Questions to Ask General Partners Before Passively Investing in Real Estate

 

As an accredited investor looking to passively invest in real estate, whom you partner with is one of the most critical decisions you’ll make. For this reason, you should approach finding these team members like a job interview. That means coming prepared with questions when you have the opportunity to speak with the general partner about investing in apartments.

Here’s a rundown on the top questions to ask general partners before you delve into passive investing in real estate.

Types of Questions to Ask General Partners

The questions to ask the general partner (GP) fall into four categories:

1. Investment Strategy FAQs: Questions to ask the GP to gain an understanding of their overall investment strategy and process.

2. Specific Deal FAQs: Questions to ask the GP about a specific deal they have under contract and are raising money for.

3. Market FAQs: Questions to ask the GP about the market in which they are investing.

4. Team FAQs: Questions to ask the GP to learn the qualifications of them and their team.

I don’t recommend calling up the GP and asking them every question on the list below if you’re exploring passive investing in real estate. Otherwise, you might drive them clinically insane, and that’s not good for anyone. Instead, you should be able to pick up most of the info from their website and any info they provide you via written format about their company.

In fact, ideally, the general partner will proactively answer these questions when they are presenting a new deal. The purpose of this list is to make you aware of the types of questions to ask and information you need in order to make an educated investment decision before diving into passive investing in real estate.

I’ve also included my thoughts on each of the answers based on my experience as a value-add GP.

Specific Questions to Ask General Partners

Investment Strategy FAQs

Once the deal is closed, the general partner (GP) should send consistent updates on the status of the deal. You may receive updates once a month, which is what my company does. However, some GPs provide quarterly updates. Others provide annual updates. And some don’t provide updates at all. The best update frequency will depend on your preference.

In regards to the information included in the update, this varies from GP to GP. Our monthly reports include occupancy rates, updates on the number of renovated units, details on our rental premiums and how they compare to our projections, capital expenditure updates, relevant updates on the market and resident events. Each quarter, we provide a link to the apartment’s financial statements, which include the T12 and the rent roll.

Overall, you want to know the status of the business plan and how the rents compare to the projections.

General partners should NEVER guarantee a return. If they do, run! Any return offered, like a preferred return, should be a projection, never a promise.

Ideally, the general partners projected returns exceed the preferred return offered. That way, if they don’t achieve the projected returns, they still distribute the full preferred return. If the actual returns end up being lower than the preferred return, the process is that which was agreed to in the PPM. Generally, the preferred return will accrue until it can be paid with the sales proceeds.

Similar to the question about “what happens if the project fails?”, if the general partner (GP) says there are no risks, they are either lying or inexperienced.

The three risk areas associated with apartments are the deal, the market and the team. Therefore, ask the GP about the risks associated with these three areas and what they are doing to mitigate them.

You should also determine if they are following the Three Immutable Laws of Real Estate Investing, which are the laws that must be followed in order to mitigate risk, especially in a down economy.

Before investing in a deal, the general partner (GP) should provide you with the projected timeline, which includes the hold period and the exit strategy of the project. Generally, that is 5 years, and the GP will require you to keep your capital in the deal until the deal sells.

This varies. But if there is a process for pulling your money out of the deal, it will be outlined in the PPM. The process usually entails you selling your shares to another party with the written consent of the general partner.

Generally, the general partner (GP) will make money via the acquisition fee, ongoing asset management, equity ownership in the deal and whatever else they decide to charge. All of the fees they charge should be listed in the PPM.

After determining which fees they charge, ask them why. They should only charge fees based on the value they provide to the deal. If they can’t explain what value they are providing for each fee, then they shouldn’t be charging that fee.

Click here to learn the seven most common fees the GP may charge.

Ideally, the general partner (GP) has their own funds in the deal because there is an extra level of alignment of interests. If you lose money, the GP loses money. If the GP doesn’t invest in the deal, they aren’t exposed to the same risks as you. Additionally, the GP investing in the deal signals to you that they are confident in the deal and the projected cash-on-cash return and IRR, or whichever return factor they base their investment decision on.

The distribution frequency varies and depends on the preference of the general partner and what their team is capable of doing from an administrative standpoint.

The typical frequencies are monthly, quarterly or annually. My company found that the majority of our investors preferred monthly distributions, so that’s what we decided to do. So, we aim to distribute the preferred returns on a monthly basis and any profit above and beyond the preferred return is distributed every 12 months. Most likely, you will receive a your monthly, quarterly, or annual distribution 30 to 45 days after the end of the period. For example, if you receive monthly distributions, you would receive the distribution for March at the end of April.

Then, you will receive your initial equity investment plus profits from the sales proceeds at the end the sale.

Most general partners (GP) will have a minimum investment. The more experience they GP has and the larger the project, the higher the minimum.

You want to know what the minimum investment is so that you can determine if you are financially capable of investing in the deal.

The maximum amount of money the GP will likely allow you to invest is typically 19% of the total equity investment. Anything greater than 19% and the passive investor is underwritten by the lender, and they usually don’t want that happening.

If the syndication is a 506b offering, you don’t need to submit your financials. If it is a 506c offering, you will.

Most passive investors will invest in their own name, while others will create an LLC and invest through that. From my experience, the breakdown is 70/30 (own name/LLC). I recommend asking your CPA for the best approach that fits your particular situation.

Most general partners accept investments through a SD-IRA.

SD-IRA, which stands for self-direct IRA, allows you to invest your tax-advantaged retirement dollars into alternative investments that a standard IRA will not, one of which being apartment syndications.

If you are investing with a SD-IRA, make sure you work with a custodian who has experience with investing SD-IRAs in to syndications or real estate investments to ensure that you are in adherence with the IRS tax code.

Most likely, the general partner is either selling private securities to the limited partners under Rule 506(b) or 506(c). One key difference is that 506(c) allows for general solicitation or advertising of the deal to the public, while 506(b) offerings do not. But the other difference is the type of person who can invest in each offering type. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors only.

If the general partners are doing a 506(c) offering, they must verify the accredited investor status of each passive investor with a 3rd party, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified account. The accredited investor qualifications are a net worth exceeding $1,000,000 excluding a personal residence or an individual annual income exceeding $200,000 in the last two years or a joint income with a spouse exceeding $300,000.

If the general partners are doing a 506(b), they are not required to verify the accredited investors status with a 3rd party – the passive investor can self-verify that they are accredited or sophisticated. However, some general partners, us included, only work with accredited investors even though they do 506(b) offerings. In addition, for the 506(b) offering, to prove that the general partners didn’t solicit the offering, they must be able to demonstrate that they had a relationship with the passive investor before their knowledge of the investment opportunity, which is determined by the duration and extent of the relationship.

As a passive investor, why the deal was difficult or the worst isn’t as important as how the general partner handled it.

So, a more relevant question is “tell me how you handled your worst syndication/most difficult deal?” Were they able to preserve their investor’s capital? Were they able to turn the deal around and still distribute a return?

If the general partner sold their shares in a deal before selling the property, you want to know why.

The reason why you want to invest with a GP who also invests in their own deals is because of the alignment of interests – if the deal doesn’t perform, they don’t make money (or they make less money). Once a GP sells their shares, that alignment of interests is gone.

Usually, the general partner (GP) will put you on their private email list.

If they already have a deal under contract, you can ask them for an investment summary, for the information to the conference call or a recording of the conference call.

Click here to learn the five step process the GP will likely follow to secure investor commitments for a deal.

If you want to invest with us, please visit www.InvestWithJoe.com to learn more.

Determine what percentage of their investors have come back to invest in a second deal. A general partner’s (GP) retention rate is a great indicator of the GP’s track record of meeting and/or exceeding the projected returns.

However, keep in mind that if the GP is just starting out and has only completed a handful of deals, their retention rate may be lower because their passive investors haven’t receive their capital back yet to invest in another deal.

As a passive investor, you need to have a high level of confidence with the individuals that make up the general partner (GP), as you are entrusting them with your capital. One way to determine the character of the GP is to determine if their family and friends invest in their deals.

Friends are much more subjective than family. So, ask them about their relationship with the people who are investing in their deals. How long have they known them? How did they meet? How has their relationship evolved over time? Maintaining and growing relationships over an extended period of time with people who trust them enough to invest in their deals speaks volumes to the GP’s character.

Similar to friends and family who are also investors, you want to understand the general partner’s relationship with the investors who they’ve known the longest. How long have they known them? How do they know them? How long have them been an investor?

Accredited investors who’ve known the GP for a long-time and still trust them enough to invest in their deals is a fantastic sign. If they continue to come back deal after deal, that is because the GP is meeting and/exceeding the return projections, preserving their investor’s capital, and is an effective communicator – all characteristics of a trustworthy GP.

On all tax related questions, always consult with your accountant. But generally, passive investors are attracted to real estate because of depreciation. Most likely, the depreciation will be greater than the distributions paid out each year, which can reduce or even eliminate your tax bill until you receive your profits from the sale proceeds at sale.

Determine if the general partner passes the depreciation on to the limited partners, because not all do.

Click here to learn about the five main tax factors that impact passive apartment investors.

The type of financing is determined on a case-by-case basis. Generally, if the general partner (GP) will perform renovations, they will get a short-term, preferably interest-only, loan, and then refinance into a permanent loan once the renovations are completed. However, the more experienced GP can secure better loan terms, even forgoing the short-term loan and getting long-term permanent agency debt that includes the capital expenditure costs.

Click here to learn about the different types of apartment debt and financing.

Interest-only payments provide additional cash flow for distribution as opposed to paying down the principal. For example, a $10,000,000 loan at 4% would have I/O annual payments of $400,000. If the loan was amortizing, the same loan would have annual payments $572,898. I/O payments, in this example, provide an additional $172,898 available to distribute to limited partners (LPs). Although the general partners (GPs) will ultimately need to repay the full loan amount, it is preferred to receive the additional cashflow along the way.

This is due to the fact that the time value of the additional cash flow received throughout the hold helps increase returns rather than receiving a larger distribution at the sale. Additionally, in the event that there is a catastrophic macro level event where a property loses significant value and the GP is unable to pay back the loan when it becomes due, it would be more impactful to have received the additional cash flow along the way.

Different lenders offer different options in terms of floating rates vs fixed rates. A lot of this depends on where the lenders are getting their money from and how they need to price it in order to get the returns they are looking for. Many of the longer term lenders (such as Fannie and Freddie) offer fixed rate debt since they tie their loans to treasuries. Since these lenders have priced their loan with the expectation for the loan to be in place for a long period, there is usually a high prepayment penalty if the general partner (GP) wanted to sell or refinance the loan early. Most of the shorter term lenders will offer floating rates tied to the 1 month LIBOR. Since the loan is tied to a shorter term security, the floating rate loan offers a lot of flexibility to sell or refinance the loan without a large prepayment.

The pros and cons of this is really property specific. At a high level, they are both good options, however, the GP will typically choose a floating or fixed rate to match the specific business plan for the deal. For deals that will be drastically improved overtime, a floating rate loan makes the most sense since it provides ultimate flexibility to sell or refinance the deal upon completion of the business plan. For deals that will be improved (but not as drastically), longer term fixed rate debt is a better option. Although it is difficult to refinance the fixed rate debt early in the hold, the GP can secure supplemental loans to capture some of the value that was created from the implementation of the business plan.

Generally, there are two ways to find apartment deals, on-market and off-market. Ideally, the general partner is sourcing off-market deals, as there are a variety of benefits to finding apartment deals off-market compared to on-market. Off-market deals are less competitive with more opportunity for negotiation, which typically means better purchase terms, which means better cash-on-cash returns.

As long as the general partner (GP) performed adequate due diligence on the asset and has a team that can execute the business plan, the project shouldn’t fail. And by fail, I mean that you don’t receive your preferred returns and/or initial equity investment at the sale. However, like any investment, failure is always a possibility. Therefore, the purpose of this question is to determine 1) their plan of action if returns dip below projections and 2) what they are doing to address the three risks (deal, team and market) associated with apartment syndication.

If the GP responds with “well that’s just not going to happen,” then that is a sign that they aren’t taking the real risks seriously.

In addition, ask to see their sensitivity analysis, which determines the returns based on changing certain variables like the rent premiums, exit cap rate, purchase price, interest rate, occupancy rates, etc.

When you invest in a syndication as a limited partner, you have limited liability. If the general partner is sued, you are not personally liable. However, a settlement or fine may impact your returns.

Additionally, a lawsuit may suggest a character flaw in the GP

If the GP has been sued, ask why, what the result was, and what policies they’ve implemented to minimize the chances of being sued again

The general partner (GP) should have a contingency or operating fund to cover shortfalls. If the project requires renovations, ask the GP how much they’ve budgeted as a contingency. A good rule of thumb is 10% to 20% of the renovation budget.

Ask them how much upfront money they’ve budgeted to cover potential shortfall like unexpected dips in occupancy, unexpected maintenance issues, lump sum tax or insurance payments, etc. A good rule of thumb is 1% to 3% of the purchase price.

Finally, ask them how much money they are budgeting annually to a reserves account. A good rule of thumb is $250 to $300 per unit per year (i.e. a 100-unit apartment community should save $25,000 to $30,000 as reserves for ongoing shortfalls).

If the GP does not budget for these contingencies, they may have to come back to you asking for additional capital, which will reduce your return on investment.

The money you invest in the deal goes towards a variety of costs associated with purchasing an apartment community. These include the down payment for the loan, financing fees, renovation costs, general partner fees charged for putting the deal together, contingency or operating account funds and costs associated with performing due diligence.

The PPM will have a “Sources and Uses” section that outlines all of the uses of the equity investment.

This process will vary from general partner (GP) to GP. If you were to invest with my company, we will notify you of a new opportunity and invite you to a conference call in order to provide you with the specifics on the deal. If you are unable to attend the conference call, no problem. We always record the calls and send the audio file out the next day.

After the conference call, if the deal meets your investing goals, you will verbally commit to the deal.

Then, you will be required to sign documents to finalize your commitment, which include a private placement memorandum (outlines structure of and the risks associated with the deal), an operating agreement (outlines the GP and limited partner responsibilities and ownership percentage), a subscription agreement (outlines the number of shares you own of the LLC that owns the apartment community) and an accredited investor qualifier form (where you state that you meet the accredited investor qualifications). We will also have you fill out a direct deposit form so that you will automatically receive your distributions.

Once you’ve finalized your commitment, you just wait for us to close the deal.

This is our process, but other GPs may have a different process.

Click here to learn more about how the GP secures commitments for their deals.

Some general partners will notify all of their passive investors at the same time, while others may notify their “preferred investors” first. Ideally, all investors are notified at the same time and commitments are taken on a “first-come, first-serve” basis to be fair to everyone, which is what my company does.

The main difference between the cash-on-cash return and internal rate of return metrics is time. If the limited partners receive monthly distributions, quarterly distributions, or annual distributions, the cash-on-cash return remains the same (it equals the total distribution for the year divided by the initial equity investment), but the internal rate of return is different for all three distribution frequencies, because internal rate of return accounts for the time value of money.

Click here for more details on both return metrics, including how to calculate each, the different variations of each, and why they are relevant to limited partners.

It depends on how the general partner structures the investment. You will be able to find the specifics in the PPM usually under a section titled “Distributions of Distributable Cash” and/or “Allocations of Profits, Gains and Losses.”

The typical investment is structured such that the limited partners are offered a preferred return based on their capital account, which starts off equal to the amount of the initial equity investment, and the remaining profits are split between the limited and general partners. For this structure, the preferred return is typically considered a return on capital and the profits above the preferred return are considered a return of capital. Other distributions that can be considered return of capital are supplemental loan proceeds, refinance proceeds, and sales profits.

Other general partners may consider all of the above as return of capital, others may consider all of the above as return on capital, and others may fall somewhere in-between.

Any return of capital reduces the capital account, which means the preferred return distribution is also reduced.

Specific Deal FAQs

For value-add apartment syndications, the majority of owners are selling because they’ve reached the end of their business plan. But, some owners may sell because they are distressed in some form or because they originally purchased the property for cash flow and didn’t make any value-add improvements.

The combination of the costs associated with purchasing the property and the capital expenditure costs should be lower than the value of comparable properties in the area. That difference is free equity, which will increase the sales proceeds.

If the acquisition plus capital expenditure costs are equal to or higher than comparable properties in the area, the general partner is paying too much for the property and your profits at sale or equity returned at refinance will be reduced.

The going-in cap rate is based on the purchase price and the current net operating income. You want to know the going-in cap rate so you can compare it to the cap rate in the market. A going-in cap rate that is higher than the market cap rate is a good sign, because that means the property is purchased below market value.

If the general partner’s business plan is distressed or value-add, the cap rate isn’t as important because the net operating income is lower than what it should be at purchase. If that is the case, you want to know the stabilized cap rate and how it compares to the market cap rate, with the former being higher than the latter as the ideal scenario.

Understanding the quality of the major systems is important for the general partner (GP) to determine an exterior capital expenditures budget. Additionally, if the major systems are in bad shape, this is a risk factor and should be addressed with a contingency budget.

Ask them if they or someone on their team inspected these major systems themselves. The only way to know the true state of the major systems is for the GP to see them with their own eyes, as opposed to trusting the owner or the real estate broker broker.

The hold period is the amount of time the general partner plans on holding onto the deal. This will let you know how long your capital will be locked into the deal.

The general partner (GP) shouldn’t just provide you with an overall capital expenditures (CapEx) budget. You want to know how much money is budgeted to each project.

Also, you want to know how they calculated the CapEx budget. More specifically, you want to know if the GP assumed the CapEx costs or if they are based on bids from contractors who inspected the property. The latter is more accurate than the former.

Finally, you want to know what portion of the CapEx goes towards a contingency fund. The contingency should be 10% to 20% of the total CapEx costs.

If the year 1 income projections are different than the actual trailing 12-month financials (T12), you want to know why.

The revenue is based on market rents, loss to lease, vacancy loss, bad debt, concessions, employee and model units and other income. So, if any of these line items differ from the T12, you want to know what the general partner (GP) based those assumptions on and whether or not those assumptions were approved by the property management company.

If the GP is a value-add investor, then the T12 will always differ from the year 1 projections because the market rents are being increased.

A conservative annual gross potential income growth factor is between 2% to 3% after stabilization. This factor is the projected natural growth in revenue.

Some general partners (GP) will base this factor on historical rent growth, which may be lower or higher than 2% to 3%. Rent growth factors 4% or higher are aggressive and if you run into such a case, the GP should have ample evidence to prove why they’ve assumed a higher number.

If the year 1 expense projections are different than the actual trailing 12-month financials, you want to know why the general partner made those assumptions and if they confirmed them with their property management company. This applies to all apartment syndication investment strategies.

You want to know if the annual tax assumption is based on what the current owner is paying or if it is based on the purchase price. The latter is the correct approach.

The tax assumption can be calculated by finding the tax rate on the county’s auditor site and multiplying it by the projected purchase price.

A conservative annual expense growth factor is 2%, which is what my company uses. This factor is the projected natural growth in expenses and should be relatively similar to the annual gross potential income growth factor.

A general partner should save $250 to $300 per unit per year in reserves. This is in addition to the upfront operating account funding.

This is to cover ongoing shortfalls or unexpected capital expenditure projects. If they don’t have a reserves budget and a shortfall occurs, they may be coming to you for extra capital.

First and foremost, you want to know if the general partner has already secured debt financing or if they are still working on assumptions. If it is the latter, the projected returns may change once debt is secured.

Next, you want information on the interest rate. Is it locked in or is it floating (meaning it could change)? If it is the latter, did they purchase a cap on the interest rate? If the interest rate is floating and/or a cap wasn’t purchased, a increase in interest rates will negatively impact the return projections.

Finally, you want to know if it is a short-term loan or a permanent loan. If it is the former, ask them what refinance assumptions they used (i.e. interest rate, loan amount, etc.) and why they made those assumptions. Also, determine the length of the short-term loan and if they can purchase an extension.

Click here to learn more about how the different types of debt and financing for apartment syndications.

For distressed and value-add deals, your largest profit will be realized at the sale of the apartment at the end of the business plan. So, you need to know what assumptions are being made to calculate the sales proceeds.

These assumptions include the exit net operating income, exit capitalization rate (is it higher or lower than the purchase cap rate, with the former being the conservative approach), the closing costs and the remaining debt.

To remain as conservative as possible, we assume that the market at the sale will be worse than at purchase.

First, we calculate the in-place or going-in cap rate, which is based on the purchase price and the in-place net operating income. To calculate the exit cap rate, we add 20 to 50 points (i.e., 0.2% to 0.5%) to the in-place cap rate. This protects our return projections during a downturn, and significantly improves the actual returns if the market remains the same or improves.

The relevant return factor is based on your investing preferences. The general partner (GP) should calculate returns using factors like cash-on-cash return, internal rate of return and equity multiple. You may have return goals for one, two or all three of these return factors. You must determined all of the assumptions the GP made when calculating these returns in their underwriting, and your decision to invest is based on these assumptions and the projected returns.

Team FAQs

You want to know what percentage of the passive investors are returning investors and what percentage are first-timers.

Because return investors have already passively invested in at least one deal, having a large percentage of return investors signals that you are dealing with a high-quality general partner (GP). However, if the GP has only completed a handful of deals, they may not have many return investors because the return investors haven’t received their initial capital back yet.

Determine how many deals they have completed and how those deals actually performed when compared to the projected returns.

If the general partner (GP) has had past deals that underperformed when compared to the projections, it isn’t necessarily a deal breaker. A good follow up question would be “what processes have you put in place to reduce the likelihood of an underperforming deal?”

I would also take into consideration if a GP hasn’t successfully taken a deal full cycle. While this can be offset by an experienced team, there is still more risk when going with a GP without a proven track record.

Click here to learn about the four things to look for when qualifying the GP.

This is a question you would want to ask during your first conversation with a general partner. If they have a deal under contract, ask them some of the questions I outlined in the “Specific Deal FAQ” section. You will have a better understanding of their business plan when they explain it for an actual deal than for a hypothetical deal.

Also, if they currently have a deal under contract, ask them how much capital they have left to raise. Maybe, this can be your first passive investment.

A satisfactory response to this question will vary from investor to investor.

Based on my experience with passive investors, the reasons they decide to invest in my deals are because of alignment of interest, transparency and trust.

We show alignment of interest by placing our asset management fee in second position to the preferred return, which means we don’t get paid until our investors get paid. Additionally, we invest our own capital in the deal.

We are transparent with our passive investors, providing detailed monthly email recaps on the status of our business plan. We also pride ourselves on our responsiveness. When an investor sends us an email, we typically reply within hours, not days.

Finally, we build trust with our passive investors through a thought leadership platform. I host a daily real estate podcast, and whenever I jump on a call with a prospective investor, most of them tell me that they feel like they’ve already talked to me because of the podcast.

These are a few examples of how general partner (GP) differentiate themselves but the reasons why you invest with one GP over another (assuming the projected returns are equal) are based on your personal preferences.

You want to know that your money is in good hands, and the general partner (GP) is one of many people that are responsible for the success of the deal.

Usually, the GP is actually more than one person. There are multiple partners who have different responsibilities. So, you want to know who all the business partners are, how they met, what unique skillsets they bring and how each partner complements the other.

Another important team member is the property management company. Their responsibility is to manage the operations on a day-to-day basis. The property management company should have prior experience managing apartment communities. In fact, they should be actively managing apartment communities that are, preferably, in the same submarket. Ask for the historical information of the property management company (i.e. how many units do they manage, how long have they been in business, has the GP worked with this company in the past, etc.)

The GP and the property management company are the most important members of the team, so gaining an understanding of their background and experience is a must prior to entrusting them with your money.

Click here to learn the 8 questions to ask in order to qualify the GPs team.

Most general partners will create a LLC and purchase the property with the LLC. As a limited partner, you will then purchase shares of that LLC.

The apartment will be managed by a professional property management company that is either a 3rd party or owned by the general partner (GP).

Regardless of who the property management company is, you want to know about their past experience. Determine how many properties they manage overall and how many properties they manage in the GP’s target market.

If it is a 3rd party management company, determine how many of the GP’s previous deals were managed by them and the success of those deals (i.e. how did the actual returns compare to the projected returns?).

General partners with one management company are able to streamline most aspects of the syndication process, because they are using the same point person for everything. The same company is confirming the underwriting and capital expenditure projects, managing the due diligence, and managing the deal. Financial reporting and performance tracking are consistent across all deals. All issues are resolved through the same point person. Additionally, if one property in the GP’s portfolio isn’t a good fit for a resident, the property manager can refer them to another property rather than turn them away.

There are, however, pros to having multiple property management companies. If a GP decides to expand or transition to another market and their current management company doesn’t cover that new market, then they will need to find a second management company. Also, when the GP has two property management companies in the same market, if something happens with one company, the second company can take over management duties indefinitely or until they find another company.

Overall, there are benefits to both approaches as long as the GP adequately qualified the management company/companies.

As the limited partner, your sole duty involves the funding of the deal. After that, the process should be hands off except when reviewing the investor reports and doing your taxes at the end of the year

Generally, the general partner will find the deal, review and qualify the deal via underwriting, make and negotiate the offer, coordinate with professional property inspectors, find the best financing options, coordinate with attorneys to create the LLC and partnership agreements, travel to the property to perform due diligence and market research, hire and oversee the property management company and perform ongoing asset management, which includes lender conversations, overseeing the business plan and ongoing communication.

Some general partners will focus solely on apartment syndications, while others may also focus on other asset classes, whether it be single family homes, mobile homes, self-storage, retail, development, etc.

Ideally, their main focus is on apartment syndications. If it is just a side business, that is a red flag.

There are three main parts of an apartment syndication: acquisition, management and sale. Each part has its unique action items and challenges. Even if a general partner (GP) has previously acquired and managed a deal, you still don’t know if they are capable of finalizing the business plan with a sale. Keep that in mind when screening GPs. If they haven’t taken a deal full cycle, they are lacking in the full apartment syndication experience.

The point person is the individual in the general partner (GP) that you reach out to if you have any questions or concerns about the deal. You want to know who this person is and what their GP responsibilities are. Ideally, they are actively involved in the deal and are one of the experienced team member as opposed to their sole responsibility being the point person.

The three main benefits an aspiring syndicator or active investor receives from passively investing as a limited partner are:

  1. Practice evaluating and underwriting large apartment deals
  2. Ability to ask questions to an experienced syndicator
  3. Credibility as a partner in a larger deal

The third benefit will directly help you when speaking to lenders, while the other two are more indirect benefits. Since you have experience reviewing deals and were able to tap into the knowledge and experience of the general partner, your transition into active investing or syndications will be more seamless since you have a head start.

Market FAQs

You want to know what market factors the general partner looks at when qualifying a market. Important factors include unemployment change, population growth, population age, job diversity, the top employers and supply and demand.

Click here to learn about these important factors, including how the data is found and how to interpret the results.

One of the factors a prospective tenant will take into account when moving to an area is the quality of the school district. Even if the target tenant demographic are not small families, a quick way to gauge the overall quality of a market is the school district. Look at the elementary, middle and high schools and see how they rank.

A website to find information on the quality of the local school district is Great Schools.

No one wants to live in a high crime area. Look at the crime stats for the market. If there is a specific deal, look at the crime stats of the neighborhood.

More specifically, look at the crime trend. Even if it is relatively high, a downward trend is a good sign.

A good resource for crime statistics is Crime Reports.

You want to know the median income of the area in order to determine if the demographics income levels support the rent projections. Generally, people spend 25% to 35% of their annual income on home expenses. Therefore, confirm that the median income is at least 3-4 times higher than the annual projected rent.

The United States Census Bureau keeps details data on median incomes across the country.

The market vacancy rate is essentially the average multifamily vacancy rate in the market. However, a more accurate market vacancy rate is based on a handful of recent sales.

Ask them what the market vacancy rate is and how it was calculated, and then compare that rate to the assumed vacancy rate for the specific deal.

If the general partner is investing in a single MSA, the first thing you want to know is how they qualified that market (click here to learn about the most important market factors). As long as they properly qualified the market, as well as each new deal, diversification across multiple MSAs isn’t relevant, because you are investing in one deal at a time.

Become a Successful Passive Investor

I have a wealth of experience with buying apartments and executing successful deals with passive investors. So, if you’re ready to start growing your bottom line through passive investing in real estate, then now couldn’t be a better time to partner with me.

Get in touch with me to find out more about how passive investing in real estate can improve your net worth in the coming months.