Top 3 Things Investors Want
A real estate investment company and the people who run it are commonly referred to as the “Sponsor.” Providing these top 3 things will put Sponsors on the right path to raising capital, keeping investors happy, and (if done extremely well) creating raving fans!
It’s natural to assume the only thing investors want is a return on their investment. However, investors want to be confident they won’t lose money before they start to think about how much money they could make. The top thing they want is to feel comfortable they will get their money back.
Here are a few areas where Sponsors can create investor comfort:
Demonstrate High Character
People want to invest with a Sponsor they trust to make good decisions on their behalf and to be a good steward of their capital. High character fosters comfort and peace of mind and dramatically reduces investment risk related to the Sponsor.
Key traits of high character are integrity, honesty, and accountability. Sponsors with those traits have strong moral principles and core values. They always do the right thing, even when no one is looking. They take responsibility for mistakes and follow through on commitments they make.
Build a Track Record
A proven track record and a history of profitability go a long way in helping investors feel comfortable they will get their money back. Sponsors should also be able to demonstrate their business strategy, be able to clearly articulate their processes, and show that they have the systems and team in place to effectively execute their strategy.
Ensure Alignment of Interest
Investors want to know the Sponsor’s interests are aligned with their own. When that alignment is present, it naturally leads to decisions that are in the best interest of all parties. That alignment should be present in every corner of the business, including the sourcing of great deals, conservative underwriting, the use of leverage, fees paid, the asset management strategy, cash flow and profit splits, timing of the investment, and the appropriate communication along the way.
2. The Best Investor Experience
The next thing investors want is a great investment experience. They want to understand what their investment experience will be like after they invest their money. How a Sponsor interacts with investors after the initial investment will have a huge impact on continued comfort and peace of mind.
The better experience a Sponsor can create, the more likely investors are to invest again and make referrals to others.
To demonstrate this more clearly, let’s look at a story from a long-time investor of ours. This particular investor made an investment with two separate Sponsors: we’ll call them Sponsor A and Sponsor B, both with similar business plans.
Sponsor A did not have a plan for investor communication, whereas Sponsor B had a detailed plan with dates, deliverables, and timelines.
Sponsor A delivered a higher return, but because there was no communication plan, the investor never knew what was going on, causing him to worry about his investment.
Conversely, even though he received a slightly lower return with Sponsor B, he was regularly informed about the status and performance of his investment, all reports and distributions were delivered on time, and he felt completely comfortable with the investment.
Eventually, he quit investing with Sponsor A because he couldn’t sleep at night. He still invests with Sponsor B to this day.
This story illustrates how important the experience is to an investor (even more important than the return). To create a great experience, you must have a clear communication plan with scheduled reporting, firm dates for distributions, and reliable delivery of documents (including taxes).
Regular reporting should contain information about the progress, timing, and status of the investment; financial statements showing how the investment is performing; and an outline of the plan moving forward.
With an approach like this, Sponsors can ensure investors continue to feel comfortable and have peace of mind, while delivering the best investment experience investors have ever had.
3. Return on Investment
When investors feel comfortable they will get their money back and confident they will receive a great experience after they invest, then they will be excited to learn how much they can make in return.
The return on an investment should be commensurate with the risk. Investors can reduce the risk in the deal by making sure the Sponsor is trustworthy, experienced, and has a history of delivering a great experience.
Sponsors can lower the risk in the deal through acquiring properties at a discount to market, underwriting conservatively, using leverage appropriately, and proactively managing assets.
Be careful not to overhype investments in an effort to raise capital. It is much better for a Sponsor to be conservative, especially because one of the best ways to create raving fans is to outperform the projected return to investors.
As a real estate Sponsor, raising capital requires careful planning and constant nurturing to attract and retain quality investors. Build a comfortable environment that allows investors to feel confident their money is in good hands. Provide a great experience through proactive communication and by paying your investors on time. Be conservative so you have an opportunity to deliver a better return to your investors than you projected. These are all ways to create a community of raving fans who will sing your praises and refer you to everyone they know.
This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation or investment advice, and is not an offer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historic data, and other sources deemed to be reliable, are as of the date of this content, and may change as subsequent conditions vary.