Six Ways To Evaluate Before Investing

Main owner, Capital Equity Partners, LLC. Sponsor, developer, syndicator, operator, consultant and coach for real estate investments.

If you are new to real estate investing, don’t be tempted by a sexy looking building or great return forecasts. To ensure a higher success rate, understand the basic elements of the offering, and then decide whether it is appropriate for your investment tolerance.

Real estate investments are becoming increasingly popular with crowdfunding sites as well as private offerings provided directly by sponsors who run individual projects they want to fund. If you are just starting out or have a little experience, I hope to accompany you on your path to success.

Any type of investment requires that you, the investor, understand the risks versus the returns, and real estate is no different. When evaluating a property listing, here are some of the core risks that you should consider before investing your hard-earned cash.

1. Operator risk: Who are you investing in? What is that person or team’s track record? A lack of experience in an operator is a primary factor to consider. If that operator has not previously operated within the asset class they are proposing, the market they are entering, or the size of the asset, proceed with caution. A smart operator will surround himself with a team of people who will support their resume where they are weak.

2. Market risk: The market risk differs from the location risk. Market risk is the area of ​​investment that can be referred to as the Metropolitan Statistics Area (MSA). This categorization divides the area and can be more easily assigned not only to a large city, but to the entire area surrounding it. For example, where I currently live is the Boston, Cambridge, Newton MSA, which covers southern New Hampshire all the way down to Cape Cod. Each MSA’s statistics help us assess and determine what is going on in a general area of ​​the country. The points of interest for real estate investment focus on employment growth, population growth and household formation. If your real estate investment market is not growing, then expect your returns to do the same. Where is the investment that you are evaluating?

3. Location risk: This would refer to the actual location of the property that you would like to invest in within the MSA. Is it in an urban location or is it a suburb? Is it a newly emerging domain or gentrifying the domain? What are the crime rates like? Most people know that real estate is about location, location, location. Where is the asset located and what happens around it to make it a good investment? Areas can be referred to as a grade letter, e.g. B. A, B, C, or D. The better the grade, the more desirable the range.

4. Asset risk: What kind of building are you investing in? In commercial real estate, this is defined as Class A, B, C, or D. Just like your school grades, grading makes the age and condition of a building easy to understand. When investing in a Class B property in a Class C location, you should proceed with caution. If the building is older and requires a lot of repairs, does the operator have the experience to properly assess, budget and carry out the value-adding renovations required to execute their business plan? This touches on strategy risk, which we’ll examine in a moment.

5. Financial risk: What are the investment conditions? How much do you invest, for how long and with what rate of return? The return should always be appropriate to the level of risk involved. The investment in the new apartment building for the largest employer in the region is comparable to buying a class A property in a class A area. There isn’t a lot of risk there. Based on these factors, reduced risks also mean lower returns. If you want to take more risk, you can find the option of buying the C-class building in a peripheral C-class area and be the catalyst of change that starts the movement to upgrade the area. There is much greater risk in this, so the returns should be higher. This is where you start to feel your gut instinct and assess the level of risk that you personally want for your money.

6. Strategy risk: What strategy is the operator pursuing? Do they deal with curb appeal and amenity packages? Will they improve the interiors of the apartments and then increase rents? What evidence is there in the market to support these increases? Do you compare apples to apples on the market? You can understand the operator’s strategy in great detail. This is where the rubber usually hits the road. The right property with the wrong strategy can lead to flat investment returns, which is not the goal.

These risk categories are not the only ones that need to be considered as there are certainly other risk factors that should also be considered, such as: B. Tax implications, investment deadlines and diversification priorities. Getting involved in real estate investments can be exciting and very rewarding, but make sure you understand who and what you are getting yourself into before jumping in to achieve your individual goals. In real estate investing, just like in life, a sexy opportunity is sometimes only superficial.


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