Starting to Raise Money - What do investors want?

Question

The company that I work for has been investing in Multi-Family for several years. Track Record is a few thousand units.  As we look to grow faster and scale we are now starting to consider letting outside investors come into our deals. If you are considering investing as a Limited Partner, what are the main things you are looking for?

I assuming since you're here on BP, you would want to learn a lot about the business.

Preservation of Capital is probably the next thing.

The rate of Return is probably third.

What else would you like to get out of your investment?

Taylor L. · Answer

@William Kyle Walker I think we need to take a step back and as you - who is your ideal investor client, or what is your investor avatar? Are you targeting high net worth investors? Doctors? People who are already investors? (Since this is BP the last one seems like it's at least a component)

@Alina Trigub gave a lot of awesome info (as always)  regarding the process for vetting deals and sponsors. My process for my passive investments is basically identical. I also factor in my gut. If the boxes are all checked and look good, but my gut feel isn't right, then I listen to my gut and look for the next deal. Not exactly scientific, but true.

Here's an anecdote from a recent discussion with an investor prospect I met in February:

We met at a certain major event in Miami in February, hosted by a sales guru turned multifamily investor. My friend & prospect at one point used the restroom, and so happened to stand in line with the host's sister! At an event with 30,000 people there! She got to talking with the sister, and it turned out the host's sister had to pay for her own ticket, pay for her own hotel, and seemingly her flight as well - to an event where her sibling stood to make tens of millions.

This prospect decided then and there that this was a bad indication of the host's character. You should always take care of your family and put them first, which would include paying for their accommodation at such a massive event.

I thought this was an interesting example of an investor making a decision based on soft information, rather than hard figures like MSA growth, break even occupancy, # of doors the sponsor has done in the past, or anything else like that.

Caleb Heimsoth · Answer

@William Kyle Walker track record. Track record. Track record.  I want to see exited deals, so you can show me what you paid for it.  What the executed plan was and what the exit looked like.  Then I want to see all the numbers associated with that.  On top of track record you’re an ethical and transparent company/sponsor.

For returns I’d like 8 percent CoC return or better and 15 IRR or better over a 5 year hold.

Chase McArthur · Answer

@William Kyle Walker

In the brokerage world I'm finding that the expectations from investors really depends on the size of the deal.

The larger properties range from, as you said, capital preservation to tax deferment. With smaller properties I'm finding that the number 1 reason is cash flow.

This is also dependent on the particular investment strategies they are utilizing. Typically Core assets are used for solid relatively risk free capital growth, value add and opportunistic assets essentially utilize stabilization strategies to generate optimal terminal value at disposition.

At the end of the day its all about risk/reward. The bolder the move the better the return.

William Kyle Walker · Answer

Thanks @Tyler R. those are all great things to think about. We plan to do monthly calls, with photos updates. We do value add, so we think people like to watch the property transform and hear how that translates to increased NOI.

As you know hold time varies from deal do deal. But we will give a business plan expectation and let everyone know if we feel its time to have an exit and why.

Tyler R. · Answer

@William Kyle Walker, I think you and others have hit on key pieces.

I would agree with @Michael Dang and build off of his comment -- one thing I would want is to know how the GP will communicate with the LPs (webinars, calls, who do I have access to if I have questions), how often (monthly, quarterly),and what will they communicate? Are we going to get to see numbers, summarized reports, etc? Will you be providing market updates?  I believe transparency to be very important, as ultimately, LPs are going to invest with you because they trust you/your group.

LP type will also factor into your communications -- if you are searching for higher net worth individuals who are more sophisticated (depending on job type), they will likely have a better understanding and require somewhat less  communication/information.

Also, I would add up front with investors is your expected hold time, and of course, your strategy, as this will dictate when they receive their money back and identify a level of risk for them. Given where most large MSAs are in the market cycle, longer hold times with longer term financing (7-10yrs) for a light value add or stabilized property would be appropriate, and some investors may not want to wait that long to have their money returned.

Lastly, I would identify for the LPs how you are aligning their interest with yours. Why did you choose your split the way you did, does the GP also have LP shares, do you have in-house property management or a relationship with a good PM who specializes in the asset type you are purchasing, are you going to give the PM a small portion of GP to provide extra incentive for great management, are you going to be a loan guarantor, and are your fees in 2nd position to a preferred return (if you're giving a preferred return) . Essentially how do you put them ahead of you, and how can you get hurt if they get hurt?

I would just re-iterate what is commonly mentioned by good, multiple-deal syndicators, and that is it comes down to developing trust with the LPs.

Hope this helps!

Michael Dang · Answer

Probably lower on the list, but if the deal sponsor is open, communicates well, and are they approachable.  I personally also look if I could develop a future relationship rather than being just a passive investor.  This may (or may not) lead to gaining more knowledge from the sponsor, possible partnering opportunities, and garners insight on how they run their operations and what content is sent in their investor reports.

William Kyle Walker · Answer

@Caleb Heimsoth Thanks for the feedback. Track record is important. Lately, everyone's is good so that's where your CoC threshold is an important metric. Lots of deals are trading with future rents priced in. But if the market turns or flattens it could bust the Business Plan and exit.

William Kyle Walker · Answer

@Taylor L. For us an ideal investor is a business owner or executive that can bring more than just a check to the deal.  Things like relationships, expertise outside of Real Estate. Hopefully, they have invested in a few deals before and if they are interested in real estate I would be happy to be an open resource. I love real estate and could talk all day about it.

@Scott Runyan that makes sense, one of the best ways to learn is by doing. Being the GP will teach you a lot. My recommendation is that you budget for paying expert advisors.  It's best to pay a little to have someone point out the landmines.

Scott Runyan · Answer

@William Kyle Walker I'm invested in a couple deals right now, and I really think it comes down to each deal. Assuming I've vetted the sponsor and am comfortable with him/her for me, it comes down to an appropriate risk adjusted return specific to the deal. Is the property stabilized, light value add, or complete gut?

To you first point about education, I'm actually looking for that right now. Searching for smaller deals that I could put up a larger portion of the equity and in exchange get a more hands on approach to the entire process or potentially also being a GP to help with the net worth or liquidity requirements.

Telling you its deal specific probably doesn't help you too much, but for me I'm still relatively young and I look at returns because I'm looking at growing my capital as opposed to preserving it.

Alina Trigub · Answer

@William Kyle Walker

Yes, there're both investors types on BP including myself. I have been on both sides of syndications.

Starting to Raise Money - What do investors want?

Most Popular Reply