Investing in a real estate deal can be highly rewarding, but at the same time – very challenging. It’s not like investing in stocks, where you know what you’re getting. Every property and deal structure is so different, there isn’t a “one size fits all” investment that can make sense for everyone.
Today, with awesome investing platforms like RealtyShares, investing in real estate deals is easier. I’ve done it sitting in my PJs at home!
But even if you’re investing online, you still need to completely understand every deal you invest in. Remember, it’s your money on the line. And nobody cares more about your money than you do.
However, due diligence is one of the main reasons I love RealtyShares, and I want to take some time to highlight what you need to know and how you should analyze deals – with some tips straight from RealtyShares VP Brian Schultz as well.
Check out RealtyShares here if you’re not familiar with them and what they offer. They primarily focus on middle-market commercial real estate projects run by experienced real estate companies. They also love value-add projects in need of upgrades or operational improvements.
If you sign up, get a $100 bonus when you invest in your first deal with the promo code PARTNER100. Sign up here.
Alright, let’s talk deal vetting and what you need to know before investing in a real estate deal.
1. Evaluate The Sponsor
No matter what platform (online or offline) you invest in, you have to evaluate the sponsor and feel comfortable that they are going to do what you are investing with them to do. If you’re investing $5,000+ in a deal, you don’t want someone who’s never done a real estate deal before. You want experience.
If you’re investing on a platform, you want to ensure that the platform is doing strong due diligence as well.
For example, on RealtyShares, they evaluate the quality of a deal’s operators by:
- Assessing track record and local knowledge. They work only with sponsors who have done at least $10 million in transactions over the past three years or $20 million in assets under management. They also work only with those who know the regions where they’re doing business.
- Doing background and credit checks. This includes checking on past foreclosures, judgments, and personal-credit issues along with police records or securities violations.
This is important. Sponsor quality equals smart investments. Any sponsor whose prior experience and track record don’t hold up should be a red flag.
We’ve seen it on other platforms where investors have lost their money on deals simply because the platform didn’t vet their sponsors well enough. Always keep this in mind.
2. Evaluate The Property
Even though you’re investing online, you need to evaluate the property you’re going to be investing in. Beyond what’s listed on the website, I like to go to Google maps and look at the property myself. I also pull crime maps and just check out the general area.
Remember – you might become a partial owner in this property! Know what you’re investing in!
After the basics, make sure you look at the following:
- Asset Type. Is it a commercial, residential, or mixed-use property. Does this align with the general area?
- Business Plan. Many assets you’ll find have a specific turn around or investment plan. Review proposed budget and improvements to better understand potential rent increases.
- ROI Potential. Higher risk must equal higher reward.
- Tenant Profile. Understand the tenant profile, rent roll, and other factors that may add or decrease risk on the property.
- Debt Allocation. Review external loans to rule out unnecessary risk.
- Sufficient Sponsor Co-investment. RealtyShares requires between 7 and 10 percent of equity be provided by sponsors, making sure they have skin in the game. If you use another platform, consider this a good baseline.
You’ve got to look at the whole picture. No two opportunities are alike and due diligence is crucial. Even as a limited partner, you’re part of this deal going forward so know what you’re getting.
3. How The Underwriting Process Will Work
If you’re not investing directly in a deal because you’re using a platform, this is where you have to have some faith in the management team of the platform you’re using.
It’s also one of the reasons we love RealtyShares. They have:
- Top-flight analysis. Their team bring experience from BlackRock, Goldman Sachs, Morgan Stanley, and other premier firms.
- Developing proprietary financial models. They’re strict with their models. This can be great as an investor, but it also can limit deal flow. But realize that the deals that make it to the platform are the best.
- First-class data. It’s not just numbers – it’s the ability to evaluate each project on pricing, performance, and demographic trends. Make sure you can trust the data you’re seeing.
You’ve got to know the risk before taking the leap. If a project holds up to our analysis, we then start to review terms and begin negotiations.
4. The Legal Stuff
Even with the best deals, problems can occur. That’s why you want a platform that is tough both in reviewing legal terms and throughout negotiations – to cut the chance of issues down the road.
For RealtyShares, Brian shares their strategy:
- Negotiate: We account for all risks and ensure investment safety while making sure all legalities are fair and accurate.
- Write an operating agreement: We outline all financial components and fees in this legally binding document.
- Tame the paper trail: Whether it’s third-party reports, title, entity information, operating agreement, loan documents (if applicable), or escrow arrangements, we’ve got it in hand.
You want to invest on a platform that protects investors and limits risk. You want them to treat each investment like it’s their own.
5. Easy To Use Deal Platform
Now that you know a lot of the behind the scenes stuff, a deal will make its way onto the platform and you can invest in it.
This is what you see as an investor, and you want it to be easy. You want the whole process of transferring money, vetting deals, placing investments, and following up to be extremely easy.
We think that RealtyShares does this well, and we love using their platform. You should check it out here. It’s free to get started – just go to RealtyShares and sign up.
RealtyShares offers smart investors thoroughly-vetted deals. That said, it’s important to note that you can’t guarantee against loss. Private investments are highly illiquid and risky and are not suitable for all investors.
If you’re interested in investing in real estate, RealtyShares is a platform that I use, and I think you should strongly consider. Get started here.