Investing in the right multifamily asset is hard. You need to find the right market, a strong neighborhood, a building that you’re excited about, and formulate a business plan to deliver returns. Once all of that is done and the contract to purchase is signed, it’s time to raise the equity to finance the acquisition. As the syndicator, you’re excited because you know this is a great opportunity that is going to produce results. Yet, as you start to speak limited partners to invest in the deal, you may start to hear objections from them that may prevent the deal from moving forward.
I’ve been in this position countless times. Over the years of structuring deals together, I’ve heard many different questions and objections from investors who are evaluating my opportunities. Though I always have all the data prepared and my underwriting tightened up and sharp, I’ve noticed a pattern of questions that investors typically pose. These questions are typically not deal specific, but they are critical to someone doing their due diligence on an investment. Let’s take a look at some of the most common questions I get.
Objection #1: “What if I Lose My Money”
Though I typically hear this from newer investors, I do think it’s a very fair question on a passive investor’s part that needs to be answered honestly and clearly. Investing in a multifamily syndication, like other investment vehicles such stocks, bonds, or crypto currency comes with it’s risks and rewards. If the investment goes south, then the risk of losing invested capital is very much real. However, if you can help the passive investor drill down that the asset class, the specific opportunity, and you and your team are the right fit, then you can drastically help them limit potential for loss and maximize their opportunity for gain.
Let’s break down each of those categories in more detail. Multifamily is an incredibly sturdy asset class that fulfills a basic human need: housing. At the end of the day, people need a place to live, so there will always be a place for quality apartments. Next, you can drill down into the specific market you are investing in and explain why that market may help protect any downside risk. Explaining factors such as diversity of industry, job growth, and population growth in your particular market can be crucial in helping your passive investors understand why the asset will continue to stay in demand.
Next, you want to position you and your team as a key element in minimizing the risk of the opportunity. Ideally, you and your team have a strong track record in executing on these kinds of projects. Having an experienced team that can overcome roadblocks and deal with unforeseen issues is critical to the success of an investment and will help investors feel comfortable with the downside.
Finally, beyond drilling down into these aspects of the deal and our experience, I like to point out to the passive investors that our financial interests are aligned in our projects. First, even though we are the syndicators of a deal, we typically have our own cash invested into the projects as well. Second, we are typically the ones guaranteeing the loans to the bank, meaning our own personal assets can be exposed should anything go wrong. Like the passive investors, we are incredibly motivated to make sure that the project goes well and becomes a success.
Objection #2: “What if I Want to Sell My Shares”
This is another common question that is asked by passive investors. Now, before jumping into the legal aspect of the question, we need to tackle this from a practical execution perspective. As a syndicator, you’re going to rely on the raised funds to close on a project and execute on the business plan. Having a certain amount of liquidity will be key to your success, and typically the hold period of a project will also be a critical factor that can determine the overall success of an investment.
Thus, the discussion I like to have with every passive investor in a project is about the mutual expectation. Though of course things happen to everyone that can be hard to predict, I like to stress to my passive investors that the funds they invest will have strategic purpose, and earlier than anticipated interruption can hurt everyone. Thus, I only encourage them to invest if they are truly sure that they will not need access to the funds for the projected hold period.
From a more legal perspective (though do note I am not an attorney), the answer to the question becomes dependent on the structure of the syndication. Each operating agreement is different, with some structures allowing for investors to sell their shares (typically within guidelines) while others strictly prohibit this action. It’s important to disclose the exact structure of the particular offering and let the investors know.
Objection #3: “Are You and Your Team Experienced Enough”
I used to get this objection quite a bit, particularly when I first started out. When I was a newer investor/syndicator, my strategy for getting around this question typically resided on highlighting my partner(s)’ and team’s resumes. Real estate investing is definitely a team sport and having experienced people on the team is critical for the success of a project. Thus, make sure to leverage others’ resumes and experiences that are working with you to help assure your investors of your ability to execute.
Today, handling this kind of question is much easier as we have a large and growing portfolio that speaks for itself. Still, even today I take the time to highlight the team that I am part of and the different strengths we bring to the table to ultimately help deliver the best results.
