- December 1, 2021
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
I’m sure you’ve been there, that shopping trip where you browse the entire store, finding things you’ve just “gotta have” and once you get to the checkout, you’re faced with the realization that not only did you buy what you didn’t need, but you didn’t get anything you actually needed.
Your cart filled up with pretty stuff, you blew the budget, and you don’t even know how it happened. Meanwhile, you lost hours of precious time and didn’t really get anything done. This is the same aimless frustration you might experience when you first start looking into real estate syndication deals.
It’s possible you’ll begin to receive a seemingly endless string of opportunity emails, each with a summary that could be 50 pages long! Although this is exciting, without knowing specific tactics, your goals, and a strategy for sifting through these, that aimlessness might turn into overwhelm. Ain’t nobody got time for that!
Right here, right now, you’re going to learn how to put a stop to that meandering and decide within 5 minutes if a deal is right for you.
The First Glance
New deal alert emails are like a surprise gift. You had no idea it was coming, but you can’t wait to rip it open and see what’s inside.
The emails you receive about new deals are full of valuable information, but a few highlights you’ll want to pick out at first glance are the type of asset, market, hold time, minimum investment, and funding deadline.
If you open the email simply aiming to extract only these pieces of information, you’ve already avoided unnecessary information overload. All you’re trying to do at this point is to find out if these data points match your investing goals. If not, there’s no reason to waste any further time or energy. As an example:
You receive a deal alert and pull these details:
- • Asset Type: B-class multifamily
- • Market: Dallas, TX
- • Hold time: 5 years
- • Minimum investment: $50,000
- • Fund Deadline: 3 weeks from today
With this simple, at-a-glance information, you’re able to immediately see that although this is the perfect asset class and market you wanted, you are aiming for a longer hold or an emerging market. Or perhaps you already know you need more than 3 weeks to access your capital. PASS.
Another deal will pop up shortly and you’ll get opportunity after opportunity to practice this little exercise. At some point, the details will all be exactly what you’ve been waiting for and you’ll get to dig deeper.
Once you’ve decided a deal’s initial look aligns with your goals, it’s time to dig further into the investment summary and explore.
As an example, you might learn that this particular deal is offering:
- – 8% preferred return
- – 9% average cash-on-cash return
- – 17% IRR
- – 20% average annual return including sale
- – 2.0x equity multiple
But what does all that mean for you and your $50,000?
In time, you’ll get lightning-quick at this and know right away what all of that means, but right now, let’s pretend this is your first go.
Preferred Return & Cash-on-Cash Return
Preferred return, a common structure for deals, means that the first percentage (in this case, 8%) of returns go 100% to the limited partner passive investors. Sponsors don’t receive any returns until the property earns more than that.
This means that if you invested 50K and everything went according to plan, you should see 8% of $50,000 or $4,000 this year, which breaks down to $333 per month.
Since cash-on-cash returns are projected at 9%, that tells you that this deal is projected to pay out above the 8% preferred return at some point.
The next fun number on the list is the equity multiple. This number quickly tells you how much your investment is expected to grow during the project.
Continuing on the example above, your $50,000 investment with a 2x equity multiple should work out to $100,000 once the asset is sold. This accounts for the cash flow distributions plus the profits from the sale.
We typically aim for a 1.75x – 2x equity multiple on deals, so you can use that as your benchmark.
Average Annual Return & IRR
My last two concerns when initially examining a new deal alert are the average annual return and the IRR.
The average annual return tells you what the average earnings are, averaged over the hold time.
In the example above, we discovered that your $50,000 is expected to double to $100,000 over the next 5 years. That total return is 100% of your original investment, and when divided over the 5-year hold period, we see that your average annual return is 20%.
The IRR (internal rate of return) is the average annual return (in this example 20%) and adjusts for the time delay. Since the majority of your earnings are expected later, at the sale, and time has cost associated with it, the IRR takes that into account. An IRR of 15% or more is a great target.
After this 5-minute analysis of these data points, you should be able to tell is this deal is a potential yes or no for you. This isn’t a final decision and it doesn’t mean you’re putting in a wire transfer this afternoon, but it does mean you can decide to spend more time reading into the investment summary or not, and you can make that decision with confidence.
If these numbers align with your investing goals, you can go ahead and let the sponsor know you’re interested by submitting a soft reserve.
New investment deal opportunities can be exciting, but if you get lost in the weeds too quickly, they can become overwhelming too.
Whether you’ve had funds ready for weeks or are still in limbo getting them rolled over into a self-directed IRA, it’s imperative to know exactly what you’re looking for so you can jump on the perfect deal and minimize wasted time.
With the data points, you learned to look at in this post, you’ll be able to identify if a deal is even worth your time and energy right off the bat.
Want to Learn More?
Ready to learn more about passive investing? Join our community and sign-up for the Sage Investor Circle. Next, please Schedule a Consultation Session so we can learn more about you and your investing goals. As a part of our community, you’ll be invited to our bi-weekly live webinars, receive our quarterly newsletters and other valuable educational content to help you become a well-informed investor. Our members will be notified first when a syndication deal passes our rigorous vetting process and becomes available.