Analyzing a Real Estate Syndication like a Professional Underwriter

by | Oct 18, 2022 | Investing Process, Passive Investing, Real Estate Investing 101 | 0 comments

The funding for a real estate syndication starts with passive investments that cover, at a minimum, the down payment to purchase the commercial real estate asset, such as a multifamily investment property.

Before they can invest, passive investors must conduct their own investigation and find a lucrative deal in which to invest their money. 

Investors perform due diligence by looking into the business plan’s details and investigating the general partners’ performance history. For example, as you consider your next syndication deal, find out if the sponsor generally has profitable or negatively cash-flowing deals in their past. 

Do they have a plan if the market goes south? 

What are the potential returns compared to the risks?

As a limited partner evaluating deals at your own risk, you’ve got to know how to assess real estate syndication investment possibilities. What does “conservative underwriting” from the sponsor imply? What are some ways to become an expert deal analyzer?

The best way to evaluate a real estate investment like a professional is by performing the same steps as an expert underwriter. This means understanding how an underwriter deciphers if a real estate syndication has the potential to be profitable. In this article, you’ll learn how to evaluate a potential deal.

Keep reading to discover three expert underwriters’ tips for looking at a real estate syndication from a conservative viewpoint. Then, after you’ve finished reading, you’ll feel more confident performing due diligence on the next potential real estate syndication offering that comes along.


Take Your Time Reading the Investment’s Business Plan

A well-formed business plan is crucial before purchasing a commercial real estate property. The property management team, renovation expenses, asset management costs, acquisition costs, sponsor fees, return structure, and who can invest in the company should all be included in the business plan. The following sections will walk you through income, expense, and net operating income projections.


Related article: Real Estate Syndication Fees Explained

The Occupancy and Cash Flow Relationship

The first thing to explore when examining a commercial real estate property’s financials is the cash flow. With the new financing and the purchase price, will the property be in the red or in the black? What is the plan for renovations, updates, or greener-living choices, and how is it likely to affect the cash flow?

Occupancy is the number one indicator of how much cash flow a property generates. Therefore, cash flow should be high if a property has high occupancy. So one question you should ask is: why does this property have such high occupancy? 

Usually, properties with high occupancy are well-kept. This means that the landscaping is attractive, there aren’t mounds of trash anywhere on the premises, and the pool and amenities are in working order. These details lead prospective renters to look favorably upon the property, which keeps current tenants wanting to stay put.

In contrast, let’s explore what contributes to low occupancy rates. One possibility is the property’s physical appearance. If it appears run down or needs TLC, that could be a turn-off for potential tenants. Of course, that could be an opportunity for the team to improve these things to increase occupancy and cash flow, too. If the property is brand new, another possibility is that it may not have had enough time to reach maximum occupancy yet. 

If the property has high occupancy, another key question to ask is what the delinquency is? Just because the occupancy is high doesn’t mean that everyone is paying their rent, or paying it on time. Some sellers do everything they can to get their occupancy up before selling, even if they end up renting to tenants who aren’t likely to pay. Then they pass that problem on to the buyers to deal with.

A strong business plan will detail how the management team plans to market the property to reach desired occupancy levels and deal with any delinquency, as well as what changes or improvements will be made and how they are expected to increase the property’s cash flow.


Operating Expenses and Capital Expenses


What will it cost to keep this property running and in good working order? To estimate operating expenses, consider the property’s condition, maintenance and upkeep, personnel costs, taxes, and other charges that can differ depending on the property’s type, age, and location.

The first step is examining the property’s age and condition. If it has been well-maintained or is a newer build, the repair and maintenance expenses will be lower, increasing projected returns. If the property is older, and particularly if it has older mechanical features like a central chiller for air conditioning, the budget for repairs and maintenance should be higher.

Next, it’s time to explore other operating expenses. The sponsor should have the assistance and advice of a local property manager to establish a budget for operating the property from start to conclusion. A competent property manager can assess a property’s potential based on their expertise and insight into how much advertising, marketing, landscaping, repairs, maintenance, and utilities would cost on comparable properties in the area.

A real estate syndication’s operating expenses should also consider insurance and tax implications. Does the sponsor have an insurance estimate from a broker? How are property taxes assessed in this market and how are they likely to change year by year? Property taxes change state by state and county by county. Some markets have predictable property taxes, while others are subject to potentially large increases, creating a risk in the operating expenses.

Back on the age and condition, are any large projects needed, such as roof or parking lot repairs? When was the last time they were done? And can the units themselves be renovated and modernized to achieve higher rents? This value-add work can be a big part of the investment’s opportunity and can attract more tenants and allow for higher rental rates. All of these major projects and renovations are considered capital expenditures. That means they’re not included in the operating expenses so they don’t count against the net operating income. However, the sponsor should have an adequate budget for all of the planned capital expenditures – and for some unplanned ones too, because they always come up.


Research Other Properties in the Area

Once you understand the occupancy and operating costs and have a general understanding of the sponsor’s business plan for the property, you’ll consider the rental rates. Forming your impression of comparable properties’ conditions and rental rates is part of your due diligence. In other words, look at how much rent per unit or per square foot is the “market norm” for comparable properties in the area.

It’s common practice, particularly on new builds, for the developer to provide below-market rents and perks or concessions such as “first month free” to attract renters. However, when searching for yield-play or value-add investment opportunities, the current property manager may be offering low rent rates with the understanding that comparable assets elsewhere provide superior amenities, more up-to-date interiors, or are in a better location.

It is the sponsor’s task to develop a strategy for rental increases until we reach market value rent rates. Rental increases are usually related to new facilities, greater efficiency, and a better property management firm being put in place at acquisition. In addition, if operating costs are kept low, investors should see their return on investment rise as rents climb.

The two primary duties of general partners that will have the most impact on net operating income (and, as a result, ROI for all investors) are raising rents to market rates and keeping operating expenses low.

We rely on the opinions and projections of reliable, experienced professionals in the tax, legal, and property management field when determining whether or not to make an offer on a deal. Honestly, we reject over 95% of the deals that come across our desks. 

The numbers we gather through our own due diligence help us estimate the costs of owning and managing the property throughout the investment period. Then, comparing these estimated costs to the income generated allows us to make informed decisions about how much rent to charge.


Is the Risk Worth the Projected Returns

You got into real estate to make your money work for you and generate dependable, prolonged returns. However, as a passive investor, the number one thing you are responsible for is researching each real estate deal thoroughly before investing your capital. This process may appear to be more complicated if you’re new to real estate syndications and trying to make your first investment.

To determine if the real estate syndication deal aligns with your objectives, each investor must thoroughly study the business plan and private placement memorandum (PPM).

While there’s no such thing as a risk-free investment, you can evaluate a real estate syndication’s strategy to see how it minimizes risk and offers cash distributions to passive investors on a dependable schedule.

Consider the tax benefits of depreciation in conjunction with the expected cash flow returns, as well as any profit shares you may receive upon the sale of the property. Compare all of these to your surveys of rental rates, tenant demand, and the property’s track record for the property management and sponsor teams. Finally, look at how the cap rate at the eventual sale that the sponsor used in their projections compares with what’s common in the market now. A conservative underwriter plans for a higher cap rate at sale, meaning we’re allowing that we may have to sell in a worse market than we’re buying in. If we can do that and still produce good returns, the deal is likely to be strong.

Questions you should consider before investing:

Do you think the projections given are correct?

What could make the deal fall apart, and how might your investment be saved?

Is the company’s financial data reasonable, and are there more potential upsides or downsides than what’s being stated?

Do the sponsors have personal capital reserves and are they willing to lend capital to the project if things go sideways, or are they likely to issue a capital call – asking the investors to invest more?

Based on the sponsor team’s past performance, can you trust this real estate syndication opportunity?


A competent real estate syndicator understands that all (sophisticated or accredited) investors feel safer and more confident when risks are reduced and will work to provide you with evidence of a competent plan.


Time is Money! Successful Investing Requires Thorough Research Beforehand

It is crucial to attain adequate knowledge about real estate investing before impulsively jumping into it. Investing in a real estate syndication is not the same as investing in the stock market or purchasing a rental property.

Now that you’ve heard it from a conservative underwriter’s perspective, you know how to do your homework and assess offers before putting your signature on a PPM.

Although it may appear complex, analyzing real estate syndication deals is crucial to mitigating the risks of investing in a property. While you can’t change economic conditions or know how much your assets will be worth, you can take charge of risk management by scrutinizing the potential real estate syndication offering.

If you learn to think like a conservative underwriter, you’ll see the markets differently and assess risks better. In addition, this skill set will help you use real estate to finance your long-term goals and grow your wealth.


Further reading: What You Should Know About Cap Rates as a Passive Investor