Please help me pick apart this private real estate investment

5 Replies

Hi, I am new to the BP forums but have been listening to the BP podcast and also another more general investing podcast for about 6 months now.

I've gotten information paralysis really.  I live in the San Francisco Bay area and have not been able to take the leap and look outside my area for opportunities.

Because I am a relative newbie to investing (I own 1 property in Jax,Fl), I emailed some of my high school friends about a site called Realty Mogul since I knew one was a broker.  Seemed like a decent service.

Anyway, it so happens a different friend replied back and said that he helps run a private fund that buys MF properties in the South and Mid South and gets a good return.

I asked him more about it and we met.

He's one of my oldest friends whom I've known for about 20 years now.  

He gave me a pitch about his firm, and it seems pretty solid.

They buy and hold for cashflow.  They have over 3000 units and look to expand.

My question is, what else do I need to ask?  I don't even know where to start.  How can I tell if this is where I want to go with my money?  

He said it's about a 7% annual return over the last 8 years. Seems easy in comparison to finding, buying, rehabbing, refinancing (BRRR). We could make an investment of $50k at the minimum.

Can anyone help me figure out what questions I need to ask?

Thanks for your help and time!

Jason

There are 1,000 ways to invest in real estate, you might not ever know if you let analysis paralysis settle. If you don't want to do a BRRR, a flip, or do any of that side of the work yourself, you can still invest. You can invest with your friend at 7%, you could find a hard money lender and invest with them, or you could find someone who is flipping or buying & holding and invest directly with them as a private investor.

A good way to figure out what to do is to write down what you are and are not comfortable with doing, and you'll be able to cross a lot of investing vehicles off your list. 

Just remember that the less involved you are, typically the less return you'll make on your investment. You are most likely the most dedicated to your own earnings, not another person investing your money for you. 

Another point of view would be for you to market for a deal that you can fix up and hold, which would give you the knowledge you need to tear apart deals that other people bring to you (if you want to be a private money/hard money lender or RE investment group investor). Once you've done a deal you'll be able to discern the good deals from the bad deals more easily. 

On the surface, this looks a lot bigger than it is and 7% return to you is relatively low.

You need to know what you are buying.  Are you going to be a full partner with equity and responsibility?  (Probably not.)  Are you going to be a passive financial partner with no say whatsoever?  (maybe).  When can you get your money back?  Is the 7% guaranteed (probably not).  Can you make more if the firm makes more?  Can you talk with existing partners?  How frequent are payments?  What protects your investment?  How leveraged is the firm?  There are probably another 1000 questions to ask.

In brief, you need to read and understand the contract and supporting material before deciding to invest.

Jim.

Hey @Jason L. ! Welcome to the site! It's great to have you here.

@James Mc Ree , thanks for the reply.

The returns are paid out quarterly and not guaranteed.  

I will definitely ask what happens if the firm makes more.

I can meet with the CEO and my friend is the President.

I don't know how leveraged they are exactly, but he did tell me they don't like to keep a lot of debt.  They will use credit to pay out investors who want out, or if for some reason they can't make a down payment on a new property.  I'll ask for more information though.

I love these questions!  

Thanks so much for your help.

Jason

It is great that you have such close access to the firm's leadership.  Be sure to read the contract as the definition of the deal versus rely on a verbal conversation.  It is the written word you are agreeing to.  The CEO and your friend could move on and new leadership will hold you to the contract.

Buy&Hold yields are usually higher if the investments are leveraged.  I would be surprised if they are parking a lot of cash in properties unnecessarily.

You might want to ask for a list of properties, rent rolls, expenses, etc.  At some point, the firm will probably say "No".  That's OK.  It will give you insight into their operation.  For example, you might see you are heavily concentrated in a certain state.  That's neither good nor bad - just a fact.  The more you know about your investment, the better.

Jim.

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