So, you’ve decided that you like the idea of truly, passive investing in real estate. You've shown some interest and now you're getting “deal alerts” in your email inbox with opportunities to invest in syndications (like the ones we send from New Heights Investment Group).
There are only so many hours in a day, and we are all inundated with emails. Therefore, when you receive investment summaries, it’s helpful to be able to quickly decide if you want to keep reading and spend more time exploring. Even when you decide to get more information, the detailed investment summary can be even more overwhelming – especially in terms of page length.
Let’s break it down and make this process easier. The 3 key criteria you should always start with when considering any real estate investment is: 1. The Market, 2. The Team, 3. The Deal.
Is this an emerging market that meets your investment criteria? Check out “Vetting a Sponsor Checklist” to do a more detailed review of questions to ask yourself about the market.
Do you know, like and trust the team that you would be investing in with this opportunity? Check out my quick “Vetting a Sponsor Checklist”.
Is this deal an asset that interests you – apartments, self-storage, etc? If yes, read on.
Does the timing work for your schedule (i.e. hold time, funding timing, etc.)? For example, I often have clients that want to invest with their Self Directed IRAs and therefore, they really like the longer hold times 5-7years, so this would be a consideration for them.
Are the projected returns in line with what you expect from an opportunity? When evaluating and comparing deals, I look at the following metrics.
1. Cash on Cash Return: This is the cash you can expect to receive every month or quarter. Unlike your investments in the stock market, you get cash returns from the rental income from the investment. I love this part!! Our deals aim at a 9% avg cash on cash return. For example, let’ say you invest, $100,000. The annual cash flow distribution base divided by my investment. If I am distributing $10,000 annually to you, then the cash on cash return is $10,000 divided by a $100,000, so it is a 10% cash on cash.
2. Internal Rate of Return: Every investment summary will have this metric, but it can be an advanced concept. Let’s first focus on the Average Annual Return (including the sale), which is similar but not exactly the same equation. IRR takes into account the time value of money over the hold period of the asset. We aim for 20% Average Annual Returns. An Example: If I put in $100,000 and the investment is five years. Let’s say I double my money in five years, I am getting $100,000 back. I will have made a $100,000 and that $100,000 “profit” is made up of the cash flow distributions AND profit when we sell at the end. Now, I divide that by the number of years, say five years, and the average annual return is 20%. IRR - is going to be slightly less than that, as it measures the net present value of time and money.
3. Equity Multiple – I like to see an equity multiple of 2.0x, meaning the investor doubles their equity over the time of the investment (including cash distributions and profit at the sale). Just like in the example above, the investor puts in $100,000 and when the asset is sold, they receive their initial investment of $100,000, plus $100,000 profit.
4. Capitalization Rate - Another metric that I’m often asked about is cap rate. Cap rate is helpful when comparing similar assets in the same market. The simple math is basically the NOI (Net Operating Income) divided by the cap rate, gets you the value of the real estate. Check with local brokers to verify cap rates in the market you are exploring.
Now, you’ve read the investment summary and get a feel for the Market, the Team and the Deal… it’s time to decide! We are here to help you walk through any opportunity and answer any questions, but always remember it’s crucial that you have confidence in these 3 factors as you move forward with your decisions to invest.
If you want to hear about my journey into real estate investing and how you can invest in syndications? Tune into this episode of our "Frenzied To Financial Freedom Podcast".