Syndication, Due Diligence, and Profitability

Your first step in syndication due diligence is deciding if this type of real estate investing is right for you. 

To help you determine if syndication is the correct type of investing for you, Sarah Sullivan, founder, and owner of SuGo Capital, shares her wealth of knowledge on syndication investing.

In general, Sullivan argues that determining what kind of investing is right for you requires you to consider four concepts:

  • Vision: passive income and net worth 
  • Effort: active vs. passive 
  • Risk: your tolerance for risk 
  • Goal: clear, attainable, and accountability 

Watch Sarah's presentation to get a detailed breakdown of Syndication Structure and Due Diligence. To help you determine whether syndication investing is right for you, we'll cover syndication, due diligence, and potential benefits. 

What Is Syndication?

Characteristics of a real estate syndication:

  • You (as an investor) would not be on the loan or the deed
  • Tenants don't know who you are
  • Passive investment

The structure of a real estate syndication consists of 

  • General partners who form an LLC and control the operation of the property
  • Limited partners who invest and receive quarterly passive income 

The capital needed for syndication comes from the general partners, limited partners, and a loan. Here is Sullivan's example of how capital and ownership would work. 

General partners pay 10% General partners own 30%
Limited partners pay 30%Limited partners own 70% 
Loan for 60% N/A

The general partners execute the business plan and exit strategy when appropriate and pay the limited partners their share. 

Because the company is an LLC, there are certain tax benefits that a limited partner is entitled to. For instance, asset depreciation passes through the LLC and can be claimed by the limited partners when it comes time to pay taxes on your gains.

Simple Model For Syndication Return On Investment

A real estate syndication should double your money in five years or less. 

Suppose you make a $100,000 investment into a real estate syndication. Your return on investment ideally would play out like this: 

  • Five-year cash on cash return: $40,000 (5 years at 8% yearly projected interest)
  • The portion of your appreciation at the sale: $60,000 
  • Principal investment returned: $100,000 

Sullivan advises her clients that a real estate indication that performs less than this level is not worth investing in. 

Syndication Due Diligence

For syndication due diligence, you want to start your evaluation with the people involved, consider the market, and then the property.

Syndication Due Diligence: People

The people involved in the deal will be a critical factor in whether your investment is a success or failure. Evaluate the sponsors, property management team, and extended team by: 

  • Googling the people involved
  • Conducting a background check
  • Asking for a track record
    • Consider the types of investments they've made vs. what they're offering you
  • Using
  • Checking the private placement memorandum (PPM) for waterfall and tax information

Syndication Due Diligence: Market

Evaluate the market and compare it to what's happening in the United States. Some of the factors include: 

  • Population growth
    • Compare it to the national average
    • Check moving company reports
  • Job market
    • Who are the major employers?
    • Do the employees fit the asset class of the property?
    • Are all the jobs in the same industry?
    • What do the next five years look like for the industry?
  • Job growth
    • Google job announcements in the city or county
    • Research historical and projected job growth rates
      • You want to see more than 2% growth for the last two years and above the national average for the future
  • Vacancy rates
    • No less than 80% occupancy
  • Market rents

Syndication Due Diligence: Property

The property is the final piece of the puzzle. When checking the property, evaluate the following: 

  • Vacancy rates
    • Property vacancy rates that are higher than market vacancy rates are ideal
  • Rents
    • Local rents that are higher than market rents make for better investments
  • Neighborhood
    • Class A properties: compare these to the broader US market
    • Class B properties: almost always a good investment
    • Class C properties: may be solid if surrounded by A and B properties
    • Class D properties: avoid these
  • Google Street View
    • How easy is it to get into the property?
    • What is next door or surrounding the property?
  • Tenant profile
    • The profile should match jobs and the asset

Key Takeaways

Finding the right type of investment for you is an essential component of your overall strategy. As you determine what type of investing might be right for you, it's crucial to do due diligence. Through careful research, you may decide that real estate syndication investing is right for you. 

Some things to keep in mind when it comes to syndication: 

  • It's passive
  • According to Sullivan, anything less than doubling your money in five years is underperforming
  • Syndication due diligence is multi-pronged and hierarchical and includes the following:
    • People 
    • Market 
    • Property 

Join other like-minded professionals in weekly Royal Investing Group Mentoring, where we network and discuss real estate investment opportunities and best practices. 

Last Updated: 
January 11, 2023

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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