When you’re considering investment into private real estate, there are several factors to analyze before choosing how to approach it. You can invest by yourself, or you could invest with an investment manager. You could invest in an individual syndication (one building), or you could invest using a fund model.
Assuming you’re not an industry expert when it comes to real estate management, partnering with an investment manager is often the best choice when you’re getting started. To ensure the relationship with your new private real estate investment manager is effective, follow these steps.
Understand how much you have to invest
Real estate is not a liquid investment; it can take time to sell. Depending on how long you decide to keep your investment property, your money could be tied up for years. Then, it could take 6 months to a year to see the funds returned to you via a sale.
It also takes time before you see returns on the appreciation of the property. Have a solid understanding of your own finances, and the liquid capital you’ll need during the time your investment capital will be tied up. Remember to consider infrequent financial impacts, such as estate or other taxes to your capital.
Ask as many questions as possible when it comes to your new investment partner. So many investors hand over money based on a relationship, but never do their due diligence to ask tough questions of the manager. Part of your relationship is based on trust, but trust should always be backed up with plenty of facts to support what the manager is saying and promoting. Here is a brief video highlighting the due diligence questions you should ask any potential investment partner.
Understand what your money is buying
Is your money going toward investments you agree with? Use your experience as well as your gut instinct to help support your decision; ensure the manager can back up the investment strategy with plenty of data. Ask about the investment strategy and the diversification of your investments.
Diversification should include the types of buildings (office, apartment, industrial, or retail) and location of the properties. Why did the manager choose a specific asset or geographic location? Do they know the area? How many deals are they sourcing each month? Are the deals on or off market? How much will the property cost to maintain or update? How many tenants do they currently have, or expect to have?
Ensuring you understand where your money is going is an important step toward establishing trust and a positive relationship.
Align yourself with the manager
Finally, align yourself with the manager. Have they asked about your goals? Do you understand the firm’s goals, management fees and return structure? Your number one concern is for your investments to yield a positive return. After speaking with an investment manager, are you confident they have listened to you? Do you trust their team? How long have they been in the private real estate investment business? You should consider different partnerships until you are comfortable. Investing with someone who doesn’t share your best interest, or whose firm’s policies do not reflect that, may lead to a poor long-term relationship (regardless of what returns are historically expected).
An effective investment relationship will only begin when everyone is on the same page. Understanding and aligning with these important steps can help yield positive returns and positive relationships in your investment future. Good luck!