December 1, 2022
Investing in real estate syndications as a passive investor requires you to like, know and trust your sponsor. We conducted a market research study for 11 days beginning from September 29th to October 10th and the results are based on 26 of the investors’ responses. While the sample size is relatively small, it does reveal a few interesting facts that can be applied to the larger pool of passive investors.
The demographics of this survey include predominantly men at 92% and the majority age range is distributed between 40-54. More than 76% of survey respondents are accredited investors with a dual household income. Their occupations are diverse and cover accountancy, banking, finance, computing or IT, and business, consultancy, or management.
Based on the survey, we learned that all LPs own their homes which is fundamental since home ownership is a primary need for shelter and security. More than 38% of investors do not own any other investment properties while more than 30% own 1-5 single-family properties.
This demonstrates that 38% of investors are looking for passive income and do not have any desire to become a landlord. We can infer that 30% of investors began their real estate journey by buying single-family homes and realized that they can scale much faster with multifamilies. The other 30% combined owns more than 5 single-family properties and small to medium-sized multifamily units.
The survey emphasized the importance of trust and reputation between sponsors and investors. More than 34% of investors first learned about multifamily real estate through someone in their network. Furthermore, more than 50% of investors heard about their first investment opportunity through personal relationships with the sponsor.
Also evident is that 90% of respondents with 1-3 passive investments suggested that they found their first deal through personal relationships with the sponsor or trusted a referral. This is evident that multifamily syndication is a heavy people-first, relationship-based business.
Another surprising fact is more than 26% of investors do not conduct their own analysis of the property before investing while 61% of investors review their sponsor’s projections. This statistic reiterates that trust is vital but it’s mostly handed off to the sponsorship team to fully and unconditionally understand the market dynamics they operate in.
Investors first learned about real estate syndications from sponsors, people in their network, and attending networking events.
Investors learned about their first investment opportunity through personal relationships with sponsors and attending networking events and conferences.
More than 69% of investors reinvest with the same sponsor. Additionally, investors may consider factors such as referrals and personal relationships if they were to invest with a new sponsor. Regardless of online presence and high authority in the space, knowing someone who has invested with the sponsor triumphs in gaining immediate trust and credibility.
A primary goal for more than 57% of survey respondents was investing for equity growth. Since the large majority of survey respondents are in their 40s-50s, it is understandable that building wealth for retirement is an imminent goal. Other investors valued cash flow to replace the income from current jobs and hedge risk by diversifying portfolio to protect downside risk as other front runners for investing in syndications.
Investors are attracted to equity growth, cash flow, and risk hedge as primary drivers for investing in syndications.
Since the survey was conducted during a volatile market with rate hikes, it’s needless to say that investors remain optimistic about future investment opportunities. The biggest barrier is not seeing enough cash flow followed by assessing which investment opportunity is right for them. Investors are open to expanding their network of deal sponsors and have the capital to deploy but will only invest when the right opportunity comes along. The issue is not necessarily the lack of capital but rather finding deals that align with investors’ goals and time horizon.
Investors will trust a sponsor if there is a one-level degree of connection with someone they are familiar with who has invested in the sponsor’s deal.
In summation, the survey re-confirmed what real estate investors already know about the industry – it’s heavily based on trust and personal relationships. Conducting business requires high integrity and esteem to execute on a deal so it’s not surprising that trust is the basis of any partnership. Trust and loyalty can also be seen as investors are highly likely to reinvest with the same sponsor. Building trust is a slow and steady process but once it’s been gained by both parties, investors are staunch and ardent supporters of their sponsors.
To access the full survey, please email Kristina@cashflowportal.com.