Apartment investing is a great way for working professionals to diversify, beat inflation and grow wealth. It is not as difficult to get into this realm or as exclusive as many like to think. (See ‘Do I have to be Accredited to Invest in Real Estate). What it does take is mindset, education and good decision-making. For this article, I want to focus on that last part: Good Decision Making.
Good choices in investing often involves making a decision to do or not do invest. Many experienced and inexperienced investors alike feel pressure to “do,” always feeling a dire need for massive action which is a risky mindset as it can lead to rushed, half-baked choices.
Focusing on multifamily investing, I believe passive investors should start with the basics. Set personal financial goals, learn the benefits of apartment investing and get to know people in the business. That last part of the process is so important that it can be THE determinant of success in your first investment. I will make it simple: Make sure there is alignment of interest with your deal sponsor.
Alignment of Interest
Simply put, alignment of interest refers to the degree to which both the sponsor and the passive investor have the same goals and incentives. This can be discoverable through getting to know the sponsor (a must!), his or her values, risk aversion and the types of investments they tend to make.
The second, and most telling way to observe the degree of alignment is through the structure of the deal itself. Clear red flags are ridiculous fees (acquisition fees are expected for getting the investment closed and management fees are expected for managing the asset; but high fees should raise eyebrows), unusual equity splits and any odd payout structure that favors the partners disproportionately.
There are other things sponsors offer that demonstrate alignment of interest and should be looked upon favorably by passive investors. These include offering preferred returns and making decisions to hit investor targeted overall investment returns prior to paying themselves.
In summary, just because one is a passive investor does not mean they should not get educated in apartment investing and understanding a good deal. Those are very important and what is most critical is getting to know your sponsor and understanding the investment opportunities to assess the alignment of interest. I would end by stating that alignment of interest is probably less a deal by deal assessment and more a character assessment, so please work with those you know and trust!
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Rodney Robinson II