Evaluating an Investment Opportunity in Less Than 10 Minutes

by | Oct 18, 2023 | Real Estate Syndications

Ah, the all-too-familiar scenario: sauntering through a store, your cart amassing items that, in the moment, you just “must-have.” Then you reach the register and realize that you’ve collected things that you are not sure you really need. Your cart has lots of cool stuff but you are not sure if you should put down the cash at the register. You might experience an eerily similar frustration when you first start looking into real estate syndication deals.

Picture it: your inbox, a burgeoning treasure trove of potential syndication opportunities, each email a 50-page summary of investment promises and possibilities. While the excitement is undeniable, without the necessary skills and processes to navigate through these opportunities effectively, what began as a thrilling journey to faster financial freedom can rapidly spiral into overwhelm and paralysis. But worry not – read on to learn how in less than 10 minutes if a deal is right for you!

Instant Clarity at First Sight

When new deal alerts pop into your inbox, it’s akin to an unexpected present. The anticipation of discovering its contents is both thrilling and irresistible.

Navigating through the wealth of information in these emails, your eyes should scout for key details: asset type, market, hold duration, minimum investment, and funding deadline. By surgically extracting just these nuggets of information, you can sidestep potential information paralysis. Your mission, at this juncture, is to gauge whether these critical data points align with your investment goals….if not, your response is “Next!”.

As an example, you receive a deal alert and then you pull these target details:

  • Asset Type: B-class multifamily
  • Market: Dallas, TX
  • Hold time: 5 years
  • Minimum investment: $50,000
  • Fund Deadline: 3 weeks from today

With just a quick glance, you have been able to discern that while the asset class and market seamlessly fit into your plans, you were looking for a more extended hold or an up-and-coming market. Or maybe, the 3-week window is simply too short to free up your funds. No worries. Pass without regret; another opportunity will inevitably knock soon, and with this methodology, you’ll be ready.

Drilling Down into the Numbers

When a deal weathers your initial scrutiny and aligns with your goals, your next step plunges you a bit further into the investment summary for a closer look.

For example, you might scope the following for this particular offering:

  • 8% preferred return
  • 9% average cash-on-cash return
  • 17% IRR
  • 20% average annual return including sale
  • 2.0x equity multiple.

Industry jargon (yes I hate it too)! Let’s break down what this all means for your $50,000 investment.

Preferred Return & Cash-on-Cash Return: The 8% preferred return signifies that the initial 8% of all returns are allocated solely to passive investors (you get paid before the operator/general partners get their backend profits). So, your $50,000 investment, if all sails smoothly, should yield $4,000 this year, translating to a monthly $333. Furthermore, the 9% cash-on-cash return signals a projection to exceed the 8% preferred return eventually. At 9%, the investment is expected to pay out $4,500, with the first $4,000 to be prioritized for distribution. Cash returns are cyclical and currently average 4% to 6%.

Equity Multiple: This value helps you discern the anticipated growth of your investment during the project. Therefore, your $50,000, boasting a 2X equity multiple, should grow to $100,000 upon the asset’s sale, including both cash flow distributions along the way and lump sum profits at the sale. We typically look for multiples in the 1.75 – 2X range…feel free to use this benchmark as well.

Average Annual Return & IRR: The average annual return and the IRR (internal rate of return) round off your initial examination. Given your $50,000 is anticipated to double over 5 years, that’s a 100% total return and a 20% average annual return. The IRR is the average return (20% in this example), adjusted for the timing of fund receipts. Since the majority of your earnings are expected later at the sale instead of being earned equally along the way, the IRR takes that into account, hence it’s 17% instead of 20%. An IRR of 14% or more is a good benchmark.

Confidently Making the Decision

Armed with this concise, 10-minute analysis, you’ll swiftly discern whether to delve deeper into a deal or gracefully step back. This step doesn’t lock you into an immediate financial commitment but enables you to confidently decide whether to go further into analyzing the investment.

If these numbers align with your investment objectives, the next step is not to wire your funds of course. Instead, it’s a go-signal to reach out to the deal sponsor to either request a comprehensive investment summary or submit a soft reserve. Then you can-deep dive into the operators, property and the underwriting for just those few opportunities that are the best fit for you.

In Closing

Embarking on new investment adventures can be thrilling but can quickly morph into a daunting ordeal if you don’t have an approach that prevents overwhelm and paralysis of analysis.

Whether you’ve been primed and ready with funds or are still navigating the intricacies of rolling them into a self-directed IRA, it’s pivotal to possess the clarity of what you seek. This ensures that when the right deal crosses your path, your decision is swift, precise, and, above all, aligns seamlessly with your investment aspirations.

Armed with the strategies illuminated in this post, you’re now equipped to rapidly discern whether a deal is worthy of your time and energy from the get-go.

And if these myriad details have left you perched on the fence of decision, worry not. Our team is here, ready to guide you through your journey, ensuring your path is aligned with your unique financial aspirations and risk tolerance. So, let’s delve deeper together: schedule your wealth acceleration call, and don’t forget to join the GrowAbility Equity Club to stay updated of all the exciting opportunities on the horizon!

Thanks for being a part of our community. Until next time, keep growing your ability to accelerate your wealth and legacy building—we’re thrilled to be a part of this journey!