The main message we try to get across to our investors is this: You CAN passively invest in real estate WITHOUT taking on another full-time job. That means you don’t have to spend a lot of time upfront in order to make your money work for you. 

Remember our motto: All of the benefits. None of the work!

At First Glance

New deal alert emails are like a surprise gift. All of a sudden there is an opportunity to put your money to work for you, easily. But now that you have received the email, how do you do a quick review to see if it is the right opportunity for you? 

When you receive a deal alert, I recommend you pull some basic details like the examples below to see if it is something you are even interested in:

  • Asset Type: B or C-class multifamily, storage, mobile home park, etc
  • Market: Jacksonville, FL, Raleigh, NC, etc
  • Hold time: 3 – 5 years
  • Minimum investment: $50,000 +
  • Fund Deadline: 14 days from today

With this basic information, you will immediately be able to see whether the asset class and market is in your investing criteria as well as if the hold time and minimum investment meets your needs in your season of life. The funding deadline will typically be a deal breaker as well because you either have access to the funds by the deadline or you don’t. It’s usually black or white. 

The Numbers

Once you’ve decided a deal’s basic info aligns with your investing goals, you should dig deeper into the investment summary for additional criteria including projected returns.

Here is some sample investment details you may want to pull from the investment summary:

  • 7% preferred return
  • 8% average cash-on-cash return
  • 17% IRR (internal rate of return)
  • 16-18% average annual return
  • 2.3x equity multiple

But what does all that mean for you and your investment? 

Once you have looked at a few offerings, you’ll get very quick at reviewing the information presented and know right away what everything means and whether the offering is a good fit for you. 

Preferred Return & Cash-on-Cash Return

Preferred return, or “pref”, means that the first percentage (in this case, 7%) of returns go directly to the limited partner passive investors (LP’s) first. Sponsors, or general partners (GP’s), don’t receive any returns until the property earns more than that. 

For instance, if you invested $100,000 and everything went according to plan and there was enough cash flow to pay the preferred return, you would see 7% of your investment or $7,000 this year, which breaks down to $583.33 per month. If there is not enough cash flow produced by the asset to pay the preferred return, the operators will pay you what they are able to and defer the remainder of your preferred return. No need to worry though! Your preferred return will be accrued and caught up as soon as there is enough cash flow or profits to do so. 

Since cash-on-cash returns are projected at 8%, that tells you that this deal is projected to pay out above the 7% preferred return at some point in the asset’s cycle. 

Equity Multiple

The next metric to consider is the equity multiple. This number quickly tells you how much your investment is expected to grow during the projected hold time. 

Continuing on the example above, your $100,000 investment with a 2.3x equity multiple should work out to $230,000 once the asset is sold. This accounts for the cash flow distributions plus the profits from the sale.

Our goal is to get to 1.8x – 2x or above for our equity multiple on offerings. You can use that as your benchmark. 

Average Annual Return & IRR

The final two items you will want to check out when reviewing a new deal alert are the average annual return and the IRR, or internal rate of return. 

The average annual return tells you what the average earnings are, averaged over the hold time. 

In the example above, we discovered that your $100,000 is expected to more than double to produce a total return of $230,000 over the 5 year hold time. That total return is 130% of your original investment. When you divide that over the 5 year hold period, you’ll calculate your average annual return to be 26%.

The IRR (internal rate of return) is the average annual return (in this example 26%) and adjusts for the value of time or time delay. Since the majority of your earnings are expected at a later time, or when the asset gets sold or refinanced, and time has cost associated with it, the IRR takes that into account. An IRR of 14% or more is a great target in our opinion. 

Your Decision

After a 5 minute (or less) analysis of these data points, you should be able to tell if this deal is a potential deal for you based on your investment criteria (that’s why it is SO important to have that established before you jump into any investments). 

After 5 minutes, I don’t expect you to know for certain if this is the best offering for you and to initiate your wire, but it will help you determine whether you should spend more time reading through the investment summary and details or not. Then you can make your decision with confidence. 

If the numbers and information you see do align with your investing goals, you can go ahead and let the sponsor know you’re interested by requesting the full investment summary or submitting a soft commitment to reserve your spot. 

Conclusion

Investment offerings can be exciting, but if you get lost in the weeds, they can feel overwhelming. 

Whether the funds are sitting in cash and ready to be deployed or are still being rolled over into a self-directed retirement account, it’s important to be clear on your investment goals so you can jump on the perfect deal (for you) and minimize wasted time.