Key Questions To Ask When Performing Due Diligence On Your Deal Sponsorship Team

Key Questions To Ask When Performing Due Diligence On Your Deal Sponsorship Team

In real estate investing, preserving capital matters more than chasing high returns. It's prudent to decline poor opportunities rather than proceed with them. Before committing funds, establish clear guidelines for risk mitigation and sound decision-making. Here are eight essential questions for evaluating a deal sponsorship team in multifamily investments.

1. Are you investing your own money in this deal? If so, how much?

Sponsors with personal capital at stake demonstrate aligned interests with investors. Their financial involvement incentivizes strong performance and accountability. That said, established sponsors managing larger properties may invest smaller amounts across multiple deals—which doesn't necessarily signal a problematic opportunity.

2. How much experience does the property management company have? How do their other properties compare to this one?

Your property manager serves as a critical partner in investment success. Verify they have market-specific experience and manage comparable asset classes. A manager experienced primarily with Class A properties may struggle effectively operating Class C assets.

3. What concerns you most about this property?

Every investment carries inherent risks and drawbacks. Transparent sponsorship teams can articulate potential problems. View it as a red flag if they cannot identify at least one significant concern.

4. What fees will be charged?

Acquisition fees typically range from 1-3% of purchase price, compensating sponsors for property identification and capital raising. Asset management fees, usually 1-3% of collected income or raised equity, cover ongoing investment management.

5. Does this deal offer a preferred return?

Preferred return structures prioritize equity investor distributions at specified percentages before sponsor compensation. Alternatively, equity-split arrangements divide all cash flow based on sponsor equity ownership. Understand how each structure affects your returns.

6. Have you surveyed and visited the comps? What makes you certain that this property can achieve the projected rents?

Sponsors should conduct rent surveys supporting their projections and visit comparable properties. Comparables must be genuinely similar—a 50-year-old Class C property differs significantly from a newly constructed Class A building.

7. How did you determine the property taxes in your financial projections?

Property taxes frequently represent the largest multifamily expense. Sponsors must consult local municipalities and tax assessors regarding increased tax liability from the purchase. Underestimating this can severely damage returns.

8. Does the insurance policy cover the loss of rental income and the full cost to rebuild?

Comprehensive coverage protects against weather, fire, accidents, and natural disasters. Policies should include loss-of-income protection and full reconstruction cost reimbursement, ensuring operational continuity.

Conclusion

Successful passive investing requires thorough sponsorship team evaluation. Conducting extensive internal due diligence before presenting opportunities to investors is a hallmark of a well-run operation.