By Mark M. Mindick, CPA,
Citrin Cooperman
To succeed in real estate, one needs to be ready to take the risks.
It may seem like a pretty tough and complicated matter, but there are a few tips to take into consideration to help you achieve goals you have set. Below are the Top 10 things you should know on how to be a savvy real estate investor:
1 Make sure you understand what you are investing in. There are many different investments out there all for different types of investors. Your obligation as an investor is to find the right ones best suited for your specific program. Get educated on the investment options available to you. Aligning assets with one investor can be an opportunistic/strategic approach. Aligning with a second can make for a good cash flowing asset. Understanding the assets and the investment motive will play a key role in how successful your investment can be.
2 Understand the risk profile that you want to undertake. Real estate investments need to be considered along with your entire investment portfolio. By not doing the proper research, you could potentially fall victim to improper investment diversification. You may already be invested in certain verticals and you may not know it. There are no rules or definitions in this investment class. For example, ask three real estate owners the definition of Class B real estate, a tertiary market, or a joint venture – you will get a variety of answers.
3 No investment is absolutely safe. You can limit risk by using diversification strategies that involve geography, property type, and sponsorship. Especially in this sector, you may find that the most conservative investments have too much stability for the yield and the more opportunistic investments that will probably yield you the returns could come with substantial risk. Be careful and make sure you are not taking too much risk trying to achieve mediocre returns.
4 Ask yourself smart questions regarding the deal and specifically the fee structure. Who/what is your sponsors end goal? Your pocket or their pocket? Are there hidden fees? Do you really understand the fee structure and how it works? Do you keep on flipping back to the pictures in the brochure? Are you ignoring certain terms and numbers that you don’t understand? Sometimes asking the right questions up front save you a lot of headache and regret on the back end. There are no dumb questions when it comes to your financial investments. Don’t be convinced by someone else, you should be the only decision maker on these deals.
5 Make sure all agreements are iron-clad and in place before the investment is funded. The worst thing you can do is make the right investment, and not legally be entitled to it. There is no such thing as a verbal or side arrangement in this business. If it isn’t written and executed, you are not entitled to it. More importantly, make sure that your deal is accurately reflected. Don’t be scared to have a professional review the agreements for you, you will only be doing yourself a big favor in the long run.
6 Do your due diligence! In addition to hanging your hat on your sponsors due diligence, you should be performing your own due diligence specific to your investment motives. Would you buy a car without taking it for a test drive, or get married before dating? Most likely not. Additionally, chemistry with your sponsor is the most important aspect of getting the right deal – make sure you have this figured out in the due diligence period. If it doesn’t smell right, trust your gut and walk away.
7 Make sure you have a plan in place to monitor the performance of the investment and the overall performance of the sponsor. If you don’t have a plan in place going in, you are never going to be able to monitor your investments properly. Your obligation is to develop a plan to manage your investments along with your professionals and assure you reevaluate on a semiannual basis for overall initiatives and for the day to day performance of the investments. Most operating agreements call for you to have the option of peaking at what’s going on from a reporting and day to day perspective, don’t be shy to utilize that clause especially in the beginning of a new relationship.
8 Don’t make the same mistakes twice. Learn from your mistakes and from the mistakes of others. Once you have made a mistake, don’t repeat it and more importantly, learn how to become a better investor fundamentally and not to walk away and lose. It’s much easier to lose money than it is to make it. Proceed with caution.
9 Nothing sits in place of good sponsorship and sponsorship’s skin in the game. There are no bad deals but there are bad partners. Make sure that your interests are aligned with your sponsors. Sponsors need to earn a living and that is exactly the fine line that you understand. Understand what “skin in the game” really means. Evaluate all deals with a fine tooth comb to be 100% comfortable with how the fee structure works in all given scenarios. Knowledge is power and in this case, it will make you a smarter negotiator that will pay you great dividends in the long run.
10 Don’t be scared to wait it out. You don’t lose money by staying on the sidelines, you just get smarter. Sometimes waiting it out is the best approach to really understand a market, asset type or to properly evaluate a sponsor or partner. Making mistakes are the best learning experiences but learning from other peoples mistakes gets you to the same place with your dollar still in your pocket.
At the end of the day, and after all the data and research has been conducted, you’ll find that you can’t go wrong if you trust your gut.
