How to vet real estate businesses and their investors

Question

I kind of have the opposite problem of a lot of people trying to get started. I'm lucky in that I have a a very steady and well paying job and a cash to invest. But with a family, full-time job and helping my wife start her own business I don't have the other required resource for investing - time. Maybe in a year or two I can start on my own, but in the meantime I want to learn the business now while time is tough to come by and use my money wisely.

The question is how does someone who is looking to finance, invest with or partner up with a real estate investor vet that person?

The obvious answer is networking, but what can you do beyond that and looking at financials involved in their deals? Some recent podcasts have featured experienced real estate business people who not only do well for their investors, but understand the obligation they have to those investors. The last thing they will do is burn an investor even if times get tough.

How can you find people like that and not someone who is over their head? Or someone who will hang an investor out to dry when times get tough?

The other side of this is how would an investor be attractive to someone who is using syndication to close on big deals? What if I'm not an accredited investor? I know there are exceptions such a friends and family, but is it realistic to get into a syndication that way?

Thanks for your time on this.

Anthony Chara · Answer

Hi Eric, make sure you ask them for references of people in their current syndications. Get at least 3-5 references. Also, make sure to ask them if they've ever lost money in a deal. If they say, "No", I would probably move on. You don't want to be their first. It may sound counter-intuitive, but most experiences come from mistakes. Never losing money can make people over confident and set them up for a major disaster.

Eric Eastman · Answer

Thanks for the reply @Nicolas Paez.

I totally agree that one transaction doesn't dictate whether a person knows how to succeed in investing, because so much could turn a winning investment into a loser and be out of the control of the investor. Not only that, but as you noted, the lessons learned could be worth more than a winning investment sometimes. It really is about whether their process is sound and if it is that person will succeed in the long term.

I also agree with your assessment and something I heard on Podcast 152 from, I believe Brian Burke, that there might be too many inexperienced investors in the multi-family market right now. At some point if the economy takes a hit some might be in some trouble. This is where the experienced guys who know how to keep their heads above water can make moves that will set them up for a great deal of long term success. That's the type of person I want to work with, if they would work with me of course.

Leslie Pappas · Answer

Hi @Eric Eastman, if you're an accredited investor, you might consider investment into DSTs. They are hands-off, institutional grade real estate investments. You can buy into institutional grade $50-125M projects with as little as $100,000 and diversify. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. This is the world of Delaware Statutory Trusts.

Eric Eastman · Answer

Thanks @Anthony Chara and @Nick Colamarino for the advice. My goal would be to try and find someone who has had success and would know what to do if a deal went south. Right now, given the general improvement of Real Estate in the last 5 years, you could easily have someone with years of experience, a track record of success, but zero clue how to handle a down turn in the economy and no exit plan if things turn south. That's the concern I have with investing with anyone and would be the focus of my vetting process.

Thank you as well @Leslie Pappas. Unfortunately, I'm not an accredited investor. My hope is to continue to grow my wealth so I can get into that class. I know that would foreclose a lot of private investment opportunities with large entities, but perhaps I can work with smaller operators, following all the rules of course.

Account Closed · Answer

Eric - The old adage is "Trust but Verify". The truth is that private real estate deals are just that - Private. References and background are a good start but the best source is to do your home work. The less you know the more questions to ask. Somewhere in that process something that doesn't sound right will emerge and then you need to ask more questions.

Keep in mind that previous failure is not an indication of future failure and like Anthony stated above, past success does not mean that they can't make a mistake.

I think most BP members would agree that there are too many investors pursuing too few deals - so that the likelihood that there will be a larger number of failures in the future is high.

Nick C. · Answer

Make sure the person you invest with has a track record of success and has been around for a while. You don't want to invest in someone's first deal. This business is about making mistakes and learning from them. You don't want someone to learn using your $$$.

How to vet real estate businesses and their investors

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