What is a Real Estate Sponsor?
A sponsor can be a great option for new real estate investors or those short on time and resources. But what is a real estate sponsor? How do they make their money? Let’s take a closer look at the role and responsibilities of a real estate investor and when you should consider working with one.
What Does a Sponsor Do?
The main job of a real estate sponsor is to research, acquire, and maintain a property. He or she will have lined up a group of investors to help purchase the property, but the sponsor will be responsible for overseeing the entire process and managing the asset afterward.
How Does a Real Estate Sponsor Make Money?
In addition to a fee for researching the property and overseeing the acquisition process, real estate sponsors are also entitled to a share of future profits. Profits can be distributed in a few different ways:
This is one of the more popular ways of profit distribution when a sponsor is involved. Once a property begins to make a profit, the sponsor will let the investors reap 100 percent of the first “scoop.” Past a certain point agreed upon by the investors and sponsor, the sponsor will then begin to earn a split profit. The exact percentage split will change as profits increase.
For example, let’s say the first profit scoop was 5% paid out to only the investors. The next round of profits past 5% will then be split between the sponsor and the investor, with perhaps 30 percent for the sponsor and 70 percent for the investors. As profits increase, the team can decide to increase the percentage earned by the sponsor. The point at which they decide to increase the split is sometimes referred to as a “ladder,” since both parties are climbing toward higher profits.
Profit splitting can be a lucrative way for a sponsor to make money. It is generally best for short-term holding, however. If a sponsor and his or her investors intend to hold a property for longer than 7 years, a co-investment strategy may be a better option. This process entails profit-sharing from the beginning.
In a co-investment strategy, the sponsor will form an LLC for the property. He or she will act as the General Partner or Managing Partner, while the investors will be Limited Partners. As the General Partner, the sponsor assumes most of the risk where the investment is concerned. The Limited Partners only stand to lose their initial investment.
As each property will operate under its own LLC, investors have the opportunity to invest in multiple properties without assuming too much risk. This is becoming an increasingly popular way to diversify an investment portfolio.
Pros Of Real Estate Sponsorship
Sponsors have direct control over investment decisions, property management strategies, and project execution. Not having to involve multiple people or entities means the acquisition process can happen more quickly. And as we all know, time is money in real estate.
Increased Income Potential
Sponsors have the potential to earn substantial income from acquisition fees, management fees, and profit-sharing. The more projects they oversee, the more money they stand to make.
Sponsoring projects allows individuals to hone their real estate expertise, gain valuable experience, and build a track record that can attract more investors in the future.
Cons of Being a Real Estate Sponsor
Sponsors shoulder the burden of deal sourcing, due diligence, project management, and investor relations. The pressure to deliver positive results can be stressful.
Sponsors often invest their own capital alongside investors, which means their personal finances are at stake. They also assume greater risk as a General or Managing partner in the event they form an LLC with their investors.
Funding for Real Estate in Colorado
Real estate sponsors are the driving force behind many successful investment projects, leveraging their expertise and management skills to create value for both themselves and their investors. Becoming a sponsor entails higher risks and responsibilities, but it also offers greater control and profit potential.
If you are looking to diversify your portfolio through a sponsor and need financing, contact the lending professionals at Pinetree Financial. We lend on all sorts of projects in the state of Colorado and are ready to help you achieve your investment goals. Call or go online today to get started.