Andrew Sinclair, the Principal and CEO of Midloch Investment Partners, a real estate investment fund manager and operator based in Chicago, discussed evaluating private real estate investments in his recent column. He highlighted that comparing different opportunities can be challenging due to various key performance metrics such as debt service coverage ratio (DSCR), cap rates, yield on cost, internal rate of return (IRR), and equity multiple. While these metrics are useful, they can sometimes be misleading when analyzing investments side by side, and it is crucial not to base investment decisions solely on one or two popular metrics.
Sinclair emphasized the importance of evaluating the sponsors behind commercial or multifamily real estate deals or funds when investing in real estate. Getting to know the people you are investing with is just as important as assessing the property itself. Sinclair provided a list of questions to ask potential real estate sponsors to gain a better understanding of their track record, consistency in performance, underwriting goals, reactions to underwriting assumptions, communication with investors, ability to navigate challenges, and level of personal investment in the deals.
It is essential to analyze a sponsor’s track record on a deal-by-deal basis to verify their performance and transparency in disclosing both poor and successful investments. Consistency in overall performance is key, and assessing a sponsor’s ability to hit their targeted underwriting goals can provide insights into their planning and decision-making process. Additionally, understanding how sponsors react when their underwriting assumptions don’t pan out and how well they communicate with investors can indicate their reliability and commitment to investor relations.
During the evaluation process, investors should consider the sponsor’s ability to pivot to alternative strategies when faced with challenges and their financial stability to weather downturns or crises. Assessing the level of personal investment by sponsors in their deals is also crucial, as it aligns their interests with those of investors and demonstrates commitment to the success of the investment. Ultimately, building a diversified investment portfolio with alternative assets like income-producing real estate requires trust in the sponsors who are managing the funds, making it essential to choose sponsors who align with your investment goals and values.
