How We Work To Preserve Your Capital And Mitigate Risk

by | Jul 29, 2021 | Real Estate Syndications | 0 comments

Whether you discovered real estate investing a month ago or have been interested for years, what was it about real estate that initially caught your attention? Close your eyes, take a minute to remember. 

I’ll wait. 

Most investors will agree that the attention-grabbing factor was the opportunity for your hard-earned money to work for you, providing you returns and the chance to grow your wealth over time without taking on a side-hustle.

In fact, that’s the number one question we field from new investors during their first foray into a real estate syndication deal with us. They want to know, if they were to invest $100,000, how much money they’re likely to make.

And believe me, we love good returns, and those returns are a big part of why we spend so much time and effort finding and vetting the best opportunities for our investors. But while returns are certainly important, there’s an even more important aspect that we focus on when evaluating potential deals.

I’ll give you a hint. It’s less exciting than passive income and double-digit returns. I’d even venture to say it’s more boring than taxes and K-1’s.

The most important thing I focus on in sponsoring a real estate syndication is capital preservation. In other words, I focus on making sure that the deal has multiple plans in place to protect from any loss of investor capital. That’s my number one priority, as boring as that might sound.

Why It’s Important to Talk About Capital Preservation

Sure, capital preservation isn’t the most exciting part of investing in real estate syndications, but it is one of the most critical pieces. 

It’s easy to just focus on cash flow returns, potential earnings, and brightly colored marketing packages, but when an unexpected situation arises, you’ll be thankful (for this article and) for a sponsor team that gives capital preservation the attention it deserves. 

Capital preservation is all about mitigating risk, and as Warren Buffett puts it, there are two rules to investing: 

Rule #1: Never lose money

Rule #2: Never forget Rule #1

No matter what you invest in or who you invest with, you should know what to ask and what to look for so you can invest confidently with a team that holds your best interest. 

5 Capital Preservations Pillars

At the core of every investment in which we participate, capital preservation is our number one priority. There are 5 building blocks that make up our capital preservation strategy.

#1 – Raise money to cover capital expenditures up front

Imagine the avalanche of problems that can accumulate when capital expenditures (like renovations) must be funded purely by cash flow. In this case, cash-on-cash returns, which vary based on occupancy and maintenance costs, would have to fund sudden HVAC repairs instead of unit renovations according to the business plan. In this case, the business plan falls behind schedule, units aren’t ready as planned, and vacancy persists. 

Instead, we ensure the funds for capital expenditures are set aside upfront. As an example, if we need $2 million for the down payment and $1 million for renovations, we will raise $3 million upfront. This means we have $1 million cash for renovations and won’t have to rely on monthly cash-on-cash returns. 

#2 – Purchase cash-flowing properties

One great option to preserve capital is to purchase properties that produce cash flow immediately, even before improvements. If units don’t fill as planned or the business plan isn’t going smoothly, just holding the property would still allow positive cash flow. 

#3 – Stress test every investment

Performing a sensitivity analysis on the business plan prior to investing allows us to see if the investment can weather the worst conditions. What if vacancy rose to 15% and what would happen if the exit cap rate was higher than expected? 

Properties look wonderful when they’re featured in fancy marketing brochures with attractive proformas (i.e., projected budgets), but stress testing those numbers helps us take a look at how the performance of the investment may adjust based on potential variability in variables. 

#4 – Have multiple exit strategies in place

In any disaster or emergency, you want to have several ways out. In case of a fire, you want a door and window. The same goes for real estate syndications. 

Even if the plan is to hold the property for 5 years, no one really knows what the market conditions will be at that 5-year mark. So, it’s important to account for contingency plans, in case you need to hold the property longer, and the possibility of preparing the property for different types of end buyers (private investors, institutional buyers, etc.).

#5 – Put together an experienced team that values capital preservation

Possibly the most critical pillar of all is to have a team that values capital preservation. This includes both the sponsor and operator team(s) and the property management team. All of these people should be passionate about their role and display a strong track record of success. 

The more experience they have in successfully navigating tough situations, the better and more likely they will be able to protect investor capital.

How We Mitigate Risk To Preserve Your Investment

While capital preservation may not be very exciting, it certainly is one of the core objectives of a solid deal. Every investor’s greatest fear is a deal going South and losing money. We’ve been through the ropes, experienced the heartbreak, and through experience, learned what to look for (and implement) in a real estate syndication to protect investors (as much as possible) from loss.

This is why every decision and initiative by the sponsor/operator team in any deal should be rooted in preserving investor capital. 

The five capital preservation pillars used in real estate syndication deals we do include:

  • Raise money to cover capital expenditures upfront
  • Purchase cash-flowing properties
  • Stress test every investment
  • Have multiple exit strategies in place
  • Put together an experienced team that values capital preservation

By putting these five pillars in place, we minimize risk to the greatest extent within our control and become aligned with our meticulous management strategy. We ensure that every decision we make around the property originates from our responsibility to protect your money, first and foremost.


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