The Wealth Elevator Syndication eCourse

Numbers in the examples on this page are hypothetical and for illustration only. Return targets are not guarantees, and investors can lose money.

Frequently Asked Syndication Due Diligence Questions

BELOW ARE LIMITED PARTNER INVESTORS’ QUESTIONS FROM PREVIOUS REAL ESTATE SYNDICATION DEALS WITH SLIGHT CHANGES TO PRESERVE THEIR PRIVACY. THE SPECIFICS ARE BY NO MEANS TYPICAL SINCE THEY ARE FROM A WIDE RANGE OF DEALS AND BY NO MEANS TYPICAL, HOWEVER, IT ALLOWS INVESTORS TO GAIN INSIGHTS FROM FELLOW LIMITED PARTNER INVESTORS.

Management Team

Is the management team investing any money?

Yes, we plan to invest alongside our fellow investors. We already have around $130K that the syndication team has put into the deal (deposits, etc.) that is “hard” and committed. The deal sponsor will be at least 10% of the closing capital. The $1.3m is what we’re aiming to have in total for closing, but our actual cash to close and raise is slightly lower (~$1.1-1.2m). This accounts for closing costs, and fees, and ensures we have the additional working capital to start. (Cash to close is lower because a lot of times the bank may not require all the Cap Ex money to be in the bank at the very start)

What excites you about the real estate syndication deal?

This is a great hybrid play with a proven model to increase rents in a strong market.  The deal is “clean” and we can come in and do little and still cashflow.

Who gets awarded ‘Incentive Units’? Is that something that goes to the real estate syndicator or is it something the syndicator awards to some passive investors

It is only for sponsors who don’t take their comp up front.  It’s a tax thing. (This term is present in some deals and not in others. It is mainly for tax use for the sponsors to get taxed accordingly. In many syndications, equity is allocated per unit which can be purchased by investors. For example in an 80% GP /20% LP deal there might be 800 units up for purchase and  200 units given to the GP as their carried interest in running the deal.)

For additional capital raises, are LPs required to contribute as well?

This is called a cash or capital call. The cash reserves serve as a buffer for such an event. Oftentimes, in order to “save face” additional cash is asked from the Key Principals of General Partners, but yes it is possible to have a cash call from LPs however unlikely.

What if we have a downturn in the economy? What will the GPs plan to do to minimize the effects?

That’s exactly why you do these deals. The investment goes through some vacancy but overall still cashflows until occupancy drops to 70%. This is where I would like to be in a downturn in the economy.

Are there defined roles and responsibilities of each GP?

There are roles that we signed up for, however, it’s fluid and in the end, all of our brands are on the line for the sake of the investment and team.

4 parts of a deal that shape a guideline on who gets what: 

1) Who is bringing the funding 

2) Who is doing the work 

3) Who found the deal 

4) Whose experience/network is being leveraged

A good starting point is evenly weighing those at 25% each but it’s very subjective.

Who’s the company doing the fix-up and repair on the apartments/townhomes? How did you get connected with them?

These contacts are through the property manager, who manages the process with the different trades. We will still get other outside bids after closing to make sure we’re getting the best price/service.

We have other contacts in the area through other relationships and because the sponsor team already owns assets in this area as well.

Property/Location Details

Is this an “All Bills Paid” property?

No. Residents pay their own electricity and water is billed back. Residents are also charged a Trash and Pest fee.

How many tenants are on Section 8 / housing program? How hard is it to re-tenant in that state?

I have four of my rentals within a few miles of this apartment. I don’t think any of mine are currently section 8, but I am a real fan of it. What you have to worry about is the LIDCA, LURA, or LURK restrictions on rent. Sometimes they have credits to builders when they build these and that is a real pain to deal with if you are the best buyer. I have not met anyone who has specialized in repositioning these because you have to be really careful with the expiration date. It’s usually something brokers trick you into buying.

The exact percentage has been around 8% total Section 8. A handful of those are carryover from the previous owner and long-term residents (5+ yrs). The property currently doesn’t rely on it to maintain or attract tenants and is not high enough for us, in general, to be too concerned outside of normal resident churn. One good thing is the property has actually been getting the current asking rent from the Section 8 residents. There are always some units not repositioned to leave some meat for the next buyer, so I’m sure naturally these will be it.

Why are PTAC units installed (Packaged Terminal AC) – HVAC?

• All the flat units have these PTAC units with electric wall-mounted heaters in rooms.
• One of those units was retrofitted with central HVAC.
• All the Townhome styles have traditional central HVAC with indoor air handlers and outdoor condensing units.
• Kind of is what it is, we could try to convert the flat units but that probably wouldn’t be cost-effective.
• Residents pay for electricity anyway.

Do we have comps of nearby properties recently sold? I see comps for rents, but wondering if there’s some data for sales in the area? How does this compare to your other projects in the area that you talked about in the webinar? Would be helpful to understand if this is being acquired below/at market rate, etc.

Personally, I pay no attention to Sales comps. It’s something brokers always put in Offering Packages to fill space. These apartments are commercial assets and valued on NOI, not SF, Units, or comps. As for the rents take a look at the graph in the webinar.

We are just doing a 7.8% increase. Anything over 15% is too high. 

Can you provide some more info about the seller, their motivation, and how long have they owned this? (if you can point me to how I can find this out myself, that would be much appreciated!)

Their business plan was to take from 70% occupancy to this point.

The current seller has owned for about 2.5 years and has a shorter-term business model when he buys properties. He is focused on large value-add with more legwork. He tends to get short-term variable financing, work on distressed properties, etc. He’s taken this particular property to this point and is ready to take gains and move to the next. He’s looking for new deals like us.

Do you have any details about the area that you may have already compiled? It would save time for me if you have this aggregate. Things like median income to rent ratio, schools, crime, etc. If you don’t have this aggregated – I’ll look into it.

This is due diligence that you need to do on your own and check out City Data and crime websites. I have owned 4 properties on this side of Atlanta. It’s not the greatest area but definitely not the Southside (Along the Marta) which is where you do not want to be.

One of the first questions that always pops into my mind when I’m sent a deal is “Where does this rank vs the others I’ve been sent?”. Where does this deal rank compared to Huntsville? Or Iowa, or Texas? etc etc. It would be nice to see where it falls on your scales of a slam-dunk conservative one, or a high-risk potential one.

I am working on a scorecard as I’m getting a little (loose) on how I view these deals where it’s more off heuristics and seeing so many I know exactly what to look for. Which is terrible for communicating with others. I realize that “I just know” is not a good answer and so is “trust me” as it does not work with everyone. Plus, I’m always afraid that I will forget it, much like the motivation behind the podcast is to memorialize this.

Using the rubric of 50% operator and 50% deal…

How much did property trade for in the past?

• The property was bought out of foreclosure a couple of years ago for $26K/door but that seems kind of irrelevant. The property was purchased after the 2008 financial crisis at what we are paying today.
• Properties in the area are trading for $50K/door

Is there new development in the nearby area that is going on?

• A number of new apartments are being built further northwest.
• Rent increases in that area and the north is starting to drive people south.
• There are a couple of different new townhome developments within a couple of miles
• Path of progress so to speak.

Why is the seller selling?

• The current owner owns multiple properties in the area and has been selling off assets.
• He has a shorter-term business model focused on large value-added projects with a lot of legwork and getting short-term financing on it.
• Taking gains and buying elsewhere. Bought property out of foreclosure from Fannie Mae.
• Brought occupancy back up (70%) and spent dollars on exteriors including paint, shutters, roofs, and stairs/decking.
• He also started his property management company, so he’s doing different things.

Tenant Profile/Demographics

• $44K medium income for the submarket. Workforce/blue-collar housing. People working in the services sector, retail, public service, food service, etc.
• For this particular submarket, the major employers are the Emory conglomerate (University, Medical Center, Center of Disease Control) and Dekalb County Gov and Schools (the county center is 5 min north).

Is it possible to see the average time remaining on rental agreements? Do we have visibility into whether tenants have signed multi-year deals, renting month-to-month, etc? What legal rights do we/don’t we have for month-to-month tenants?

We have the rent rolls and do an audit. We are looking for abnormalities, but everything so far looks like a typical hodgepodge. In the end, it works its way out to be a wash because if you have a lot of vacancies at the beginning of ownership, it can be good cause you “rip the band-aid off quickly” and get a jump start on rehabs/end business plan. And if you have to wait 3-6 months for a bulk of the vacancies to come then you get better cashflow in the interim. With a large property like 300+ units, it dilutes the risk that you are considering here.

Business Plan

Is due diligence complete?

Yes. There were no big surprises, other than some minor deferred maintenance for we are able to get a $25,000 credit for. Unit interiors need some repairs, but again nothing major. All of this has been accounted for in our underwriting.

What is the timeline for this investment?

We are oversubscribed meaning people have committed funds but are in the process of signing docs and wiring in funds. There is still time to get in, but email me ASAP.

Will distributions be by check or electronic transfer?

Likely Check. Checks are easier especially because people move around so much. But we can do ACH if the bank allows it.

In extreme circumstances, can I exit before the property is sold?

Not really, especially for such a small position. In my opinion, it does not happen and if you think you need the money back, do not invest and please save everyone the hassle. This is one of the reasons sponsors don’t typically bring in lower net-worth individuals and non-accredited investors into these deals.

How is the team planning to renovate with tenants there?

Rehab is done with natural turnover in order to optimize cash flow. In some investments, there are a lot of vacancies which expedites rehab. However, there is a big hurt on cash flow during that period.

Why are you rebranding the property?

• The current owner previously bought the property out of foreclosure. Previously, it had not been taken care of, bad tenants, etc.
• There are older (3+ yr) bad reviews online from when it was run poorly prior (was bought out of foreclosure).
• The property also had an incident.
• Obviously, that hasn’t affected occupancy and performance at this point, but it gives us a fresh start, signals new ownership, and we can ride the wave of a new sheriff in town.
• Rebranding, as well as the new name, were suggestions from the property manager.
• The property next door is rebranded and going through renovation, so we’re keeping suit.

What are some new revenue opportunities / other ways to generate income?

• We’ll continue to look at property management. Some immediate things I see are that the Townhome units have full W&D hookups, so we’ll look at opportunities there.
• The laundry income is underutilized.
• We’ll also look at turning the office (currently a 2BR) into an efficiency which property management thinks we could get $550/mo. for. 

With a $30K investment, how much equity am I holding in the deal?

If the total raise was 1.3 million, your $30K investment is 2.3%. But since it’s an 80% LP / 20% GP split, you own 1.8%. But 1.8% of 114 units is 2.1 units.

Does 100% Total Return mean when I break even with my initial investment? When would you think the exit will be?

100% return means if you invested $100K, if you added up your proceeds from cashflow paid quarterly and money from the sale/refi you would walk away with $100k and your original $100k.

The normal 5-year hold is because it takes two years to get all the rehab units done, two years to get the culture to change and further bump rents, and the final year to stabilize the books for the new buyer. Of course, this is a conservative projection.

Do you anticipate the 8% return and payments to be paid monthly to investors starting the first month after the acquisition?

All deals are pretty much paid up and financials are rolled up on a quarterly basis starting around the half-year mark as we force bad tenants out and stabilize after the takeover. It has to do with minimizing admin and being cost-effective. This is the case for Class B traditional equity. For Class A (debt) investors, we pay monthly and from the first month.

So the plan would be to sell the property at year five and get back the investors’ money plus appreciation?

We could sell or refi earlier (years 3-4) or even after years 5-6. It is unlikely we would hold past 8-10 years. It’s based on how much returns we can squeeze out of the asset with the least amount of risk. We monitor the market and try to make the best decision for everyone… this is why it is good to be aligned with a performance split with the sponsor.

Is depreciation being offered to the Class A debt investor?

Not on this one particular project. It acts like a debt investment – no depreciation. More for regular equity investors.

Why do you say Class A is for a “very high net worth investor” and how/when is the 2-4 years determined and agreed upon?

I might have made a general statement, but most investors follow a bit of progression where they start out looking for cashflow and then look for higher gains (no cashflow) but in the very endgame (or over 4-6M net worth) they just want a fixed return that the debt investment yields. Here is a short video in our new Mastermind Syndication Secrets series coming out soon discussing this progression of an investor’s mindset.  In a structure like this, the sponsor usually aims to pay out Class A investors once the property can be refinanced, which shifts more of the upside to Class B. When that happens depends on the market and is not guaranteed; a 2-5 year window is a common target.

So for Class A at the end of the (2-4 years), you only get your initial investment back along with the monthly but with Class B you get the monthly, appreciation, and initial investment?

Class A gets paid in the first month so it’s pretty instant feedback (again Class B investors are projected to wait a couple quarters and then should be paid on a quarterly basis). Class B gets the upside in the deal, so that is the tradeoff. Most investors will get the Class B unless they have a higher net worth or really want cash flow.

Can you provide more details on the differences between the A and B investors for this deal and also what happens in 5 years for both the A and B investors if the decision is to keep the property?

A Class (debt investors) is more for conservative and very high net-worth investors. It’s a 10% return starting right away paid monthly, but no upside. Plus we try and cash out those investors out of the deal as soon as we can (2-4 years). Class B investors are traditional equity who have a split of the profits but will likely have to wait a couple of quarters to start getting quarterly distributions.

What happens if the property is not sold in year five?

We continue to cashflow. If we hold longer, we will refinance and basically pull all your initial investment so you are still cash flowing with none of your initial investment, so you are playing with house money at that point on.

Do the payouts increase over time if rents go up?

Yes, the more money the property makes the more money you make. If we make just $25 more per unit it means huge dollars for us!!! You take 80% of all profits. When the property is really performing well above a 14% IRR the GP takes 25% of profits and LPs take 75%.

What will be some of the cost savings and expense reductions?

• Payroll is the largest item here ($1500/door), the current property had an extra full-time maintenance person. Since Provence manages the property next door, we will share resources which will bring that down closer to industry standard (we’re underwriting $1200/door).
• Other things we’ll look at are utility savings with energy/water conservation.

Other Items that are probably “too much info”

Using the Hedonova scam as a case study:

1. Transparency and Authenticity: Operators should be fully transparent about who they are which means if you can’t find them on the internet with a simple Google search then that is a huge red flag. Sure everyone is going to have a little dirt on them as that is the nature of Web 2.0 where regular people are given platforms to post whatever but what you don’t want to see is zero footprint! Hedonova seemed established, for instance, the CEO used a stock photo instead of a real one—a major red flag. Authenticity is key​. I personally get to know all the operating partners and I try my best to build a connection with all of LPs (now over 900+ as of 24.08.21).
2. KYC (Know Your Customer) and Background Checks: Always ensure that operators pass thorough due diligence. Hedonova didn’t pass basic KYC checks, which was one of the first signs they weren’t legitimate. Any reputable operator should be able to provide background checks and verifiable financial statements​. More importantly, I always want to have an organic connection and do business with the individual before I GP with someone as my criteria. For LPs doing a private investigator workup on every sponsor might not be worth it for a little 100k investment. Beware of “review sites” out there because many times they are just getting kickbacks or the members there are fake too. Many times when this news comes out they are quick to revise the previously shinny reviews.
3. Track Record: Hedonova made exaggerated claims about assets under management (AUM) and investments, yet they couldn’t back them up with real data. Basic math revealed their AUM was grossly overstated—by a factor of 10​. A lot of fake to make it operators use some type of some of their years of experience but they use like 12 people on staff so obviously they’re gonna get a lot of years of experience through that method. Additionally, some people might count up their assets under management through being a passive investor or an LP, which means nothing and which is why you know when we count up our assets under ownership that’s always been as under a managing partner or general partner, you can’t blame these guys. That said hey, everyone is just trying their best, trying to best their best suit and tie forward and it’s a bit of a cat and mouse game but hopefully you the LP know this now. Guess what all these vanity awards out there are a pay-to-play program.
4. Consistency in Communication: Operators should have consistent, verifiable communication across platforms. In the case of Hedonova, many of the individuals associated with the fund were fictitious, which raised doubts about the legitimacy of their communications. Names like Alexander Cavendish and Munish Kumar were thrown around, but there was no real evidence these people existed​. PR releases were all fake too (these are laughable). In case you haven’t realized Instagram followers are just purchased through apps and also YouTube channels you can just purchase subscribers and views through that method one way that we’ve kind of fallen just to do due diligence on any guest that we bring on on our podcast as we if anybody’s got more than 10,000 subscribers, they better have a lot of common activity on their YouTube channel. If not, it’s a clear sign that their followers are fake. From my experience with LinkedIn, despite their efforts to authenticate users through platforms like IDme, I still encounter numerous fake profiles created by AI. It’s challenging to know who’s real. There’s also a trend where some groups present a large staff, but in reality, they’re just marketing sub-syndicators with no actual operations. When you consider the supposed salaries of these ‘staff members,’ it becomes clear that their payroll expenses are unrealistic compared to the company’s income. As someone who runs my own company and understands payroll costs, this raises some serious questions.
5. Legal Standing and Compliance: Make sure the operators are in good legal standing. The SEC charged Hedonova in July for fraudulent activities, such as misleading statements and a fraudulent investment scheme. Avoid operators who are involved in legal issues or can’t provide proper documentation​. Hedonova also misrepresented its relationships with reputable financial institutions, claiming they had auditors and bankers from prestigious firms, which was later debunked. These types of fabrications are huge red flags. Always verify any affiliations an operator claims to have​. Alternatively, any operator managing $1 billion in assets and overseeing 10,000 units is bound to deal with lawsuits. Unfortunately, with that many units, incidents like suicides or even tragic murders happen every few years, often leading to legal action. While these are typically contained within the LLC, it doesn’t stop people from targeting general partners personally, which can be frustrating. It’s part of the business, though. When you see some controversy around a large operator, it can actually be a sign that they are actively managing a significant portfolio, and facing the challenges that come with it. So, it’s important to consider the context when evaluating such situations.
6. Other sources: tech.eu/the-wild-story-of-an-investment-into-a-company-that-doesnt-exist