When evaluating a real estate investment, it can be easy to just assume that the project at hand is a good opportunity. This is especially true when someone is presenting the opportunity to you since it’s in their best interests to maximize the upside, mitigate the downside, and make the investment sound as good as possible. However, blindly jumping into real estate deals can be a surefire way to set yourself up for failure.
You don’t necessarily need to spend hours of your life researching deals. But, there are almost a few key areas that you should almost always clear up before deciding to invest.
Here are 6 crucial real estate questions to ask before you invest.
1. Who has skin in the game?
As a general rule of thumb, you want to invest with managers that are investing their own capital in their deals or at least have something to lose if the fund goes south. If the managers own a percentage of the fund then they will go above and beyond to ensure that the fund is successful.
The same thinking applies to fund managers that have used a personal guarantee to secure the funding for the fund. If they have used a personal guarantee then they will be at risk of losing their money if the fund isn’t successful. The same is true for a loan that is secured to their personal assets, like a recourse loan. With any of these options, the manager has skin in the game and will have something to lose if the fund does not perform them.
On the flip side, if the fund manager does not have skin in the game, or something to lose, then they are simply investing other people’s money. This means that they are missing a critical motivator to perform well.
This isn’t to say that fund managers with no skin in the game can’t be successful. It just means that there is a crucial safety rail missing where, if the fund manager gets overly aggressive, they won’t be impacted financially.
2. What type of team is involved?
The next thing to look at is whether or not the property manager has the appropriate team behind them. For example, the fund should have separate departments for things like accounting, investor relations, and acquisitions. If the fund managers don’t have a supporting cast behind them then it’s a sign that the fund is young and, most likely, inexperienced.
Again, that doesn’t mean that a bigger fund is always better. In fact, if the fund is too big then it could run the risk of being overly bureaucratic. Investing with a fund that’s too big can mean that they will be slow to pivot or make decisions. It can also make you feel like a small fish in a big pond where you don’t get the communication and personalization that you want.
Ideally, you want to find a fund that’s somewhere in the middle of these two extremes.
4. What fees are involved?
Remember that, for real estate investment funds, fees should only be charged to help cover the expenses associated with running the fund. These fees shouldn’t be used as a way of generating revenue. With this in mind, you want to look for a fund that might charge fees but has an overall structure that’s performance-based. This way, the manager’s and investors’ interests are aligned. As a good rule, look for a fund that invests about 95% of all AUM.
Again, you want to avoid funds that operate at either end of the spectrum. You definitely want to avoid funds that charge significant fees upfront since they are less likely to prioritize the fund’s performance. But, you should also be wary of funds that advertise zero fees. Zero fees can be a sign that the fund is engaged in an unethical practice of some sort. As the saying goes, if it sounds too good to be true, it probably is.
5. What does the balance sheet tell you?
Before investing in a real estate fund, you should also take a look at the fund’s balance sheet. The balance sheet will tell you a number of things, such as:
- How much capital is on hand
- Whether or not the fund can meet its expenses over the coming months (payroll, funding deals, etc)
- Whether the fund can survive short-term problems
- Whether or not the fund is overleveraged
As many investors say, trust your managers, but do your own homework. Taking a look at the fund’s balance sheet will help you identify any potential issues, as well as any discrepancies between what the fund managers are telling you and reality. If there is a discrepancy, it can be a sign that the management team is not being fully transparent. Usually, this alone is a sign that you should pull out of the deal.
6. Does the team have a successful track record?
Another relatively easy way to ensure your success in the world of real estate investment is simply to align yourself with other successful investors.
You can do this by investing with funds that already have a track record of success. That said, this doesn’t mean that you can stop doing due diligence altogether. It just means that you should start your research process with some of the most well-known and respected names in the industry. Once you’ve whittled down your list, do a deep dive to make sure that the fund is a good fit for you.
We hope that you’ve found this article valuable when it comes to learning a few crucial real estate questions to ask before you invest.
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Sachin Maskey is a physician, real estate investor, philanthropist, and entrepreneur. He has over 17 years of expertise in the medical industry as a family medicine specialist. Outside of medicine, he is the founder of the commercial real estate investment firm Avatar Equity as well as the Dhana Yoga Foundation. You can follow along with Sachin on Instagram, Facebook, TikTok, and LinkedIn.
