It is not possible to eliminate all risk from an investment. After all, the zombie apocalypse could hit tomorrow and possibly wipe out your entire portfolio. However, even high-return investments can reduce risk. in fact, These are exactly the investments you want to minimize risk. Government bonds require no risk.
I I love real estate syndicates As a high return investment. They are completely passive. You don’t have to worry about financing or contractors, permits or inspectors, tenants or property managers..There’s no need to be be landlordstill You can still enjoy all the benefits of real estate ownership. Cash flow, thanksand Tax incentives.
If terms like “real estate syndicate” or “private equity real estate” scare you, please stay away. These are simply group investments, where professional investors take on a silent partner to fund the deal. Effectively, you become a part-owner of a large property, such as an apartment complex, mobile home park, or industrial or commercial property.
So what kind of risks should you take? be careful When to vet potential investments? Here are nine things to remember.
1. Sponsor Risk
in front staring at specific investment, Start by evaluating Syndicator (also known as Sponsor, General Partner or GP, Operator).
An experienced and skilled sponsor who puts investors first can find a way to recover their money. rampant trading. An inexperienced or irresponsible sponsor can ruin even a good deal.
There are many questions to ask your sponsor, but here are some questions to start with.
- How many deals have you done in your career so far? How many of them were sponsored and syndicated deals?
- How many of them left? full cycle? What kind of return did it bring to investors?
- Have you ever lost an investor’s money? Have you ever lost your own money on a trade?
- Have you ever made a capital call?
- Please tell me about unplanned transactions. to you And how you reacted.
- What is your niche strategy and why did you choose it?
Do not invest with any investor what you don’t feel 100% confident in. If you don’t feel “yes!”, then consider your attitude toward sponsors as a firm no.
2. Debt risk
lots of The syndication deal has collapsed in the last two years. Because of risky financing. Too many syndicators took out short-term or variable-rate loans, only to find themselves in trouble when interest rates skyrocketed. Ultimately, cash flow was weak or negative., You probably won’t be able to refinance at today’s high interest rates.
When we vet a deal at Co-Investment Club, one of the first things we look at is the debt structure. We ask questions such as:
- What is the loan term?
- What is the interest rate? Is it fixed or floating?
- In the case of floating rates, does the sponsor purchase interest rate caps, interest rate swaps, or other protections against further increases in interest rates?
we declined the investment About last year was financed Comes with a 2-year bridging loan. I There is no motivation to gamble with interest And cap rates will fall within the next two years.
In lieu of that transaction, we invested in a transaction in which the sponsor assumed a fixed rate 5.1% loan from the seller. Contract Signing: There were 9 years left on the contract.
We don’t know what the market will do in the next two years. But I’m confident that at some point over the next nine years, there will be a good market to sell.
3. Market risk
Markets are always changing and evolving, going up or down. under. They rarely sit still.
if cap rate As it rises, the price of income real estate falls. it is Great for investing in new deals and bad for you Existing real estate investments.
recession risk It falls under the category of market risk. In a recession, rent arrears rise, as do vacancy rates. both were hurt Real estate net operating income therefore, both that cash flow and the value.
You can’t control cap rates or recessions. Sometimes the market moves in your favor, and sometimes it doesn’t. However, by using a long-term, low-interest fixed loan, you can conservatively invest in real estate with extremely good cash flow.
As a final thought regarding market risk, all real estate investments are made locally. When talking about “market risk”, people may worry about macroeconomic markets or the broader economy.But what? Really What is important to real estate investors is the local market, including local cap rates, vacancy rates, rents and expenses.that affects you genuine The return you will get from that particular investment.
Fortunately, you can: Passive investing is possible from anywhere in the world, in any city in the country. From my current home base in Lima, Peru, I certainly think so.
4. Concentration risk
I I don’t understand specific cities or states, or even specific asset classes (multifamily, mobile home, retail, industrial, etc. ). That’s exactly why we work with you on these deals to spread small amounts of capital across different properties, regions, and property types.
At last count, I own interests in approximately 2,500 units in 20 properties in 15 states. Most often, in each property he invests only $ 5,000 to $ 10,000.
That means you don’t need a crystal ball. There’s no need to predict (gamble?) the next hot market or asset class. I simply Continue to invest in different properties in different regions monthly as the form of dollar cost averaging method.
Because, let’s do it Please face reality. As with any local market, unexpected spikes and dips can occur. To avoid that risk, Diversification: Spread the small eggs among many baskets.
5. Regulatory risk
Local cities and states are Own Landlord and Tenant Regulation. Some companies are investor-friendly, while others lean heavily toward protecting tenants at the expense of property owners.
Properties subject to tenant-friendly regulations come with additional risks. It takes much longer to enforce lease agreements and evict other tenants who default or violate their obligations. We have seen evictions take 11 months in tenant-friendly jurisdictions.
In some markets, owners Be strong Even if the lease expires, you can renew the problematic tenant. It is not possible not to renew the lease contract.
That doesn’t mean we don’t consider investing in anti-landlord markets at all. However, we prefer non-residential investments in these markets. For example, we invested in a short-term cabin rental business in Southern California.in An unincorporated mountain town supported by tourism. The risk of ~ is zero short term rental prohibited Or, if these cabins only support stays of up to a week, you’re in for the nightmare of eviction.
6. Cash flow risk
I mentioned earlier the risk of local rents stagnating or even falling. That can put a strain on cash flow.
Cash flow may also be under pressure from other directions. in the form of Increase in expenses.Look no further Rising insurance premiums Significant increases in labor costs or significant increases in labor costs over the past two years.
So how does our investment club protect itself from cash flow risk? Look for deals with modest prospects, including low rents growth and a significant increase in expenses.Even assuming the numbers work out difficult There is still some room for adjustment if market conditions worsen.
7. Construction risks
When syndicators plan to add value through renovations, they need a great team. actually Raise the hammer and get the job done within budget. upon schedule.
Who is doing that job?Is your construction team in-house or hired? Many times Has the sponsor worked with this team on previous deals?
if This is the sponsor’s first rodeo with this crew.be careful.
8. Property management risk
The same principle applies to property management. who is going Do you manage the property on a daily basis? Whether your property management team is in-house or hired externally, Many times Did the sponsor work with them? in front?
Poor real estate management is a recurring theme in future syndicated transactions.our investment club search Work with a proven PM team to reduce this risk.
9. Partner risks
in bigger A syndication deal may have a primary sponsor and multiple supporting sponsors. Be sure to understand who exactly manages assets and focuses on due diligence.
I’ve seen deals where the supporting partner sponsor has a great track record., but they weren’t Lead sponsor or person responsible for asset management. The lead sponsor botched the deal and left it to other companies to clean up the mess.
This brings us full circle to sponsor risk, make sure you understand Who exactly are you entrusting your money to?
final thoughts
By considering these nine risks when investing in passive real estate projects, you can reduce your risk while earning returns of 15% or more.You can also manage risk by Invest in debt instead of real estate equity.
A few months ago, our co-investment club invested in a rolling six-month note paying 10% interest, secured by a first lien of less than 50% loan-to-value. Real estate prices and interest rates can go up or down, but we will still have peace of mind. Admittedly, this is not the 15%+ annual return we would normally aim for as a club. But with short, flexible terms and incredible collateral, we walk away. Feeling I am confident in taking risks.
Risk cannot be completely eliminated. However, these asymmetric returns can be mitigated and managed by finding that they provide sufficient profit with moderate risk.
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