The Fourth Leg of Real Estate Investing 

The Importance of Management in Real Estate Syndications 

While we have examined the importance of markets, locations and fundamental features of the property, the last leg of investing in real estate is the management team. 

In the case of a real estate syndication, the lead sponsors (also known as the general partners) will handle all the day-to-day operations of the property, while you simply provide the capital. However, not all lead sponsors are created equal. It’s important to do your due diligence before investing in any real estate syndication. 

Warren Buffett has famously said that buying a great company will do well in good times regardless of the management, however, a good management team can make a bad company good and a good company even greater.  The same can be said when looking to invest in a real estate property, which in effect is purchasing a company. 

Here are some of the key qualities that Buffett looks for in a management team that you should seek in your sponsorship team that you are investing with: 

• Honesty and trustworthiness: Buffett believes that it is essential for management teams to be honest and trustworthy. He wants to invest where he can be confident that the management team is acting in the best interests of shareholders.  In the case of lead sponsors, you want one that is transparent with you in the affairs and performance of the property. 

• Competence and experience: Buffett invests in companies with management teams that are competent and experienced. He wants to be confident that the management team has the skills and knowledge necessary to run the operation successfully.  In a syndication, the lead sponsors should have a proven track record of success in multifamily real estate through various cycles (i.e.:  good times and bad). They should be able to show you a portfolio of properties that have performed well over time. 

• Focus on long-term value creation: Buffett looks for management teams that are focused on long-term value creation. He wants to be confident that the management team is not making decisions that will benefit shareholders in the short-term but will harm the company in the long-term.  The same can be said for properties.  Decisions made are not simply for the sake of immediate short-term profits, but for the overall viability and value of the property. 

• Willingness to share profits with shareholders: Buffett believes that it is important for management teams to reward shareholders for their investment in the company.  In the case of real estate syndications, you want to determine that the compensation structure is set such that the shareholders are placed first above the sponsors.  In other words, they only make significant money if shareholders make their money first.

Other things to look for in lead sponsors include: 

• Reputation: The lead sponsor should have a good reputation in the industry. They should be well-respected by their peers and have a positive track record with investors. 

• Team: The lead sponsor should have a strong team in place. This team should include experienced real estate professionals with a variety of skills and expertise. 

• Financials: The lead sponsor should have a strong financial track record. They should be able to provide you with audited financial statements that show they are financially sound. 

• Investment thesis: The lead sponsor should have a clear investment thesis. This thesis should explain why they believe the investment is a good one and how they plan to achieve their goals.  They should show you exactly how they plan on achieving the returns they are projecting. 

• Due diligence: The lead sponsor should be willing to provide you with all the information you need to do your due diligence. This information should include financial statements, property information, and legal documents. 
   
• “Skin in the game”:  Sponsors should have some stake or money invested alongside with yours’, and that their success is aligned with your success as a shareholder.   

If you are considering investing in multifamily syndication, it is important to do your due diligence and select a lead sponsor who meets your criteria. By following these tips, you can increase your chances of making a successful investment. 

Here are some additional tips for selecting a multifamily syndication lead sponsor: 

• Ask for references from other investors who have worked with the lead sponsor in the past. 
• Attend a live event where the lead sponsor will be speaking. This will give you a chance to ask questions and get to know them better. 
• Read the lead sponsor’s blog or website. This will give you a better understanding of their investment philosophy and approach to multifamily real estate. 
• Talk to a financial advisor who specializes in real estate investing. They can help you assess the risks and potential rewards of multifamily syndications. 

As Warren Buffett places importance on the management teams of the companies he invests in, by following these tips, you can increase your chances of finding a qualified lead sponsor and making a successful investment in a real estate syndication.

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