What are passive Investors looking for?

Question

We are scaling up our Real Estate Investment fund with accredited investors, developing infill multi-family opportunities in SW Idaho. As we start to fundraise, what are passive accredited investors looking for in development opportunities? What are deal breakers, fees you hate to see included, structures that you shy away from?

Scott Mac · Answer

To TRUST YOU with their money.

Fail that, and all else doesn't matter.

Good Luck!

Paul Moore · Answer

Hi @Robert Frazier this is a great question:

• Safety and principle
• Cashflow
• Appreciation
• Tax benefits
• Hands-off. Meaning they are trusting you to manage the project and their money

Good luck!

John Sayers · Answer

Oddly quiet.

If nothing else than 5 words; communicate clearly, fully, openly/transparently.  Some are looking for the most open vs just the pretty return #s than can often be overly optimistic in pro-forma. Some don't read much either, but it still sets a foundation.

Be 100% clear to the investors about what phase the deal/property is in (Research, due-diligence, Acquisition (LOI, PSA etc.), acquired, entitlements etc.). If rezoning (or any approvals) is needed but not yet approved, note it; don't gloss over the facts with "pending", "finalizing", "few weeks" etc.

If the Investment Offering  LLC is acquiring the land from a sister LLC investment (vs a non-related 3rd party) and a chunk of profit goes to the parent LLC on day 1, just state it clearly. Generally no one mentions that the parent LLC grossed millions in profit day one while the Investment Offering  LLC took on most of the remaining risks going forward. Be transparent. It likely won't impact attracting investors, however the hint of leaving something out on purpose can erode trust with some. In bad times, it can also, ever so slightly, open doors for cases that no one wants to see as they can be lose/lose.

Those that strongly compare glossy projected development returns, AAR, multiples, IRR, ROI etc, to NON-development deals can imply the GP is possibly (yet not necessarily) targeting slightly less sophisticated investors by conflating (accidentally or intentionally) the types of investments as if they carry the same types of risks, risk levels, timelines, etc. Put another way, a developer that mostly promotes the deal based on returns being higher than non-dev deals, but yet not near high enough to account for all the additional risks involved, can trigger an alert flag for some. "Risk adjusted" is used a lot, but less often substantiated.

Try to enumerate an many plan assumptions, risks, risk mitigation plans, stress-testing scenarios etc as possible, yet without overly dwelling on it either. Investors accept all sorts or risks, so it won't scare them. Sure won't bother the speculator / gambler.  Not mentioning risk mitigation plans and forward thinking planning may remove a few potential investors who may wrongly think/assume the GP is just not aware of all the risks, or is afraid to mention them, or is maybe willing to take risks the LP is left unaware of. Either way they bow out, and may never ask a question.

Having said all that blah, blah, the frenzied current market will still have investors that invest like hungry bass on an attractive lure. Though maybe many of them they are not investors at all and more Vegas type.

Taylor L. · Answer

The deal breakers or things you want to see revolve around alignment of interest and skin in the game. Investors should be put before the sponsors, and sponsors should have real risk on the table. There isn't one set rule of fees/structure that works, it's really more about putting investors first.

Chris Seveney · Answer

@Robert Frazier

A lot of great responses / one will be what does the model look like if you have an asset in mind.

I have seen a lot of financial models that were banking on low cap rate exits or low interest rate refinances. Those syndications could be in rough shape for the next 24 months especially if they also have a variable rate adjustment.

So make sure you have a model that is not overly too aggressive and be able to answer question like what if refi rate is X or if cap rates go up to Y. How does that impact the investor ?

Robert Frazier · Answer

Thanks everyone. This is great.Will share our PPM and Pro Forma as we move forward for your expert advice. We are so thankful for our bigger pockets community.

What are passive Investors looking for?

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