Tips To Underwrite A Passive Real Estate Investment

investors searching for quality and stability. Investors, especially those getting closer to retirement, do not like or cannot manage the volatility of traditional investments. Rising interest rates mean bond prices are falling. The 10-year also dropped by over 50% to be more precise. Not to mention these are supposed to be your “safe” investments. The preservation of capital is more important than ever!

As investors look for quality, they are turning to real estate. Some benefits to investing in real estate in volatile times include finite, insured, an inflation hedge, you can add value to it and it can produce income. But there are some downsides to investing in real estate too. Tenants locking themselves out or trashing your house to name a few. Savvy investors see the benefit of diversifying into real estate, but they don’t want the headache that comes with it. That is why they are investing passively in other people’s deals. A passive real estate investment is when you invest in someone else’s deal and let them do all the work. These are known as real estate syndications. If you are looking at investing in syndications, here are 4 steps to underwriting the deal.

Underwrite the manager – This is hands down the most important piece of a passive real estate investment. A great deal can lose money because it is mismanaged. Or worse, the manager may not always be honest with their investors. Obviously, you want to invest in a team with experience. When I underwrite a manager or management team, it starts with getting to know them. I read the bios and then I want to speak with them and, if possible, meet them in person. From there, you can do all the normal steps which would include Google searches, references and double-checking past projects. I would do this same process for each individual manager of the deal. You would be surprised how often I find negative information about one of the managers in the group. I had one who served time for a white-collar crime. Don’t skip this step!

Financials – I like to see past and projected performance of the target asset. I am specifically looking at the manager’s plan for the asset and how they will be adding value. Past performance can be financial statements, but it is better to get tax returns. I will always run a comparable rental analysis so I can get an idea of the true market rent. Depending on the asset, you can get that info from websites such as rent-o-meter, appartments.com, CREXI and Loopnet. These numbers will be in the financials that you receive so I am only verifying what is being presented. I also examine current and projected expenses and try to poke holes. Can the new manager really do a better job than the seller or the old manager? Often, I see low projections with maintenance and loss reserves so focus on those.