If you are considering becoming a passive investor, it is relatively intuitive to determine how to find active syndicators, what to look for in sponsors and questions to ask during the start of the relationship. One lesser discussed topic is what sponsors are actually looking for when bringing in potential passive investors to investment opportunities. Here, I discuss three simple characteristics that most sponsors seek to identify when getting to know potential investors.
Investment Experience
As discussed in the earlier article on accreditation, according to SEC guidelines, there is a general requirement that passive investors are “Sophisticated Investors,” at minimum (the 506(B) exemption to regulation D allows for up to 35 “Sophisticated Investors” in a syndication and requires the remaining to be Accredited, whereas 506(C) allows for advertising to the public, but all investors must be accredited).
The obvious reason for the SEC requirement is to protect investors, and one key way to do that is to ensure investors are knowledgeable and experienced investors in the first place. Outside of the legal requirement to do so, having investment experience in stocks, real estate or other forms of assets helps facilitate dialogue and ensure minimal headache and confusion between passive investors and the sponsor throughout the investment period.
Alignment of Interests
The combination of an investor who has experienced in acquiring assets as well as the sponsor’s essential duty to effectively communicate the deal prospects, allows for the onion layer to further be peeled back, so that there is an understanding of whether an alignment of interests exists. Based on the type of deals that the sponsor makes, is the investor’s profile a good fit? Below are a few examples of where sponsors seek to align:
- Investment hold period
- Investment returns
- Investment risk aversion
Compatible Temperament
Investing in apartments is a not an insignificant decision. We are talking about large dollar amounts of investment capital (any sponsors require minimums of anywhere between $50,000 and $250,000, depending on their strategies, types of deals and core investors’ level of maturity). Because of this, occasionally, sponsors may have a challenging limited partner who may worry about his or her investment and overwhelm the team with questions and request for status updates.
Of course, questions and clarifications are certainly welcome, and great sponsors who handle investor funds should regularly communicate openly, throughly and consistently; however, an anxious temperament can be a drain to the team and sponsors should assess passive investors just as thoroughly as they themselves are being vetted during the initial call and the relationship-building phase.
Both misalignment of interests and worrisome investors can often be attributed to a lack of investment experience; it is likely the case that new investors or those who seek to invest their only $50,000 are going to become anxious about their investment. This situation supports why law exists to protect both inexperienced and ignorant investors from uninformed investments choices as well as fraud.
Relationship Building
During your search for syndication opportunities, consider what most sponsors are also looking for in partnerships and always ensure that there is alignment of interests and a compatible fit.
Safe investing!
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– How To Use Your 401k To Invest In Real Estate
