One of the tenants of our company is that, beyond being transparent and accessible to our investors, we want to educate our investors to truly understand what they are investing in.
Here are some of the questions that you must have a thorough understanding of prior to investing in any real estate project.
- Who is asset managing my investment?
This is an important question: many firms outsource their asset management, acting more as capital developers than asset managers. Make sure that the company that is taking your investment dollars is the same one that will manage the asset. David and Lisa, our asset management team members have weekly calls with our property managers to drive the process efficiently.
- What is the business plan for the property?
Is the underwriting of the deal based on “best case” scenarios? Is the sponsor looking for conservative leverage on the deal and not over-leveraging? If it’s a value add play, are they fully capitalized for the renovation? If the sponsor indicates that they are planning to pay for renovations with future cash flows. CONSIDER THIS A RED FLAG.
- What is your track record?
Does the sponsor have other properties and assets to point to that prove the ability to operate and pivot if there are challenges? Is at least one partner in the project experienced in the day-to-day operations and will facilitate the property management oversight?
- What are the risks?
How risky is the investment? How robust is the submarket? What type of market diligence was performed to help protect against fluctuations in the area? What types of stress tests were done on the market numbers during the last recession? Is the employment diverse? Who is the potential tenant base?
- How will distributions be made?
Make sure you have an understanding how and when distributions will be made. Sometimes in our value add deals investors understand that they should not expect a distribution in year one, while in a more stabilized deal, distributions will occur earlier. This should be clearly laid out in the offering documents.
- How will I know how my investment is doing?
Investor communication is paramount. You should be informed up front of what type of updates the sponsor will provide, and how you can periodically look at how your investment is progressing. We provide monthly updates for our heavy value-add/repositioning deals, and live quarterly webinars. Our robust investor portal allows you to check up on your investment from anywhere, at any time.
- WHAT ARE YOUR RIGHTS IF SOMETHING GOES WRONG?
What is the voting process and the process for capital calls? Things are not always going to run smoothly, that’s the nature of the business – it’s how the sponsor handles an underperforming property, takes action to cure the issues and communicates the progress with you, the investor.
- How will this investment get me closer to my goals?
This is actually the MOST important question here.
It can only be answered thoughtfully by you. Think about your requirements for return (long-term/short-term), your comfort level of investment, and the time commitment. If you’re looking for a steady cash return, a heavy value-add may not be the best investment choice for you. An examination of your ultimate goals for your real estate investment is an often-overlooked and necessary step.