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Guest Contributor: Seven Questions to Ask Before Investing in a Private Real Estate Deal or Fund

By Andy Sinclair, principal and chief executive officer, Midloch Investment Partners

There’s more to investing in real estate than the property itself. You’re investing in people, too … so kick the tires of the sponsors behind the commercial or multifamily real estate deals or funds you are considering. In other words, get to know the people you’d be doing business with before investing.

How do you do that? A good place to start is by asking these seven questions:

What’s the sponsor’s track record?

It sounds simple enough, but it’s amazing how many firms squirm when you ask them to detail their performance on a deal-by-deal basis. That’s what you want to see, if only to verify that the sponsor is disclosing the poor or middling performers as well as the winners. There is no shame, by the way, in necessarily having some poor performers.

How consistent is their overall performance?

General consistency is arguably as important or more than occasional misses. Look at the sponsor’s overall track record over time. For most people, overall performance is most important, especially if you’re investing in a diversified fund that holds multiple properties.

Do they hit their targeted underwriting goals?

Before making investments, sponsors analyze them, determine how they intend to make money, and develop a business plan for each asset or portfolio. Asking sponsors how well they’ve done at underwriting reveals how thoughtful, thorough, and accurate the sponsor was in their planning versus their actual performance. It also reveals the role of luck (good or bad) and how extenuating circumstances may have affected their projected versus actual performance.

How do they react when their underwriting assumptions don’t pan out?

In other words, are they able to pivot to a “Plan B” to turn the property into a performer or otherwise exit the deal in a way that minimizes losses?

How well do they communicate with investors?

You can gauge this by assessing the frequency and the transparency of a sponsor’s investor communications, their willingness to be available and answer your questions, and by speaking with other people who have done business with them.

How likely are they to make it through the next few years and take care of you?

This can be a tough question, but what you’re really trying to gauge is how prudent, or not, a firm is in its investment decision-making and operations. In contrast, if they’re a highflier making high-risk bets, the odds are higher they won’t survive a crisis or downturn.

How much of their own money are they investing alongside yours?

The sponsor should always have skin in the game, plain and simple. Make sure the “House” is invested alongside you in any deal or fund.

Long story short, no person or firm is perfect; that should not be the standard. But you see where I’m going here.

Who you do business with is as important as the fundamentals of the deals you are investing in. As you seek to build a diversified investment portfolio with alternative assets including income-producing real estate, you should be comfortable with the sponsors who are the stewards of your money.

Andy Sinclair is principal and chief executive officer of Midloch Investment Partners, a real estate investment firm, operator, and fund manager based in Chicago.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.

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