Top 10 Commercial Real Estate Investment Mistakes and How To Find the Right Investment Partner

Are you thinking about investing in commercial real estate syndications? You may wonder exactly what a syndicator is in a commercial real estate investment, including what they do and how you can vet syndicators to determine the best investment opportunities. You may be unsure how to invest in real estate without buying property. 

We answer all of those questions and share the 10 important ways you can avoid making these rookie real estate investing mistakes.

Mistake #1: Active Investing Instead of Passive Investing

First, make sure you come into commercial real estate investment with the right expectations. You don’t need to be extremely hands-on with your investment in your daily life but rather you can allow your skilled syndicator to work their magic on your behalf.

Commercial real estate investment syndication is a form of passive investing — the syndicator handles the day-to-day details, and you, as the investor, are freed up to focus on other things. 

Mistake #2: Not Vetting Your Syndicator

Commercial real estate investment through syndication allows a group of individual investors to pool their resources to fund a larger project. This group funding aspect allows the individual investors to participate in larger real estate investment opportunities that otherwise might not be accessible due to a lack of funds, experience, or desire to put in the work themselves to develop a project.

The syndicator in this project is the sponsor, who manages the group funds and facilitates the development of the project. They perform all the leg work from locating properties to development and management, presenting investment opportunities to individuals in their network, and managing distributions to participating investors based on the terms of the deal. 

What to Look For in a Commercial Real Estate Syndicator

Choosing the right commercial real estate syndicator is the key to your investment success. The best syndicators bring the experience and intellectual capital required to identify viable opportunities, invest wisely, and deliver positive financial outcomes. So how do you find this ideal syndicator? Here are some of the most important characteristics to look for. 

  • Market Knowledge. Successful real estate syndication requires that the syndicator is very familiar with the geographic area where they maintain real estate assets. They should understand the basic demographics, plus any economic, regulatory, and market shifts happening in the area. Is there local population growth? Job growth? Diversity in housing needs? Ask the syndicator how they stay on top of news about their investment projects.
  • Legal Savvy. Your syndicator doesn’t need to be a lawyer or realtor, but they should be familiar with real estate laws and regulations with a solid real estate background related to investing. This type of investing can involve landlord-tenant laws and contract laws. Your syndicator should have a firm grasp of the most relevant rules for commercial real estate.
  • Tax Understanding. Real estate investing comes with certain tax implications. There are many tax benefits, and your syndicator should know how to help you take advantage of them. Investors in commercial real estate investment projects have mostly tax-free use of the distributable cash flow from their investments. You could also see significant financial benefits when the property is sold or refinanced.
  • Structure. Another important consideration is how the syndicator is structured. The waterfall structure is the gold standard of structures in real estate investment. Download our whitepaper, A Guide to Passively Investing in Commercial Real Estate, to learn more.
  • Experience Adding Value. A commercial real estate syndicator’s primary goal is to add value. They should know how to identify opportunities in the marketplace and instantly see potential value in undervalued properties. This requires a special blend of financial knowledge, marketing savvy, and real-estate development skill. 
  • Comprehensive Portfolio. The syndicator should have a large portfolio of successful projects and be willing to share the financial details so you can understand how their syndicate works. Review these projects and see if they’re the right match for your commercial investment approach. 
  • Acceptable Terms and Conditions. Read the terms and conditions of the agreement carefully and ask questions about investment terms you don’t understand. This is the best way to become an informed investor who builds a mutually-beneficial relationship with a syndicator.

Mistake #3: Thinking Too Small

Some people prefer to think small. Others think big. Which type are you? If you have a modest amount of money to invest but want to be part of something big, you’re a good fit for real estate syndication. You can fund large projects like revamping distressed multifamily housing by joining other like-minded investors.

Mistake #4: Not Reading the Agreement

Always read the contract thoroughly and understand the investment terms and conditions. You might see terms like capital stack, liability, preferred returns, voting rights, and exit strategy. Ask what they mean. Get clarity upfront, and the deal will go more smoothly for everyone.

Mistake #5: Focusing on the Short Term

Commercial real estate syndication is a much longer-term strategy than many other investments. In many cases, you will not see results in one day or even one month, so don’t get obsessed with the short term. Instead, focus on the bigger picture and talk to your syndicator about a realistic timeframe. Look at actual investment summaries for these types of projects. It’s common for a project to include 5 to 7 years’ worth of projections for investor returns.

Mistake #6: Assuming You Need Real Estate Knowledge

Good news: You don’t need any real estate knowledge to join a real estate syndication. A talented and trustworthy syndicator understands that investors rely upon their intellectual capital for smart investments. They put a massive effort into making good choices and keeping their investor group updated on each project’s success.

Mistake #7: Not Meeting the Requirements

You’ll need to be a certain type of investor to join in on most syndication projects. But don’t let this scare you off. Talk to the syndicator about what it takes to join. The minimum investment is usually $50,000. Ideally, the investors should be accredited or sophisticated, as defined by the U.S. Securities and Exchange Commission (SEC).

Mistake #8: Misunderstanding Value-Adding

If you’re not familiar with the idea of value-adding, here’s a quick summary. Value-adding involves identifying undervalued/undermarketed properties, investing in them, adding value, then selling or renting them to bring investor returns.

Value is added through activities like remodeling, installing new features, adding amenities, making cosmetic and aesthetic changes, targeting new audiences, and deploying fresh marketing approaches. Your syndicator coordinates all of this.

Prepare yourself for the idea that undervalued properties may need a significant period of value-adding before they bring returns. There will be a time when money goes into the project, followed by a much longer timeframe where money flows back out to the investors in the form of returns.

Mistake #9: Not Taking Advantage of Tax Strategies

Investing in commercial real estate syndication comes with significant tax advantages you should use to your benefit. You can ask a financial advisor for the details or download our Guide to Passively Investing in Commercial Real Estate for a more general explanation.

Mistake #10: Waiting Too Long

Curious about commercial real estate investment? Don’t wait too long to invest. Every day you aren’t investing is a missed opportunity to make money. An ancient proverb says, “The best time to plant a tree was 20 years ago. The second-best time is now.” 

Life Bridge Helps You Get the Most Out of Commercial Real Estate Investing

Life Bridge Capital is a leading commercial real estate syndicator that can fully meet all of the criteria described above. We will help you find success in real estate syndication. Contact us to start your commercial real estate investment journey.

Related Posts