Should I invest in this deal?

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Attended a Princeton alumni event last night and got into an interesting conversation with a guy who is considering investing in a syndicated multifamily deal in Arizona. He asked me my thoughts.

Here’s what I told him: Focus on the operator, not the deal.

Why?

First, there’s no way an amateur is going to come to an educated opinion about a deal based on materials provided by the operator. You don’t know the market or the property. And the information you’re getting is provided by someone who wants you to do the deal. It’s not propaganda, but it’s not objective, either.

Second, separate from risk factors that no one can control (interest rates going crazy, the economy tanking, etc.), the operator is the one who is going to be holding all the cards. He’s the one who has chosen the property. He’s going to oversee whatever value-add is going to happen. He’s going to oversee the leverage. He’s going to set the asking rents. He’s going to police the management company. He’s going to pay himself fees (hopefully, only those set out in the operating agreement!). He’s going to choose when / how much to distribute back to the investors.

In short, when you’re in an illiquid real estate deal, the operator is king. So focus on what kind of king he will be.

How do you do this? Ask the following questions:

  1. Has he done these kinds of deals before in this market? How have they worked out?
  2. Is he putting in an amount of money that is material to him? (Remember that, early in an operator’s career, $50k can be a lot of money!)
  3. Who else is investing? My biggest investor suggests the “were they invited to his wedding” test… if “yes”, that’s a good sign
  4. Can you speak to other people who have invested in his deals? How do they feel about the results?

If you like the answers you get and you can live with losing your money (if it comes to that), then go ahead and invest. If not, run.

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