The 5 Key Deal Components Passive Investors Must Examine Closely

Updated: Jun 5, 2018

As a passive investor, you receive deal packages and executive summaries from syndicators, and most of the time they all look great. As a former lawyer, I can tell you that the written word, in this case, should be taken with a lot of caution. In Israel, where I am from, there is a phrase lawyers use frequently, “the paper will suffer anything” which means there are no limits to what you can write on a piece of paper. It will carry it.

Most syndicators are honest. The vast majority will not try to present false information in their investment package. However, as a passive investor, you should be aware of several components in every deal that can significantly affect the returns the syndicator predicts. In this article, I will discuss the 5 most critical components that you should pay a close attention to and thoroughly investigate if needed. Knowing where to look is key to making an informed decision and choosing the deals with the highest chance of success.

The Exit Cap

I chose to start with the Exit cap because it seems like a small factor in the syndicator’s underwriting and is often overlooked by many passive investors. However, it’s one of the most important factors in any underwriting that can significantly affect returns and can be the difference between a failing investment and a successful one.

The Cap or Cap Rate is the ratio between the Net Operating income (NOI) and the purchase price. The lower the cap rate – the more you pay for a property, relative to its NOI, and vice versa. Sellers always aim to sell their properties at the lowest cap rate, and the buyers’ interest is to buy properties with the best cap rates.

The Exit Cap is the cap rate that the syndicator assumes they will be able to sell the property for by the end of the holding period (at time of exit). If you only change the E