You can’t eliminate all risk from investments. After all, the zombie apocalypse could strike tomorrow and probably wipe out your entire portfolio. But you can reduce risk, even among high-return investments. In fact, these are precisely the investments you want to minimize risk for—your Treasury bonds don’t need it.
I love real estate syndications as high-return investments. They’re completely passive: You don’t have to worry about financing or contractors, permits or inspectors, tenants or property managers. You don’t have to become a landlord, yet you still get all the benefits of real estate ownership, including cash flow, appreciation, and tax advantages.
If you find terms like “real estate syndication” or “private equity real estate” intimidating, don’t. They’re just group investments, where a professional investor takes on silent partners to help fund the deal. You effectively become a fractional owner in a large property like an apartment complex, mobile home park, or industrial or retail property.
So which risks should you watch out for when screening potential investments? Here are nine to keep in mind.
1. Sponsor Risk
Before looking at specific investments, start by evaluating syndicators (also known as sponsors, general partners or GPs, and operators).
An experienced, skilled sponsor who puts their investors first can find ways to salvage deals that go sideways. Inexperienced or loose-scrupled sponsors can find ways to mess up even good deals.
While you should ask sponsors many questions, a few to start with include:
- How many deals have you done in your career? How many of those were sponsored syndication deals?
- Of those, how many have gone full cycle? What kinds of returns have you delivered for your investors?
- Have you ever lost investors’ money? Have you ever lost your own money on a deal?
- Have you ever done a capital call?
- Tell me about some deals that went…