Is that investment a “great deal?”
The elephant in the room
Let’s get the awkward topic out of the way first: Remember that “investment” you made last year based on your coworkers hot tip? Well, that was not actually an investment, per sé - It was speculation (aka - gambling).
Did it increase in value? Chalk it up as a win. You’re a successful speculator. In casino terms: you ‘beat the house!’
Did it lose value? Lick those wounds and buckle down. Time to learn the difference between speculation and investing!
I’m not here to judge or throw stones. I’ll share a personal example to hit home on this point: We bought our home in October 2013. Over the course of ~4 years it increased in value 56%.
- Friendly folks tend to comment: “what an awesome investment!”
- My typical response to this is: “crazy, huh? Yep, we got lucky.”
Like many first time homeowners, we needed a place to live for a growing family… and that was why we purchased a house. We liked the price point, the community and the property itself. We made a consumer purchase, not an investment. Maybe if we had we sat down for a planning session, set investment criteria (e.g. target ROI, IRR, etc), agreed on discrete improvements we’d make to the property over time and locked on a solid exit strategy (e.g. sell/dispose in year 7)… then maybe we could argue that our house was an investment.
Labeling our home purchase a “savvy investment,” ex post facto… doesn’t qualify it as such. It skyrocketed in value largely because we caught a bull economy wave and a hot real estate market. Sure, we made some frugal, high-yield improvements (e.g. new kitchen, landscaping overhaul, etc), but we did so for lifestyle benefits… not to drive toward an exit strategy.
Is it a great deal… for you?
Now, we are stepping down off of the soapbox and getting down to business. Here are the steps to making an informed investment decision:
Step 1: Define your investment criteria
- Annual ROI: 18%+ (<< just an example)
- Must produce cash flow (<<one of our actual criteria)
- Passive - will not require increased time commitment or stress (<< more actual criteria)
Step 2: Confirm your financial readiness
- Can you afford this investment?
- If you want to invest $50k in a syndication, do you have additional $50k in reserves in case a life event happens in the next 5 years?
Step 3: Look through the “3 lenses” - Market, Operator, Deal
Market
To analyze a market, you start by considering the asset class (for the types of assets we syndicate: multifamily and self storage, in this brief example)
- Example 1: Multifamily deals: you’d consider things like employment rates (are the trends positive or negative?) and industry diversity (is the local economy tied to a single, large company.. whose employees comprise 70%+ of the tenant-base? Or are there 2-3+ different industries contributing to a diverse and rich renter pool)
- Example 2: Self storage deals: in addition to some of the variables mentioned above, you’d consider inputs like traffic count directly passing by the property
Operator
Also referred to as “the team” - the most important proof point in vetting the operator is their track record.
- Have they managed this type of project before? … in this market?
- How many similar projects have they managed?
- What does their performance track record look like?
Deal
This is where your investment criteria comes into play. To analyze a deal, you’ll want to compare the financials outlined in the investment summary PDF against your investment criteria. If you set criteria ahead of time, it makes the analysis process unemotional and painless.
At first, there’s some new language, but that’s what we’re here to help with. If you find yourself saying “this feels right”... i’d recommend stepping back from the pretty looking investment summary PDF and plugging in the raw numbers into a spreadsheet instead. The whole point of this blog is to make this point clear:
Investment decisions are made based on real data points. They are not made based on how a marketing brochure made you feel.
Note: a key benefit of investing passively in syndications - what we do at Madison Investing - is that you are reviewing a pro forma projection from the operator, not from a real estate broker or agent. You are not running a deep analysis of the properties potential performance. We take the leg work out of it for you and can help address any of the deep dive questions for the data-hungry investors.
To help you take the next step in setting your criteria, we’ve included a helpful scorecard of investment returns at the bottom of this post (courtesy of the timelessly wise, Gary Keller. Buy his book an amazon).
Take stock of how your current portfolio is performing. Set criteria that aligns with your goals. If you are hungry for more education on this topic, we are happy to share resources.
Now get out there and make something awesome happen! #LearnMoreEarnMore
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Disclaimer: I am not a tax advisor or financial planner. This article represents my opinions. Please speak with a CPA for tax advice. Speak with a lawyer for legal advice. Speak with a certified financial advisor or planner for financial advice. The opinions in this article will hopefully inspire curiosity and motivation to take action and improve your financial position via real estate investments, as part of a diversified investment portfolio.
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