When evaluating real estate investments, several critical factors should be considered before making an investment. In this article, we will address the top five items to “get right” when evaluating both an investment and the people behind it.
1. Character and Track Record: Get the People Right
Without question, the most important thing an investor needs to get right is the people. Even if you check off every other item on this list, the likelihood of a bad experience and/or losing capital is higher if the sponsor managing the investment is wrong.
Seek a sponsor who demonstrates high character and who you believe will do the right thing when nobody’s looking. As is the case with all investments, real estate deals don’t always go exactly as planned, and the quality of the people you are invested in will directly correlate to your experience if anything goes awry. Invest with the wrong people, and you will be left “holding the bag.” Invest with the right people, and you can sleep well knowing they will make decisions in the best interest of all parties.
Speaking of interests, make sure the sponsor’s motives are aligned with yours. Avoid sponsors who are driven by fees or vanity metrics related to how fast they can acquire property or deploy capital. Rather, seek a sponsor whose key metric is the investor’s return and who has a track record of patiently waiting for quality deals.
As you’re analyzing returns, resist the temptation to jump into investments that sound too good to be true – because they probably are. Look for conservative sponsors who have a history of meeting or exceeding yield projections. Sometimes under-hyped investments can be the best opportunities, where there is a realistic likelihood of over-performance.
While returns are always a consideration, investors often overlook the experience they will receive after the initial investment. Your overall experience will involve much more than the potential yield you could achieve. Take the time to gain clarity on what your experience is going to be AFTER you invest. Is the sponsor accessible? Will you be able to reach them after you invest? Is there a clearly defined communication plan? How often will you receive reporting? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? Historically, have the reporting, distributions, and tax documents been delivered on time? These are just a few of the simple questions that will give you a preview of the investor experience.
At the end of the day, the purpose of passive investing is to leverage a sponsor’s time, expertise, and ability to source great deals. However, if the experience causes you to lose sleep at night, the potential yield simply will not be worth it.
2. Risk and Reward: Get the Real Estate Right
Another key consideration is the risk and reward of the real estate itself. The potential for yield should correlate to your appetite for risk. The more risk associated with the real estate, the higher the likelihood of total loss of investment.
Taking on higher risk usually involves speculative investments that are dependent on favorable market conditions, with the understanding that if the conditions reverse, you could lose all investment capital. On the opposite end of the spectrum, lower-risk investments with the highest degree of recession-proof qualities are capable of delivering predictable cash flow and preserving capital, even in the worst market conditions.
If we look back to the financial crisis of 2008, one type of real estate weathered the storm better than anything else, outperformed all other types of real estate, and continued to experience high demand throughout the recession: mobile home parks. Due to their intrinsic performance qualities, we believe mobile home parks are the only type of real estate that can truly survive a recession while continuing to outperform other investments and remain in high demand. The next time a market crash occurs, we and our investors plan to weather the storm just like last time.
To avoid losing investment capital, it is extremely important to invest in real estate that will be in demand at all times, including in the depths of a market crash. Without sustainable demand, even the right property in a good location can underperform, resulting in foreclosure.
Today, the country’s shortage of affordable housing is the most severe it’s ever been. At the same time, the supply of mobile home parks – the most affordable housing option – is shrinking. Due to these dynamics, mobile home parks will continue to be in high demand for the foreseeable future, offering the potential for stable cash flow and consistent returns.
3. Deal Pipeline: Get the Deals Right
A sponsor who has built a proprietary deal pipeline that consistently delivers will have a competitive advantage in the market and will be better positioned to find quality properties to acquire.
Remember: The potential for investor return is created when the real estate is acquired, so a robust deal pipeline is crucial. When you include off-market deals the public doesn’t know about, the potential deals in the pipeline can more than double. This allows a sponsor to sift through more deals and find the ones that will be the best fit.
4. Effective Business Architecture: Get the Execution Right
It’s one thing to project impressive results and quite another to execute the strategy and deliver. This is why it’s so important to assess a sponsor’s track record of performance and the consistency of their results.
At 52TEN, we use a business architecture called the Entrepreneur Operating System (EOS), a goal-oriented system consisting of six components:
- Vision: Everyone in our business is on the same page with respect to short, medium, and long-term goals. We’re all working together toward the common aim and not fighting against each other.
- People: This means putting the right people in the right seat, whether it’s employees in our office, staff at the parks, contractors, or vendors.
- Data: This component is centered around tracking the data that will tell you whether you’re on track to achieving your goals. Everybody at 52TEN has a number that represents what they’re accountable for, and they report on it on a weekly basis.
- Issues: We have a clearly defined process for identifying issues as they come up, discussing them, and then permanently solving them so they don’t just get kicked down the road.
- Processes: We have clearly defined methodology for everything that we do, and those methods are constantly being fine-tuned and updated.
- Traction: When all of these things are implemented, you gain traction and constantly move toward achieving the vision.
We install EOS at every single property we own, meet with our staff members weekly to stay on track, and maintain measurable goals that ensure consistent results at each property.
A sponsor who has designed their business correctly will be able to execute the strategy in a consistent manner and will have a competitive advantage over others. This leads to meeting or exceeding timelines and budgets, which results in optimal returns for investors.
5. Transparency & Accuracy: Get the Administration Right
We’ve all heard stories of Ponzi schemes, skimming, cooking the books, and misappropriation of funds. We also understand that humans are capable of making mistakes, and that’s why transparency and accuracy are so vital.
A fund administrator plays the role of neutral-party referee and reports exactly what happened without a vested interest in the outcome. This provides the transparency and accuracy investors need to feel complete confidence in their investment.
Preparation Pays Off
Evaluating a private real estate investment and its sponsor requires careful consideration of various factors. Before making a commitment, make sure you feel confident in the people behind the investment; the real estate’s ability to survive a market correction or recession; and the sponsor’s ability to find great deals, properly manage real estate, execute their strategy, and partner with a trusted third-party administrator.
By assessing these factors, you can make informed investment decisions to reduce risk and maximize returns. And most importantly, you can sleep peacefully knowing you made a thoughtful choice.
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.