It can be intimidating to try to choose between different opportunities as a private investor looking to break into adding some real estate to your portfolio. Where do you begin when there are so many options, and when making the right choice is paramount to your future investment success?
We put together a quick list of 10 questions you should ask the managers of potential future investments, to see how they stack up. That includes RE/DEV — we encourage you to ask us these questions and more, and to check out our FAQ page for even more information.
1. What’s the manager’s background? Where else has he or she had experience and responsibility like this?
You’re ideally looking to invest your money into a fund with a manager who has experience with this type of work. You also want to ask where his or her previous investments are now, and what, if anything, has gone wrong. That way, you’ll be able to figure out whether it was bad management, a bad market, or some combination of the two.
2. Can I talk to one of your current investors and someone who’s moved on?
This will help you find more information about the past, as well as how the manager(s) communicate with investors. Even in down times, a good manager will communicate with investors and reassure them their money is still safe — do current investors feel good about where their money is? Why did past investors leave?
3. Do the IRR, and other future projections, seem realistic?
This is easy enough to check out. The manager will give you a projected internal rate of return (which we have happily outlined for you here) and you can do some research into the rest of the industry to learn what’s normal. If this fund’s projected IRR is much higher or lower than the industry average, it’s good to check in on why.
4. How do you protect your investments in a down market?
We love answering this question, because it’s probably the biggest key to putting potential investors’ minds at ease. We get it — markets don’t always go your way, and it can be really scary to think about putting your future investments to “chance.” For instance, at RE/DEV, we own our property — nothing is leveraged, or borrowed, and we aim to sell the real estate in which we invest. So if the market takes a down turn, that’s OK with us; we’ll just hold off on future development, or rent our existing stock until we’re confident we can sell it high enough to make you money. Be sure to ask your future potential investors this; it can be revealing.
5. Outline your fees — what am I paying, when, and why?
Sometimes, private real estate investment fees can be downright predatory. Other times, they make perfect sense. Performance-based fees tend to be preferable, since you pay more when the manager of the fund does his or her best, but some fee structures hide fees, or bury them, and what’s going on under the hood can be much more expensive than you’d thought. Ask for a diagram, and don’t be shy about asking for clarification.
6. Who else is on your team?
Who else, besides the fund manager, is making decisions? Having a strong team of experts is always desirable and an effective way to execute strategy.
7. Are there any conflicts of interest here?
Inherent in real estate investing are conflicts of interest. Experienced managers often use affiliates and third party service providers they trust. A good investment fund will address any and all conflicts of interest upfront. At RE/DEV we like transparency so all of our conflicts of interest are addressed in our PPM. Never make an investment unless you feel 100 percent comfortable.
8. How is your company funded?
Hopefully, the fund is hoping to draw from your wallet, but where’s the rest of the money coming from? How much of the fund is leveraged? Do managers personally guarantee loans, and if so, what will happen if the deal loses money? You know the expression — hope for the best, but plan for the worst, just in case.
9. How could this go wrong and what will happen if it does?
Every deal can lose money. Every investment, no matter how safe, is something of a gamble, and you’d be smart to know what it will look like if you come up with a low roll. Look at the manager’s models, and determine if their assumptions are reasonable.
10. How much of your own money is invested?
It’s rare to see a skinny chef. Likewise, a good manager will have his or her own capital invested, too; it’s a show of confidence, and a manager with skin in the game will work harder to achieve success for the fund, and the good of all its investors. RE/DEV invests in every project we work on; it’s important for us to feel the market’s effects personally, rather than just professionally. We want our investors to know we’re in the trenches with them, and every good manager should do the same.