Step 1: Determine the Exact Nature of the Opportunity
- Location: is the property located in an area you feel comfortable with? Is it in a market that you are familiar with or at least comfortable with. Some investors like to invest in their ‘backyard’ and some are comfortable investing out of state. Additionally, make sure you understand the location’s demographics profile – is the property located in a decent area or in a crime zone? If you are unfamiliar with a certain city or neighborhood, look up the crime rate on Trulia and Google the city/neighborhood name to gather more information that will help you assess whether the property is located in a decent area or in a crime zone. Some investors have a higher appetite for risk, where returns are high, but the risk is high as well. Knowing your preference when it comes to property’s location can help you save time and focus on the right deals for you.
- Hold period: take a close look at the business plan – does the syndicator plan to hold the property for 3-5 years? 10 years? Longer? Every investor is comfortable with a different time frame, and knowing your ideal hold period will help you screen the numerous investment opportunities out there and focus on the ones that fit your needs.
- Risk Profile: is the deal low risk (core or core plus, no renovation or raising rents needed) or a high risk (repositioning of a Class B apartment building in a Class D neighborhood). Make sure you understand your appetite for risk before making a decision to join a syndication. Don't be tempted by high returns! The higher the returns, the higher the risk, so make sure you are comfortable with the risk associated with the deal.
- Return Driver: is the opportunity based on appreciation (low cash flow throughout the hold period and high appreciation factor), cash flow (high cash flow during the hold period with a modest appreciation projections), or both. Finding opportunities that have strong cash flow and appreciation is ideal, but very hard to find these days. It’s a balancing act and you should know in advance if you favor cash flow or appreciation as a main driver for returns.
Step 2: Evaluate the Sponsor’s Experience
Once you decide that an investment opportunity is the right opportunity for you, the next step involves evaluating the experience of the sponsors. Consider the experience level and competence of not only the sponsor, but of the sponsorship team as a whole. A sponsorship team with a well-balanced backgrounds and experiences in real estate and outside of it can be a great asset and will add unique value to the deal.
Step 3: Look for Your Ideal Return
The most experienced and seasoned players in the realm of passive investment provide effective clues and guidance, when it comes to looking for an appropriate and most preferred return. In fact, in their book it’s not feasible to consider any passive opportunity unless and until it does not include a preferred return for them. It’s best to take a leaf out of their book as a preferred return essentially guarantees receipt of the first installment of the profit amount, before it’s split for the manager’s share. When this happens, it helps in recouping the original investment amount on a priority basis. The amount of return definitely depends upon the level of experience at the end of the day.
Step 4: Review the Profit Distribution
Profit distribution is one of the most critical factors in any investment as this determines the ROI at the end of the day. Thus, it’s extremely important to review this factor before considering any opportunity of passive investment. Profit distribution ironically depends upon the managers’ experience and their share of contribution in terms of work and labor throughout the lifespan of the investment opportunity. Some sponsors offer an equity spilt that ranges between 5%-95% and 30%-70% (where 95% and 70% goes to the investors, respectively). Generally speaking, the more experienced the sponsor, the higher their share. In this scenario, the sponsor will receive an agreed portion of the profit regardless of their performance (with the exception of a preferred return payout).
Another format of profit distribution is waterfall. Waterfall distribution is directly related to the sponsor’s performance and allocates a higher portion of the profit the higher returns the sponsor provides. Today, however the vast majority of sponsors don’t offer this option.
As a passive investor, you should decide which profit share mechanism you are most comfortable with.
Step 5: Evaluate the Pro Forma Assumptions
One of the most effective mechanisms to ascertain whether one is dealing with an aggressive management or a conservative one is by reviewing the assumptions used in Pro Forma. These assumptions provide a first-hand feel of whether the opportunity is going to perform as ascertained. However, the goal should be to look for a conservative manager, who will be using the conservative assumptions to make sure that they are able to under-promise as well as over-perform for setting up long-terms relationship with the investor. The main assumptions you should review are the rent growth trajectory, the occupancy and the exit cap rate. It is advised to have a conversation with the sponsor and ask how they arrived at the assumptions.
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About Ellie Perlman
Ellie Perlman is the founder and CEO of Blue Lake Capital, a woman owned multifamily real estate investment firm focused on partnering with family offices and accredited investors to build and preserve generational wealth. Since its founding in 2017, Blue Lake has successfully acquired and operated multifamily assets across high-growth U.S. markets, completing $1B+ in transactions.
At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.
In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.
Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.
Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.
