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I was recently at a Deal Analysis class by GoBundance.

Why was I there?

Because a few months ago, I lost money in a syndication. The deal went sideways, and I walked away with nothing.

The reason I lost money is because I didn’t do 100% due diligence.

This was partly because I didn’t know the best questions to ask. When I lose money, I see it as a lesson. Like I took a class. An expensive class.

I hear a lot of investors get excited about the opportunity to invest in syndications for passive income.

But just because a syndicator is offering an 8% preferred return for doing nothing, doesn’t mean you’ll actually get that 8%.

I’ve never lost money on my own deal. But I did lose money in this syndication.

This was a hard lesson to learn, but a great one that will help me out for all future deals.

So today, I want to share with you 6 key questions to ask if you are looking to invest in syndication.

These are the questions to ask the sponsor.

The sponsor is the person raising money and is part of the General Partners (GPs). They raise money from limited partners (LPs). LPs don’t have a vote on the day-to-day management of the syndication.

Question 1: What are the risks in this deal?

This is important because the sponsor should know and willingly share the risks of the deal. The risks could be

• It's a big rehab project, which could be more expensive or take more time than projected.

• There could be two other multi-families competing in the same area.

No investment comes without risks.

Question 2: Who is the lead investor?

Find out who’s investing the most money in the deal.

Depending on who’s investing, it could be a good sign. However, you must do due diligence further.

If you remember the story of Theranos—the company was backed by dozens of famous people who didn’t do enough due diligence because everyone assumed the other famous people who funded the company had done their research.

Question 3: Can I pull a background check and what will I find?

If they say it’s not necessary, that’s a red flag because they have something to hide.

Only invest with people who are transparent. They might even admit to having done something in the past.

I’d generally recommend trusting your gut about a person—don’t invest if the vibes are off.

Question 4: What keeps you up at night?

This ties into the risks of the deal. You want a sponsor to understand what leaves them vulnerable.

A good GP would say something like, “What keeps me up at night is if rehab prices double—for labor and materials. If that’s the case, we have this much wiggle room or are doing XYZ to mitigate it.”

Question 5: Are you putting money into the deal? And what source?

In a syndication, there are fees like an acquisition and or management deals.

Many syndicators say they are investing in the deal, but sometimes it’s the money from those fees. It’s not money coming out of their own bank account (hence why you ask the source).

You want the GPs to have skin in the game with their own money so their incentives are aligned with yours.

Question 6: Have you ever lost money in a deal? And what happened?

Any GP can say they will safeguard your investment, but actions speak louder than words.

See what actually happened when things went sideways. Ask,

• Did you pay the people back months later?

• Did you lose your money and not take any from the deal but did right by the investors?

• Or did you file for bankruptcy to get it out of the way and start again?

You want to know their history of action when crap hits the fan.

These questions are phase 1

You still have to do due diligence further and ask questions to other LPs in the deal. You want to know how their experience was investing with them before.

It’s a good sign if there’s a long history of GPs and LPs working together.

Remember, these deals are more complicated than your average house hack

• The debt is structured differently

• There are more tenants/ operations

• More money is involved with more contingencies, etc.

This current market, with unanticipated higher interest rates, has hurt a lot of syndications.

Usually, syndications try to refinance in 3-5 years in order to pay your money back. But in order to refinance, interest rates have to be lower than when they signed the deal.

So a lot of people aren’t getting their money back now that they expected a few years ago because interest rates are at 7%.

GPs couldn’t have planned for such high-interest rates at the time when rates were so low. So even if the pro forma was perfect, they could still be hosed with higher rates.

Should you invest in a syndication?

The best way to get into a good syndication is to be able to identify opportunities on your own.

This likely means you’ve purchased and own real estate now because you’ve gone through that process. I’d be skeptical about going into syndications if you haven’t built your own portfolio.

Want to learn more about synidcations?

• Listen to Friday’s podcast where we break down these questions further

• And listen to the pod with Pascal Wagner (#28) about having an investment thesis

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