Most investors are seeking the same thing. Regardless of the asset class, they prefer to invest with predictability while receiving a good return on their money, relative to the risk. But what they are REALLY seeking is peace of mind.
Since the turn of the century, working with private investors has taught us a host of lessons about what is important when considering a passive investment. In this article, let’s cover the most common questions investors tend to ask before investing in a real estate project.
Creating wealth through real estate is an artform. Protecting that investment requires a great deal of experience and technique. Most investors will need a skilled operator and partner who understands how to successfully buy, manage and sell real estate to ensure success. In this relationship, the investor provides the money and the operator provides the strategy, the experience and the labor. To achieve peace of mind, here are the top three questions investors ask.
“How will I get my money back?”
It is interesting to note that the return “of” the investment is more important to an investor than the return “on” the investment. To get comfortable with the answer, investors ask these three additional questions.
- Do I trust the operator? Even if the plan makes a lot of sense, if you can’t trust the people, you should pass. The plan needs to be executed by people you can trust.
- Does the deal make sense? In other words, does the plan for the property sound logical? Even if you like and trust the operator, if the plan doesn’t make sense, you should pass.
- What are the risks? Even if the operator is trustworthy and the plan makes sense, if they are not aware of the risks and have not taken steps to mitigate those risks, you might want to reconsider. Many things can go wrong and it is important the operator has given those variables considerable thought.
Once investors are comfortable with these answers, it is then appropriate to understand how the investment is secured.
“What kind of return do I get?”
The type of investment will determine the return and how it is distributed to the investor. It is important to note that if an operator is offering outlandish returns, that should raise a red flag. Realistic returns in today’s investment environment should range from six to 14 percent, depending on the risk. Investments that provide higher returns usually come with higher risk. For example, a land development project where there is no income may offer a higher return, but with no tenants and no income there is higher risk. An existing building where there is income while renovation takes place would offer a greater degree of stability and the return would not be as high. In either case, the risk should reflect the return.
Some investments have income along the way, while some share profits at the end, and others have a blend of both. In addition, each investment has its own time horizon and you will want to consider the value of having your capital deployed long term for a consistent, predictable return versus a shorter term that will require finding another good investment when that one matures. Getting comfortable with the answer to this question involves understanding your own appetite for risk, and the appropriate return that comes with that risk over the term of the investment.
“Does the operator have the experience to execute the plan?”
Knowing there is an experienced team capable of carrying out the plan successfully is extremely important. You don’t want to be part of an operator’s “learn-as-you-go” strategy. Confidence in the operator’s track record, their current successful projects, and the culture of their team will help you understand whether or not they are qualified to fulfill the strategy.
So, in the end, find a trusted and skilled operator, who has a sound plan, and is capable of executing it successfully. Ask the right questions and get comfortable with the deal, the returns, and the risk.
That is the best way for investors to achieve peace-of-mind.
By Jack Martin
Jack Martin is a passionate business and family man, a visionary, and a people-person. Jack has been building strategic relationships with capital partners, particularly in the real estate and investment market, since he co-founded Bakerson, LLC in 2002. His ability to identify great opportunities is incomparable, as is his passion for powerful relationships, and his clients have more fun investing than they ever thought possible. Tweet @JackMartinCo.