket, & why did you select it?
- Who will be managing the property & what is their track record?
- What are your assumptions that went into your underwriting and business plan?
- What would be any reasons someone wouldn’t want to invest in this deal?
- Why do you think this is a great deal?
Questions To Ask The Sponsor Team
- Who are the lead sponsors?
- What are their roles and responsibilities?
- How long have the sponsors known each other?
- Have they done a deal together?
- What is the sponsorship teams track record?
- Are they each investing in the deal?
- Who is the Property Manager & how were they selected?
- How many units do they manage?
- Who will manage the Asset?
Questions To Ask About The Market
- What is the population growth of the MSA (Metropolitan Statistical Area)?
- Is there job growth?
- What is the median household income?
- How is it trending?
- What is the unemployment rate?
- Is there economic and industry diversity?
- Wide range of industries and employers
- Who is the biggest employer in the area?
- Is the crime rate declining or increasing?
- What class is the neighborhood?
- What are major economic anchors near the asset?
Questions To Ask About The Property
- What year was it built?
- How many units?
- What is the unit mix?
- 1, 2, 3 bedroom units
- What class is the property?
- Class A, B, C, D or 1-5 Star
- What is the cost per unit?
- What is the current average rent?
- What is the projected average rent?
- What is the current occupancy?
- Why is the owner selling?
- How does the property compare to others on sale comps?
- How does the property compare to others on rent comps?
Questions To Ask About Financing
- What is the loan amount?
- What is the amount of capital being raised?
- How much of that is for down payment?
- Are you raising enough for CapEx?
- What is the loan to value (LTV)?
- What is the debt service coverage ratio (DSCR) in year 1?
- Do you have a term sheet?
- What kind of loan terms are expected?
- What type of loan is it? (Agency or Bridge)
- Is it a recourse loan?
- Does your lender offer loan extensions? How much do the extensions cost?
- What is the CapEx budget and how is it being funded?
Additional Questions For Due Diligence
- Is there a Financial Audit Report?
- Has the Internal Property Condition Assessment been completed?
- Has the Lease Audit been completed?
- What does the tenant profile look like?
- Is there a Unit Walk Report?
- Is the Site Survey done?
- Has Property Condition Assessment been done?
- Has the Environmental Site Assessment been completed?
- Is the Appraisal complete?
Questions To Ask About The Investment Summary
- How is the deal structured?
- Is there a preferred rate?
- Are there different tiers of preferred rates? What are they?
- What is the equity split?
- What is the cash on cash return?
- What is the average annualized return?
- What is the IRR?
- Internal Rate of Return
- What is Equity Multiple?
- How long is the expected hold?
- Is there a waterfall structure?
- Can I invest with my retirement funds?
- What is the minimum investment?
- What is the maximum investment?
- Is there a webinar or pre-recorded presentation?
- What is the soft commit deadline?
- When does the deal expect to close?
- What is the wiring deadline?
- What are my liquidity options?
- What are the project fees?
- Asset management
- Capital Event or Refinance
- Construction management
- What is my biggest risk?
Questions To Ask About The Business Plan
- What is the business plan?
- Yield play
- What are the first 3 things to be done after the close?
- How many units are you planning to renovate and why?
- What are the projected premiums for renovated units?
- Are you going to do a Cost Segregation Study?
- Will you rebrand the property?
- Do you plan to refinance the property?
- What % of investor capital would be returned at re-financing?
- What are the CapRate assumptions?
- What is the Market CapRate?
- What is going in CapRate?
- What is exit CapRate assumption?
- How is the property management company vested in the deal?
- What is the marketing plan?
- How are you going to advertise this property?
- Are there plans to leverage local societies, clubs or teams to improve visibility and rentals?
- How are you going to make sure the leasing is up?
Questions To Ask Yourself About Investor Expectations
- What if the distributions are delayed or missed?
- How are the missed preferred returns made up?
- Who can I contact if I have questions?
- How are investors kept up with the progress?
- How frequently do I get reports?
- Is there a detailed quarterly update?
- When do I get tax reporting?
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