In our quick guide to syndication, we just glanced over the subject of which were adequate questions to ask before going into a deal. You mustn’t go into passive investing thinking that is going to be a somewhat automatic process. 

We cannot stress that enough! Most articles online will sell the idea of you sipping margaritas on a beach somewhere in the pacific while money multiplies on its own. Like everything that has true value, passive investing requires a bit of discipline and knowledge to succeed.

That’s why you shouldn’t be afraid to ask potential partners about a deal! We all have to start somewhere after all. It is as Carl Sagan, one of the great American minds of the 20th century, said:

There are naive questions, tedious questions, ill-phrased questions, questions put after inadequate self-criticism. But every question is a cry to understand the world. There is no such thing as a dumb question

To be on your way to build enduring wealth, these 5 questions should be on the top of your mind:

1. What is the role your company plays?

This is definitely one of the first things you want to know. The company in question will either be the operator or a syndicator.

Although operator and syndicator are oftentimes interchangeable there’s an important difference. 

If they’re the operator, they’ll be in charge of acquiring and selling the investment, as well as implementing the business plan. They may also raise a portion or all the capital required to close on the investment.

But as the syndicator, they might not operate the investment at all. Instead, they might act only as a co-General Partner or owner of a fund that raises capital to invest with other operators.

Another thing you need them to clarify for you is whether their compensation is aligned with the success of the project. Is the operator’s or syndicator’s compensation tied to the investment’s cash flow and value? Or an asset management fee, percentage of equity raised, and such? Maybe a combination of both?

Since your returns as a passive investor are based on the cash flow and/or value, The compensation of your future partners should be based on those same two metrics as well.

2. “Tell me about a time a deal went bad”

This is one of our favorite questions. When an operator or syndicator is giving you the pitch, most of what they’ll say will be the positives and past success. Nobody wants to talk about that time they lost a lot of money on a bad call or when a deal went south. However, we believe that knowing about a failed deal is very valuable since it will give you insight into how your potential partner managed a difficult situation.

Also, if an operator says that they never had a bad deal, turn around and walk away. Chances are they’re lying or they don’t have enough experience to ensure you’ll have a good run on a passive investment opportunity.

3. Ask them about their core values

A well-defined mission, vision, and set of values are the elements that communicate the identity of a future partner. These are important because they tell who they are, and why they do what they do. It also adds credibility to the entity and professionalism, since it means they took the time to define a path and identity for themselves.

Most importantly, you’ll want to see if their core values align with your own; that will ensure a great working relationship that could last many years and be mutually beneficial for both parties.

Remember to ask them how they used their mission, vision, and values to make a business decision, and evaluate how that shaped the outcome of the deal.

4. Who is on the team?

The key to success lies in proper organization, where everyone has a role to play. You don’t want to make a deal where there’s only one or just a few individuals calling the shots. They should have their C-Suite established, and the rest of the top-down structure neatly organized: executives, directors, managers, analysts, assistants, and associates.

It helps a lot that they do most of their operations in-house. We’re talking about property management, compliance construction, investor relations, marketing, underwriting and, so on. The less work outsourced to third parties, the better.

Another good thing to know is how much of their revenue is dedicated to their own growth. Are they hiring new team members and providing better opportunities to their current team? Or are they pocketing most of the profits?

5. Ask them about their business model

Ok we know what you’re thinking: “Of course, their core business model is buying and managing properties, adding value to apartment communities, etc. Why should I ask the obvious?

But remember there’s no such thing as a dumb question, and what you might be thinking might not always be the case. Sometimes, they may be buying residential buildings, for example, while working a full-time job. Maybe they’re focusing on finding deals or raising capital, and so on.

What we’re getting at is, just because someone is involved in real estate, it doesn’t mean it is their core business model.

Ideally, you are investing with a group who are full-time operators. They have a fully integrated company that buys, manages, and sells commercial or residential real estate. It is okay if they are involved in other industries, like education, coaching, passive investing, etc., but it should be secondary to their core business model.

The right answers will go a long way

Passive investing in real estate means that you’ll be placing a lot of trust in the operator. The only way to ensure your money is in good hands, don’t be afraid to ask away and dissipate any doubts.

Those simple 5 questions will help you select the right partner to start your journey into passive investing and build enduring wealth to live the life you deserve.

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