Why Experience Matters in Real Estate Syndication Operators

When I first started investing in real estate syndications, I was excited about the potential returns and didn’t pay much attention to the experience of the person running the investment. A saying goes “a rising tide lifts all boats,” which means when the market is doing well, everyone seems successful. But when things get tough, you find out who really knows what they’re doing.

Whether the market is going up, down, or sideways, investing in real estate syndications can be very profitable, but it’s essential to look closely at the experience of the operators. The right operators have the knowledge, skills, and expertise to make a big difference in how well your investment does. Experienced operators can handle market ups and downs, manage properties effectively, and make smart decisions to protect and grow your money.

Let’s dive into why experience matters, and how it leads to better results for investors.

Would You Ask a Medical Student for Heart Surgery?

Imagine needing heart surgery and deciding whether to choose a seasoned surgeon or a medical student. The answer is obvious: You’d prefer the experienced surgeon. They have extensive knowledge of the human body, especially the cardiovascular system; are trained in surgery; and have the right team in place, including nurses and anesthetists.

Similarly, in real estate syndications, you want operators who are not just knowledgeable about real estate, but also experienced in the specific asset class, local market, and business plan you are investing in. Their expertise ensures they can navigate the complexities of real estate investment successfully. 

Key Areas of Experience

Knowledge of asset class

Experienced operators understand the details of different types of properties, whether they are residential, commercial, industrial, or retail. This knowledge helps them make smart decisions and avoid common mistakes.

For example, with multifamily properties, an experienced operator knows how important location is, understands who the tenants will be, and has the know-how to manage the property well. They can accurately estimate rental income and predict maintenance issues.

For commercial properties like self-storage, they understand lease terms, how reliable the customers are, and how economic changes can affect different commercial spaces. In industrial properties, they know about logistics, zoning rules, and the needs of various industrial tenants. And for retail properties, they can assess foot traffic, competition, and the financial stability of retail tenants.

Knowledge of the market

Knowing the local market is crucial. Experienced operators have a deep understanding of market trends, property values, and economic factors that influence real estate performance in specific areas. They also have an experienced team in place—brokers, property managers, and contractors—to help them source and complete due diligence on the deal.

In a booming city, an experienced operator knows which neighborhoods are up-and-coming, and which are declining. They understand local regulations and how they might impact property development or renovation. They can identify which property types are in high demand, whether it’s single-family homes, apartments, or commercial spaces. Their team of brokers can find the best deals quickly, property managers can keep the property running smoothly, and contractors can handle renovations efficiently.

Syndication-specific experience

Real estate syndication is a unique field requiring specialized knowledge—and there are many moving parts. Operators with syndication experience know how to source market and off-market deals, complete due diligence, structure deals, secure capital, manage operations, manage teams, manage investor relationships, and comply with legal and regulatory requirements with organizing a group of investors.

Time in the industry

The longer an operator has been in the industry, the more they’ve seen and learned. Years of experience translate to a wealth of knowledge and an ability to handle various challenges.

Consider an operator in Florida who has been in the market since 2010. This operator has witnessed and navigated through several significant events. They experienced the end of the Great Financial Crisis, understanding how to manage properties and investments during a time of economic recovery. They also dealt with the impact of COVID-19, including eviction moratoriums, learning how to maintain rental income and support tenants during an unprecedented health crisis. 

Additionally, being in Florida, the operator has managed properties through multiple weather-related events like hurricanes, gaining insights into property insurance, emergency preparedness, and disaster recovery.

Most recently, this operator has faced the increase in interest rates from the Federal Reserve. They have adapted their investment strategies to cope with higher borrowing costs and found ways to maintain profitability despite these changes.

Each of these experiences has taught the operator valuable lessons. This extensive experience means they should be well equipped to handle future challenges and make informed decisions that benefit their investors.

Number of properties/units managed

Managing a large portfolio of properties or units can demonstrate an operator’s experience, capability to handle multiple projects, and ability to scale their operations effectively. This shows they have been in the business for a while and know how to manage different types of properties successfully.

An operator with a large portfolio has likely dealt with a wide range of property issues, from maintenance and tenant management to financial planning and regulatory compliance. This experience helps them develop efficient systems and processes to manage properties smoothly.

Having a larger portfolio also allows the operator to build and maintain a skilled team. They can hire experienced property managers, maintenance crews, accountants, and other professionals who specialize in different aspects of property management. This expert team can handle day-to-day operations of the properties, ensuring everything runs smoothly.

For investors, this is a significant advantage because the operator’s team can quickly address any issues that arise, minimizing disruptions and maintaining the value of the properties. Additionally, the operator’s ability to scale their operations means they can handle new deals effectively, bringing more opportunities for investors to benefit from well-managed, profitable investments.

Investor tip: It’s worthwhile to do your due diligence on operators who emphasize the number of properties or units managed without demonstrating full-cycle deal experience. While such metrics can be impressive, they may not reflect the sponsor’s ability to effectively manage and exit properties successfully. Look for operators with a proven track record of managing and exiting multiple properties through complete investment cycles to ensure their effectiveness and reliability in real estate syndication investments.

Track record in successful management of assets

Closing on a property, managing it effectively, and exiting successfully are three distinct sets of skills. Each one requires different expertise and experience.

Closing on a property involves finding the right deal, negotiating the terms, securing financing, and completing all the necessary paperwork. It requires knowledge of the market, strong negotiation skills, and attention to detail to ensure everything is in order before the purchase is finalized.

Managing a property involves day-to-day operations like maintaining the property, dealing with tenants, handling repairs, and ensuring the property remains profitable. This requires good organizational skills, a reliable team, and the ability to respond quickly to any issues that arise.

Exiting a property successfully, whether through selling or refinancing, requires another set of skills. It involves assessing the business plan and market timing, understanding the property’s value, marketing it effectively, and negotiating the sale or refinancing terms. This process requires strategic thinking, market knowledge, and strong negotiation skills to maximize returns.

A proven track record of managing and exiting properties successfully shows an operator’s competence and ability to execute a business plan. It demonstrates the ability to navigate each stage of the investment process effectively, from buying and managing to selling. For investors, this is a clear indicator that the operator knows their stuff and can deliver successful outcomes.

Market cycle experience

When evaluating real estate operators, it’s important to look beyond just the number of years they’ve been in business. Experience isn’t just about time spent; it’s about how well they handle different challenges and market conditions—especially ones over the past four to five years.

In the past, many operators had experience during generally good times, especially before the Great Financial Crisis (GFC), when real estate syndications were less common. This means some operators might have never faced a downturn or major challenge. 

Today, we need to assess experience more thoroughly. Operators who have been through various market conditions—both good and bad—show they know how to manage properties effectively in different situations. Their experience should include handling recent challenges like:

• COVID-19: The pandemic influenced various aspects, including tenant occupancy, rental income, and shifts in local legislation.
• Supply chain issues: Disruptions led to delays and increased costs for repairs, renovations, and new construction projects.
• Labor issues: Challenges in hiring and retaining skilled workers affected everything from property renovations and new construction to day-to-day property management.
• Severe weather events: Increased frequency and intensity of severe weather required effective disaster response and maintenance, along with managing insurance claims, repairs, and higher insurance costs.
• Interest rate issues: Fluctuations in interest rates between 2022 and 2023 impacted financing costs and overall investment returns.

Operators who have dealt with these issues have shown they can adapt and make smart decisions under pressure. Today, it’s easier to evaluate an operator by looking at how they managed through these recent challenges.

In short, real experience should include handling a wide range of problems—economic downturns, health crises, supply chain disruptions, labor shortages, infrastructure issues, extreme weather, and interest rate changes. This broader view helps you assess whether an operator can effectively manage your investment in any market conditions.

The supporting team

An experienced operator is part of a skilled team, including property managers, accountants, and legal advisors. Here’s a look at each role: 

• Property managers handle the day-to-day operations, such as maintenance, tenant relations, and rent collection. 
• Accountants manage the financial aspects, including budgeting, financial reporting, and tax compliance. 
• Legal advisors ensure that all transactions and operations comply with relevant laws and regulations, protecting the investment from legal issues. 

This support network is crucial for the smooth operation of syndication projects, as each team member brings specialized expertise that ensures every aspect of the investment is managed effectively.

When considering a syndication deal, the team should be listed in the offering memorandum. This document should detail who will be managing the property, handling the finances, and providing legal oversight. If the team is not clearly outlined in the offering memorandum, it’s important to ask for this information. Knowing who will be involved in the project and their qualifications can give you confidence in the operator’s ability to manage the investment successfully.

How Experienced Operators Add Value

Experienced operators bring several key advantages to the table. 

First, they have built strong networks and relationships that help them find the best deals before they even hit the market. This means they can source superior deals that others might miss. Their expertise also allows them to conduct better underwriting and due diligence, which means they can more accurately assess properties and reduce risks. 

Additionally, they can make realistic financial forecasts based on their past performance and deep knowledge of the market, leading to more accurate financial projections. When problems arise, experienced operators can solve them quickly and efficiently, minimizing disruptions. They also know how to adjust their strategies to manage market changes, which helps them navigate market fluctuations and protect investor interests.

On the other hand, newer operators often offer amazing terms on their deals to attract investors. While these deals can look very attractive because of promised high returns, you are trading off the experience. 

Newer operators might not have the same level of knowledge, skills, and networks. They may struggle with finding the best deals, accurately assessing properties, and handling problems when they come up. They might also have a harder time navigating through market changes. So while the terms might look great on paper, a lack of experience can increase the risk of your investment. The great thing is you have a choice on who you invest with.

Red Flags to Watch For

Although I love investing with experienced operators to expand and diversify my portfolio of assets, this doesn’t mean every syndicator out there would qualify as an experienced operator. You have to do your due diligence on every operator you are considering investing with. 

When evaluating potential operators, here are some red flags when it comes to experience that seasoned passive investors watch out for: 

• No successful background in business: Ensure that at least one sponsor has a proven track record of successfully running a business, especially through challenging times. This could also apply to an operator who adds a new asset class to their portfolio. Someone on the investing team should have a business background in this new asset class.
• A part-time operator: The operator should be dedicated full-time to the real estate syndication business. Part-time involvement can jeopardize the management and success of your investment.
• Only one managing partner: Avoid deals with only one managing partner. Multiple, unrelated partners provide a better safeguard against potential issues, including disappearance or lack of communication.
• No preferred return, or preferred return with catch-up: Look for deals with a clear preferred return for limited partners. Avoid deals where the preferred return includes a catch-up provision, as it often benefits the general partner more than the investor.
• Modeling a refinance in return projections: Be cautious of deals that include a refinance in their return projections. If the deal hinges on this, it may be too risky.
• Distributions as return of capital: Distributions should be classified as a return on capital rather than a return of capital to avoid tax implications and reduced preferred returns.
• No skin in the game from operator: Ensure that the operator has invested a significant amount of their own money into the deal, ideally 10% of the equity required to align their interests with yours.
• Floating-rate loans with no interest rate caps: Avoid deals with floating-rate loans that do not include interest rate caps. As the 2021-2023 real estate market has demonstrated, this can expose the investment to significant risks if interest rates rise substantially.

Final Thoughts

Simply put, choosing the right syndication operator is crucial for a successful real estate investment and you ultimately meeting your investing goals. Experienced operators offer a higher likelihood of success through their knowledge, skills, and proven track records. As you consider syndication opportunities, prioritize operators with the depth and breadth of experience necessary to navigate the complexities of real estate investment. Their expertise can make a significant difference in the performance and profitability of your investment.