“The number one factor in deal performance are the operators behind it.”
You’ve worked hard to put yourself in a position to have investment capital, now it’s time to put that investment to work. Deciding WHO to trust with that investment is just as, if not more important than, the deal itself.
If you’re anything like I was when considering my first passive investment, you have NO IDEA what questions to ask and how to determine who to trust with your investment. This left me investing in a fairly decent deal, in a fairly decent market, with some fairly horrible operators.
The real estate market was booming but my investment was a bust !
This is when I learned that the number one factor in deal performance are the operators behind it. There are going to be curveballs on EVERY deal, which means the operators better be experienced enough and dedicated enough to handle it. You can buy the best deal in the best market in the world, but if the operator doesn’t do a good job, then it won’t be a good deal. I’m not saying that a strong operator can make any deal work, but that the operator is as — if not more — important than the deal itself.
With all that being said, here are a series of questions I wish I would have asked on my first investment. I plan on writing another post with all the questions to consider asking, but here are the FOUR MOST IMPORTANT questions to ask in my opinion.
Question 1
what is the background and experience of everyone on the team?
Imagine that you’re about to invest in a professional sports team, would you ever do that without knowing who’s on the team? Do you have LeBron James or Justin James?
Unfortunately my first deal I invested with the equivalent of a Justin James… a Justin James without any other team members. Shit.
With the amount of knowledge and work involved in a syndicated multi-family deal, it’s imperative to know the team that will be handling everything.
- What is their background?
- How long have they been syndicating deals?
- How long has the team worked together?
- How many deals do they own in the current area?
- How many deal do they currently own and manage?
- Is this their full time focus?
question 2
what is your investment approach?
Everyone has a different idea of what risk is and how much of it they’re comfortable with. Some investors look for the highest possible returns and aren’t too concerned with risk. Some syndicators think the same way.
For example, as a team we are more conservative and focus on improving class B & C apartment communities in secondary and tertiary markets. This is our focus because that niche within the multi-family asset class has been the least volatile during downturns while still offering strong upside potential during up-cycles.
Do they prefer value-add, turnkey, or major reposition deals?
- We focus on value-add because they typically provide higher returns than turnkey but are less risky than major reposition deals.
How long do they hold the asset?
- If a syndicator wants to double my money in 12 months that’s not necessarily a good thing. That means they are extremely aggressive where I’m more conservative.
Why did they choose the specific markets they’re in?
- The biggest key indicators we look for when choosing a market are Job Growth, Diversity of Job Growth, Household Formations, and Supply & Demand. In other words, we have a system. If they don’t… run.
What is the projected return?
- Risk doesn’t always mean return, but a higher projected return almost always means higher risk. The answers I get here will dramatically influence how granular I get in determining how they made their projections.
Question 3
are you investing your own capital into the deal?
I feel like this question is VERY telling. We invest in EVERY syndication deal we put together because we believe in those deals, it’s easier than trying to vet other investment opportunities, and because we always want to make sure we’re equally aligned with our investors. This makes decision making an easier process.
question 4
why do you feel an investor should invest with your company?
This question is one of my favorites. If answered correctly, the likely hood of me investing with them SKYROCKETS! I believe alignment of interest, transparency, and trust are critical.
Alignment of interest comes from having their capital invested alongside mine. Transparency comes from reporting. We provide monthly financials, monthly recaps, and in-depth quarterly reports on the progress of the business plan. We are also available to jump on the phone to discuss anything and reply to emails within a few hours, not a few days.
All of the above will build trust with investors. That’s earned over time. We’ve developed these standard operating procedures because we know what it’s like to be on the passive side of most deals and want our investors to have a better experience.
If an operator relays something similar to me, once again, the likely hood of me investing with them skyrockets.
Side note
A experienced operator should know that you’re going to ask these questions and proactively answer them before you even have to ask them. We record a video for each deal that walks investors through our offering materials and answers questions we know they will or should have.
Conclusion
Hopefully this list has helps make you aware of the types of questions you should be asking. I also hope it helps in obtaining the information you need to make an educated investment decision!
Understanding what you’re looking for will also be critical in identifying the right syndicating partner. Take a few minutes to map out whats most important to you before investing any money into any investment!
Also, check out the most critical Deal Specific Questions to ask as a passive investor!
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