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Updated about 4 years ago on . Most recent reply

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Jim Kittridge
  • Rental Property Investor
  • Charlotte, NC
259
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How do you measure risk when investing?

Jim Kittridge
  • Rental Property Investor
  • Charlotte, NC
Posted

A common mistake I see for new investors is that they focus on finding the highest projected IRR. Experienced funds are offering 10-15% IRR yet newer syndicators are offering a 20-30% IRR.

So how does a newer syndicator finding/executing deals with drastically higher IRRs?

There are three simple answers:
1. They struck gold and found the deal that nobody else could.
2. They are taking on substantially more risk.
3. They are making lofty assumptions.

How do you measure the risk-adjusted returns of a syndication or investment?

Most Popular Reply

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Bryan Hancock#4 Off Topic Contributor
  • Investor
  • Round Rock, TX
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Bryan Hancock#4 Off Topic Contributor
  • Investor
  • Round Rock, TX
Replied

Risk is often in the eye of the beholder, but from what you wrote above items 2 and 3 are highly more likely to be why a sponsor is offering higher proposed returns.  Those types of returns are a signal that the sponsor has to offer them to attract capital, which wouldn't be the case if they were more seasoned.  

There are ground-up development projects that offer really high returns commensurate with risk, but I find that sponsors often fail to account for their time in these projects or if they do so they don't do a great job of doing it.  The returns are often far less impressive when you account for your time.  If the capital is working that hard it's one thing, but it is generally the sponsor working really hard and conflating their labor with a "return on investment."  

There ain't no such thing as a free lunch.  

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