Written by Zane Willman, Associate Advisor | CCG Real Estate Advisors
Thinking of investing your hard-earned money in a real estate deal?
In this article, we're going to tell you why it's more beneficial to invest with the pessimist instead of the optimist. The sponsor who tells you what could go wrong, accounts for sh*t hitting the fan, and is straightforward about the end goal. Not just the best-case situation.
Here's how to find that person:
Ask About the Worst Deal, Not the Best
Anyone can show you the winner of a deal they completed. When everything went right. What about when it went wrong?
Did a projected 18-month timeline turn into 36 months? Did actual returns come in at 60% of the expected pro-forma?
The gap between projected and realized performance across their full portfolio is one of the most useful numbers you can get.
Understand How They Get Paid
A sponsor earning fees on acquisition, asset management, and disposition gets paid regardless of how the deal performs.
One whose upside is concentrated in the back-end promote only wins when you do.
Ask directly how much of their own capital is invested in the deal alongside yours.
When sponsor's have their skin in the game, they're more incentivized to see the deal perform well.
Press on the Underwriting Assumptions
Ask what exit cap rate they're underwriting to, and what happens to returns if it's 50–75 basis points higher at sale.
Ask what their rent growth assumption is, and whether it's above or below the historical average for that submarket. San Diego, or example, has seen rents cool this at ~3% annual rent growth (Source)
A sponsor who answers clearly and with conviction has actually stress-tested the deal. One who gets vague or unclear on their answer is usually someone to be wary of.
Look at How They Communicate
This is the MOST IMPORTANT thing to look for. How often is the investor providing updates on the deal?
How does their communication activity change when things aren't going according to plan? Great GP's are capable of having the hard conversations when things aren't all sunshines and rainbows. In this business, you get judged off of your worst deals vs your best. Ask for a reference from someone in a deal that hit trouble, not just their best case study.
Ask Who's Behind the Deal
Who's the operating team? (acquisitions, asset management, investor relations, contractor, etc.)?
Ask How They've Fared Through a Down Cycle
A lot of sponsors have only operated in a rising market. How did they fare from 2008-2010 (if applicable), or how their existing portfolio has performed since rates spiked in 2022.
The Bottom Line
When investing your money into a deal, these questions are crucial in determining if you're making a good decision vs a bad one. You're just trying to find out whether a sponsor has actually thought past the best-case outcome. Because the deal that matters most isn't the one that goes as planned. It's the one that doesn't.
Thinking of investing your money into a syndication, or looking for a team you can trust with your capital? We can connect you with a network of proven GPs with strong track records. Happy to make an introduction and help you evaluate the right fit for your goals.
