A Comprehensive Guide to Evaluating Real Estate Investments

When it comes to real estate, doing your due diligence before committing your hard-earned money is one of the best things you can do to protect yourself and your capital. By taking out the time to thoroughly assess the operators, property, and offering documents, you can ensure that your interests align with those of the general partners (GPs) and maximize your chances of success. When you use a strategic approach to evaluating real estate investment and focus on key indicators and considerations, you will be able to make informed decisions and keep you and your stress level out of the red.

Check your numbers. An effective way to determine if the operators have run their numbers correctly is to confirm that they have successfully raised debt from credible institutions or banks. When a bank is willing to lend on a property, it signifies that the operators have undergone a certain level of due diligence. This external validation can instill confidence in the investment opportunity.

Engage with your operators. Engaging directly with the operators is imperative to gain deeper insights into the investment. Attend their webinars, where they typically discuss the deal in detail. Consider their previous experience in similar transactions and evaluate whether they have a track record of success. Conduct thorough research, including checking public records and the Securities and Exchange Commission (SEC) filings, to ensure there are no past complaints against them.

Seek out references. Seeking references from other limited partners who have invested in deals with the operators before is a valuable step. Engage in conference calls or personal conversations with these previous limited partners to confirm the operators’ communication skills, ability to follow through with plans, and overall success in past projects. These conversations will offer practical insights into the operators’ reliability and professionalism.

Book a visit. While not always necessary, if possible, it is beneficial to physically visit the property being promoted. This allows you to assess the neighborhood and validate whether the operators’ claims align with the reality on the ground. By conducting your own research and observations, you can ensure the property is situated in a desirable location and that the operators have conducted thorough research.

Read the documents. Take the time to read through the offering documents, often referred to as private placement memorandums. Although they may be lengthy legal documents, they provide valuable information about the responsibilities of the syndicators and operators. Pay attention to the plans outlined for paying limited partners and assess the fees associated with the project. Ideally, you want the operators to earn the majority of their profits on the back end, after limited partners have been compensated.

Evaluating real estate investments requires a meticulous approach that encompasses various aspects. By first considering factors such as debt raised from reputable institutions, engaging with operators, requesting references, conducting physical property visits, and reviewing offering documents, you can make more informed investment decisions. This thorough evaluation process increases your chances of a successful investment. Remember, it is always better to be cautious and diligent rather than rushing into an investment that may not meet your expectations.

To Your Due Diligence,

Paul Davis Thompson