How We Protect Your Capital
Real estate investing is a great tool to build generational wealth and achieve financial freedom. However, as with any investment there are risks involved. A worst case scenario is losing money and investor capital. However, we want to avoid that and therefore, we view capital preservation (return of original investor principal in full) as our worst case scenario, even if in some cases it may come from our own pocket.
In today’s quick snippet we will briefly discuss what steps we take to mitigate risk upfront and protect your hard earned money.
1. Partnering with the right operators. To us that means people we have known for a while, who have a good track record, open communication, are or have boots on the ground, and are vertically integrated (or have worked with the proposed property management company for some time). While past history is not a guarantee for future performance, prior experience and how the sponsor has handled prior investments provides comfort. The vertical integration aspect provides control vs. reliance on a third party to execute (which would require more oversight and follow up too).
2. Selecting the right markets with strong fundamentals. The market is the tail wind that further propels the investment’s performance or helps provide cushion during times of market volatility. Selecting locations with population growth, job growth, and low crime rates are just a few examples of our market criteria.
3. Finding a deal with multiple exit strategies. Multiple exit strategies allows you to be nimble and pivot in an effort to preserve returns. Once upon a time we invested in a property where the lender ghosted us completely during the diligence. The deal we had on the table was no longer available as the market had shifted. However, as the property had multiple exit strategies, we were able to pivot to reach an outcome that would allow us to achieve acceptable returns.
4. Identifying properties that cash flow on Day 1 and have a value add component in order to mitigate against market movements, which we might not be able to predict. We’d like to say that the value add is the cushion that can help during a period of market volatility (see link above for a detailed explanation on this approach and its importance). And if market circumstances prevent us renovating units or immediately executing on the value add, then at least the property cash flows (vs. losing money from the get go).
5. Having adequate operating and capex reserves, which we raise upfront (vs. relying on monthly cash flow that may or may not be sufficient to cover the planned rehab or deferred maintenance for that month).
6. Having a conservative underwriting approach coupled with stress testing. Planning for the worst case scenario by stress testing upfront helps vet the property at the beginning and plan for surprises. Among other indicators, we also like to look at the break-even occupancy. If the margin of error is too thin, that is a good indicator that the investment may be a risky one. Lastly, we prefer to buy properties with a positive yield on cost relative to the cost of debt.
7. Selecting a proper debt structure in line with the business plan. See our recent article for more detail.
8. Working with a GP/JV and strategic partner team (insurance, lender, PM, etc.) who shares similar values and has the operating knowhow to execute on the business plan.
Needless to state our goal is to always at a minimum meet but ideally exceed projected returns. As such capital preservation might not sound very exciting. However, we do need to plan for and mitigate the worst case scenario upfront and we hope today’s quick snippet provided an insight on how we approach the process.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.