One word that has become common place to describe the current state of the market is uncertainty. As a passive investor, especially as a new passive investor, you are making investments in a changing market. If you have done this before you probably already know that investing in a changing market is difficult. If this is your first time investing, then it may be even more scary trying to figure out how to move forward.
As you are witnessing all these changes, the deal sponsors who are offering private real estate investments in multifamily are also seeing changes and making tweaks to the way they purchase, finance, and appeal to passive investors. A good understanding of real estate investments and the traditional advice provided to passive investors on how to analyze an investment opportunity still holds true. The intention of this article is to highlight a few critical metrics passive investors will want to pay attention to specific to the current market conditions.
As you may already know, when you invest in a passive real estate syndication you are investing in the deal as much as you are investing in the person. Passive investors in today’s market should be on the hunt for the best-in-class deal sponsors they can find.
Skilled and seasoned operators that have been through prior recessions or turbulent markets have something that is hard to find. Experience. The only way to gain experience is by the very act of going through an event. Due to having this road-tested knowledge these operators will be able to draw on their prior investment experiences to succeed in current markets.
If you already invest with someone that has shown to be a skilled operator, congrats! That is not the end of your job, however. Given the changing market, you would still benefit from diversifying the sponsors that you invest with. In the case that things take a turn for the worse with the sponsor you currently invest with, you have other performing investments that will balance out your portfolio.
You can speak with friends, family, other passive investors, go to real estate networking events and look online to try and find deal sponsors that have a reputation for transparency and high performance.
Transparency will be key in the current market. There are times when things do not go as planned. You will want to know that the person leading the ship to ensure the success of the investment is someone that can be trusted to do the right thing and make the hard decisions necessary to protect their passive investment partners.
One of first factors a passive investor should consider about an investment is the story. A good storyteller is lauded for their ability to captivate minds with their communication skills. When we talk about the story here, we are not referring to bed-time stories and novels but rather the “why” of the investment. The story of the investment property includes why it is being sold. What is the opportunity to create additional value for investors that would be strong enough to overcome headwinds in the current market?
In a changing market the standard deal may no longer work to get the returns that you are looking for. Further, if a deal sponsor is promising the same returns as prior years with out anything “stand out” about the investment, then it is likely they are over promising and may under deliver. A good deal sponsor will likely offer more conservative investment return projections compared to prior years but with a strong story that has the potential to outperform. Deals with lots of “room for error” will help you sleep better at night. In this market a reasonable return that has a high chance of being realized will be more comforting than a high-risk deal which may not end up delivering as promised.