Like any financial venture, real estate investment can be fraught with uncertainty. When you’re putting your hard-earned money on the line, it can be difficult to feel confident, given all of the factors, most out of your control, that might impact the investment’s performance.
An essential part of the process is objectively evaluating opportunities as they arise, working to remove biases, taking your time to make calculated decisions, and gathering as much third-party info as you can.
The majority of online investments involve a third-party platform that has typically promised to have heavily vetted and underwritten the investment before making it available to you. Understanding the company’s underwriting process is critical in evaluating an investment through that platform. Its quality is an indicator of the quality of the investment itself.
Experienced investors often develop (long) lists of deal breakers they use when reviewing any potential investment. Though eliminating an investment when you have capital ready to invest can be challenging, it’s an essential practice to ensure you remain unemotional in your financial decisions.
To get you started, here are just three of the thousands of ways to identify a questionable investment:
1. The Financials Don’t Add Up
Are the sponsor’s numbers validated by third-party data? What assumptions are they making? Are they overly aggressive?
Assuming that rents will rise by 10% by the time a project hits the market is likely unrealistic without strong underlying fundamentals and indicators of growth.
Before investing always take a step back and ask yourself if the deal makes sense. A 20% return in a 9-month timespan sounds great, but how realistic is it?
2. The Market Isn’t Playing in Your Favor
No matter how good a real estate opportunity looks on paper, if the surrounding market is struggling, your due diligence needs to be done with extra care.
Investing in an emerging neighborhood can be beneficial both for the community and for investors, but can take several years if not decades to pay off so is likely not for investors with short timelines.
Understanding broader real estate trends is also key. If there’s a national pattern of millennials moving into cities, an investment in suburban housing targeted towards millennials should be even more heavily scrutinized. You can change a lot of things about a property, but location isn’t one of them.
3. A Sponsor with an Invisible or Questionable Track Record
The “jockey” is just as important as the “horse” when investing in real estate. It’s crucial to dig into a company’s previous experience and track record – before you begin to review the deal itself.
There are several key questions to try to answer (using as much verifiable data as possible) when evaluating a real estate company, a few of which include:
- What is the developer’s track record?
- Do they have experience with this type of asset?
- Are they well capitalized?
- How many millions of dollars do they have under management?
- How much equity are they investing into the project?