Similar to any other relationship, if the company (often called a sponsor) can provide the items the investor really wants, it creates a comfortable environment and makes it easier for investors to naturally speak favorable on behalf of the sponsor.
Top 3 Items Investors Want
There are more than three items investors want, but today we are going to focus on the top three most important ones. As a foundation, these three items will put a sponsor on the right path to raising capital, keeping investors happy, and if done extremely well; create raving fans.
Most people would think the top item investors want would have to do with return on investment, but that is not the case. Investors want to be confident they won’t lose money before they start to think about how much money they stand to make. The first item investors want is to be comfortable they will get their money back.
Next, investors want to understand what their investment experience will be like after they have invested their money. How a sponsor interacts with investors during the investment period will have a huge impact on their continued comfort and peace of mind. The second item investors want is a great investment experience.
And, of course, the whole point in investing in the first place is to make a return. Investors will naturally seek a fair return relative to the risks in the actual investment itself, the market, and the sponsor. The third item investors want is a return on their investment.
Investors want to be comfortable as they decide to invest, they want to be confident they will have a good experience along the way, and they want to receive a fair return relative to the risk they are taking. As a sponsor, if you can create an environment that checks these three items off their wish list, your investors will become your biggest fans. Do all three of them extremely well before an investor even wires his funds, and you’ll have comfortable and confident investors from the very start.
Let’s dive into each of those 3 critical items to better understand how to approach them.
1 – Create Investor Comfort
The first item investors want is to be comfortable they will get their money back. Here are some of the areas you can focus on to help create comfort for your investors as they decide to invest:
- Character. Investors want to invest with someone they can trust to make good decisions on their behalf, and to be a good steward of their capital. A sponsor with high character reduces the risk in the investment and is a person who always does what’s right on behalf of all parties involved. Beyond your ability to demonstrate your good character, you can invite new investors to visit with investors who have already earned your trust. This is a situation where raving fans will be of great value to you.
- Track Record. It is much easier to create investor comfort when you have a track record of success. If you don’t have a track record yet, start with the people who know you and trust you. In addition to building a track record, you’ll also want to be able to demonstrate why your strategy is smart, be able to clearly articulate your processes, and show that you have the systems and team in place to effectively execute your strategy.
- Investment Model. The way income, proceeds, and profits are split between a sponsor and the investors is often referred to as the “investment model”. Investors want an investment model that fosters trust. A good investment model will create the least amount of conflict of interest, and naturally result in decisions being made in the best interest of all parties.
2 – Create a Great Investor Experience
The second item investors want is a great investment experience. To demonstrate that, let’s begin with a story from one of my long-time investors.
This is a story he shared with me about two sponsors he had invested with–we’ll call them Sponsor A and Sponsor B–both of whom had an essentially similar business plan. The difference was that Sponsor A did not have a communication plan, and Sponsor B did.
Even though the he always got his money back with Sponsor A and even received a better return than he did with Sponsor B, he never knew what was going on with his investment, and there was a generally high degree of uncertainty.
With sponsor B, he always knew what was going on–good, bad, or indifferent–and everything was always on time. Even though he usually received a lesser return with Sponsor B, he felt extreme peace of mind.
Eventually he quit investing with Sponsor A because he couldn’t sleep at night. He still invests with Sponsor B to this day.
I share that story to demonstrate how important the experience is to an investor. To create a great experience for investors while they are invested, you must have a clear communication plan. A well-thought-out communication plan should include scheduled reports, firm dates for distributions, and reliable delivery of documents. A sponsor’s ability to create an experience characterized by transparency and regularity will deliver peace of mind for investors.
A good communication plan should include a regular project update that contains these 6 pieces of information about the investment:
- General update (since the last update)
- Recent physical improvements to the property
- Income and expenses update
- Recent surprises (good & bad)
- Plan moving forward
- Bottom line (compare where you thought the project would be with where it actually is)
3 – Return on Investment
When you’ve created an environment where your investors feel comfortable, have regular communication and peace of mind, they’ll feel confident they will get their money back, which is the most important item. After that, however, investors will be excited to learn how much they can make as a return on investment.
Return on investment is a direct risk-reward relationship. The higher risk, the higher the return. The lower risk, the lower the return. For an investor, the best investments are those where the return is greater than the risk. In a real estate investment, the elements of risk will include the property itself, the market, the sponsor’s plan, the exit strategy, interest rates, and the inherent risks associated with the asset class, just to name a few.
Interestingly, risk to an investor is not always directly related to the real estate itself. Risk also shows up when the sponsor doesn’t have the necessary experience, when their processes and team aren’t adequate, and when transparency, reporting and timeliness are lacking. You can have a great project, and one that is purchased at the right price, but the investment could still be more risky if all these items are not well planned and the sponsor doesn’t have the ability to execute.
Most real estate sponsors focus solely on the real estate and neglect nurturing their investor relationships, but that’s not how to have your investors raving about you. Building trust, comfort, and confidence leads to investor peace of mind and is the path to create raving fans.
Raising capital from private investors is a lot of work. The last thing you want to do is earn an investor’s trust, only to lose it later by not giving them the important items they want.
If you deliver the 3 items that investors want most–and do them well–you will, over time, earn their trust and give them the best experience possible. They will become not just investors, but fans who will not hesitate to sing your praises to everyone they know. You’ll see your relationship with your current investors grow more solid, and you’ll begin to see referrals from them as well.
Jack Martin is a principal at 52TEN, an Arizona investment firm focused on Mobile Home and RV parks.
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