Investing in a property syndicate for the first time can be a daunting prospect for investors. A starting point for many is knowing the right questions to ask and understanding the criteria to look out for when identifying an investment option that aligns with their wealth creation strategy. Here are five key questions you should ask before investing in a property syndicate.
Does the syndicate align with your risk profile?
One of the most important questions you will need to ask yourself before investing in a property syndicate is whether the syndicate aligns with your risk profile and investment goals.
For instance, if you are pursuing a more aggressive investment strategy and are looking to make quicker (and potentially larger) returns, you might look to invest in a property development syndicate, whereby the profits from the project are distributed amongst investors after the completion and sale of the development. This is generally a higher-risk strategy, but one that can offer significant rewards with the right investment and management in place.
Alternatively, if you are looking for a more passive investment that offers consistent and stable returns, as may be the case if your goal is to generate a passive income stream from your portfolio, you may be more suited to a commercial property syndicate that holds income producing properties (through leases to tenants). These will generally offer consistent contributions to investors throughout the term of the syndicate and will therefore be more suited to lower-risk investors seeking a stable source of cash flow.
What are the distributions and how are they paid?
Once you’ve determined the right type of syndicate to suit your risk profile, you will also need to consider how and when distributions are paid to you as an investor. This will vary depending on the terms of the individual syndicate, and can be monthly, quarterly, yearly, or (as is the case with most property development syndicates) at the end of the syndicate term. This is something you will need to take into account when assessing your ongoing budget and cash flow situation.
As an investor, it’s also really important to find out whether the distributions quoted are a net figure (i.e. incorporating additional costs), or whether they exclude additional expenses such as management fees. If the distribution figure doesn’t incorporate the latter, this is something you will need to factor into your budget when assessing whether the investment is right for you.
When investing in a property syndicate, you may also want to speak to your accountant to ensure you are choosing the right investor structure and entity to suit your individual situation.
What is the experience and track record of the property syndicate management team?
As part of your own due diligence when researching potential property syndicates, it’s vital that you consider the experience and track record of the syndicate management team. Do they have a proven knowledge of the industries and locations they are investing in? Have they managed similar syndicates in the past with successful outcomes? And what assets do they currently have in their portfolio?
The syndicate management team will be responsible for everything from property research and acquisition to due diligence and ongoing management, so it’s important to find a high-quality syndicate manager who has an understanding of what to look for in a property and (perhaps more importantly) what to avoid and how to mitigate risk for the investors involved in the syndicate.
Have the syndicate managers undertaken thorough due diligence?
When researching potential syndicates to invest in, you will want to ensure that the assets within the syndicate offer strong prospects in terms of both immediate and long-term performance.
When carrying out their due diligence, your syndicate management team should be assessing a large range of factors, including competitor properties in the nearby area, future oncoming supply (i.e. from competitor development sites), and market trends that could influence the future value of the assets.
For existing properties, the quality of the tenants and the overall tenancy mix should also form a fundamental part of their investment criteria, as this will play a crucial role in determining the syndicate’s stability and, ultimately, its performance.
When investing in a property syndicate, make sure you ask the management team about their investment criteria and the strategy behind their investment decisions to ensure they have undertaken thorough due diligence and are making strong asset selection choices.
What is the length of the syndicate term?
Another key element you will need to know before entering into a property syndicate is the length of the syndicate term. This can vary considerably depending on the type of syndicate and the investment strategy behind it.
Whilst property development syndicates tend to have shorter terms due to their focus on profit and value-adding, many commercial property syndicates will have initial terms between five and seven years to allow for capital growth of the assets. In many cases, these syndicates will also include the option to extend the term after the initial period if investors deem this favourable to their objectives, which is often decided based on a majority vote. As an investor, you may therefore want to ask about the exit strategy of the fund, and whether there is the option to exit the fund earlier should you wish to sell your units.
When investing in a property syndicate, carrying out your own due diligence and asking the right questions will be key to ensuring the investment fits your long-term strategy and risk profile. Choosing the right type of property syndicate with a management team that understands and supports your long-term investment goals will be fundamental to ensuring that your investment decision meets your expectations.
This articles has been contributed by our friends at Momentum Wealth.