Andrew Sinclair, the Principal and CEO of Midloch Investment Partners, a real estate investment fund manager based in Chicago, discusses the importance of evaluating private real estate investments in his latest column. He highlights common real estate performance measures such as DSCR, cap rates, yield on cost, IRR, and equity multiple, but warns against making investment decisions solely based on these metrics as they can be misleading when comparing different opportunities.
In addition to analyzing the property itself, Sinclair emphasizes the importance of evaluating the people behind the commercial or multifamily real estate deals or funds. He advises investors to ask potential real estate sponsors key questions to gain insight into their track record, overall performance consistency, ability to meet underwriting goals, responsiveness to changes in assumptions, communication with investors, and ability to weather crises.
Sinclair suggests looking at the sponsor’s track record on a deal-by-deal basis to verify their performance, including poor or middling performers, in addition to the winners. Consistency in overall performance and the ability to hit underwriting goals are crucial factors to consider when evaluating sponsors. Investors should also assess how sponsors react when their initial assumptions don’t pan out and how much of their own money they are investing alongside investors.
The principal stresses the importance of communication with sponsors and their willingness to address investor questions transparently. He also advises investors to speak with other individuals who have done business with the sponsors to gauge their experiences. Additionally, Sinclair urges investors to assess the sponsor’s likelihood of making it through challenging times and taking care of their investors, as prudent decision-making and investment operations are essential.
Ultimately, Sinclair emphasizes that the people behind the deals are as crucial as the fundamentals of the investments themselves. As investors seek to build a diversified portfolio with alternative assets like income-producing real estate, they should be comfortable with the sponsors who are managing their money. The Forbes Business Council, as the foremost growth and networking organization for business owners and leaders, offers valuable resources and connections for business professionals.
