How to Better Communicate with Your Investor

If you're working with a very new investor, you may have to start all the way at the top, which is the story of cash flow and real estate. Here's why we like it. Here's why it's a low correlated asset. You don’t have to deal with the stock market volatility. Here's why there’s some of the tax advantages with depreciation covering your rental income coming out of the asset and so that you may have to start at that level. But for someone who's now ready to get involved in commercial real estate and they're looking at you as a sponsor, they're looking at you and a particular deal, a particular market. Then at that point, I really like to help them walk through, “Well, how do I look at the deal? How do we get comfortable with it,” and really go through the story of how we found the deal, why we like it, what are concerns are.

Listen to full episode: https://lifebridgecapital.com/2019/09/ws334-how-to-better-communicate-with-your-investor-with-alan-lewis/

I think investors really want to see, “OK, help me see the upside. And that's the easy part. Now, help me understand the risks and how we’re going to mitigate them and deal with them.” And I think having a balanced story really helps you establish that credibility. So if I'm in a tertiary market and there may be some risks as far as occupancy rates go, I really want to get into the story of the comps. Here's a comp that’s crossed the street, and here’s how it’s performing. And we went and visited it, and here’s what we saw. And here’s where we think we can duplicate their success. And here’s why we think we can match their rent per square foot and really go through exactly how we think about our asset. And the other thing too I found is a lot of your new investors have what I call analysis paralysis. They don't know what they don't know. So if you have all this information, they just don’t even know, “Well is this enough? Should I be doing twice as much due diligence?” Then there are four other secret questions I should be asking. So as I kind of walk on through like, “Here’s I look at comps. Here’s how I look at pro forma. Let me help you understand why we think you’re looking at the IRR.” And the cash on cash yield, withholding, and the equity multiple are the three big economic drivers on return that we focus on. Then the other thing too I think is a lot of investors don’t want to admit what they don't know. No one likes saying, “Hey, can you explain it to me? I have no idea what you’re talking about.” So I just always check in with them as we’re having a conversation, “Hey, as we’re talking about this 18% IRR net to investors, I assume that you heard it before, but happy to go through that. Would that be helpful if we can walk through that?” Mostly will say, “Yeah. If you won’t mind going over that again and kind of walking me through the details.” Even if they’re really familiar with it, it’s still good to have a refresher and have that conversation.

If you want to know where an investor’s at, you just have to ask. And it’s that simple. I know sometimes people are little gun-shy and feel like, “Okay, if I'm just having an initial conversation with the semester, it’s probably too early to start asking some personal questions about past investments.” And I don't think that's the case. I've always found investors this point are talking to you about a particular deal. And I think they understand that it's a very frank conversation about what they're comfortable with and what they’ve done in the past. So I’ll just ask and say, “Hey, help me understand so that I can do a better job, presenting this deal to you and focusing on things that are relevant to your questions. Help me understand what you’ve done in the past. Have you invested in real estate before? Have you done your own vacation rentals, fix and flip? On the residential side, have you ever invested in an apartment building? Tell me about that deal.” Then what will happen is they’ll tell you their story. And if they've had a deal gone wrong, that's super helpful because now that's a concern that you have to overcome. So if someone's invested and done fix and flip and had a terrible experience, I want to make sure I help understand why that went wrong and what the difference is here so that they're not worried about dealing with the same issues. So it's really helpful to hear about their deals gone wrong and then help them to see why this is a different scenario and how we dealt with those risks and don’t expect to have the same issues.

Listen to full episode: https://lifebridgecapital.com/2019/09/ws334-how-to-better-communicate-with-your-investor-with-alan-lewis/