August 29, 2022

10 Key Questions Private Real Estate Investors Should Ask

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Dave Seymour

10 Key Questions Private Real Estate Investors Should Ask

All investments in private real estate begin with a promise of big gains. But an investment doesn’t always follow the expected path, in fact it rarely does. There are some that will exceed the projected results; others will not meet the expectations, while others still will totally fail. It is problematic to rely on projections while making a decision since some variables of an investment can be twisted to make it enticing.

It’s therefore a challenge for a private real estate investor to tell between a good investment and that which will serve as a lesson. There are real estate managers who create models using achievable assumptions, while there are others who create models to attract investors for capital gain. There are a vast number of assumptions that are considered while creating a financial model and the inputs are always at the manager’s discretion.  

A good real estate manager realistically thinks through the assumptions made. A reasonable and responsible manager is key to achieving success in the real estate industry. It’s also important to ask the manager the right questions before an investment to ensure that their strategy is in line with your expectations.

Here are 10 questions that should be asked to determine a real estate manager’s approach, ethics, and potential performance:

Question #1: Are the assumptions of the model accurate?

Each assumption made in the model should be questioned to establish the manager’s approach. The inputs determine the projections and are all at the manager’s discretion.

Question #2: How much money of your own are you going to invest?

Your manager should also invest a notable amount of their personal capital along with you.

Question #3: What competitive advantage do you have in the market?

The advantage against their competition should be something measurable.

Question #4: How will you protect my capital during a down market?

You should be comfortable with their strategies and track record. You should know how consistent they have been in beating their projections and the amount of leverage that they use.

Question #5: What’s the possibility of losing money in the deal?

A good manager will always have this reasonably thought through.

Question #6: What Was Your Worst Deal and What Did You Learn From It?

All managers have had a bad deal in the past and it’s up to you to determine what could have been the cause. Verify it through an investor that was involved in that deal.

Question #7: Can I Speak with One of Your Current Investors and Someone Who No Longer Invests with You?

Randomly pick an investor rather than the one they give you.

Question #8: How is Your Company Funded?

The company should have enough cash flow to cater for the bills.

Question #9: How is Your Team Incentivized?

The performance of the team is crucial and can be determined by the retention rate of the key team members. Participating in profits is one of the best incentives.

Question #10: What is Included in All Your Fees?

All the fees included should be straight forward and reasonable.

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