Those who are financially strategic understand the necessity of diversifying their investment portfolio. Real estate investments are often complementary because they are less volatile than the stock market and include a finite and insured inflation hedge. Investors can add value to it, and the investment can provide income.
While there are options like buying and operating a commercial property or developing something, investors may also want to explore passive real estate investments that leave others to do the work. These are sometimes called real estate syndications.
Passive investments are a good option
Rather than taking on the role of landlord or developer or hiring a team to handle the job, busy investors can take a more passive investment approach that provides much-needed investment in others’ real estate deals like developments, condo complexes, malls or large buildings.
4 areas to examine when underwriting a project
Underwriting is the review of the risk involved in the investment. For passive investments, it includes underwriting the financials and the management team. Areas to look at are:
- The manager: This is essential because a dishonest or incompetent manager puts capital at unnecessary risk. It is critical to meet with them, get references and confirm their work on past projects was as successful as they claim. Do this with each manager.
- The plan: Look at the plan and how the investment will add value. Financial statements are helpful, but tax returns can provide a more accurate picture. Compare these details to similar projects in the market. Do their projections make sense?
- Key documents: The environmental and appraisal reports should be in order. Did the city, county or municipality approve the project yet? Does the approval match the projected use? Is the plan compliant with all applicable regulations? Is there a variance in place?
- Investment documents: This involves the Subscription Agreement and the Operating Agreement. Are the terms fair, or is the management team taking a bigger cut of profits?
Minimize the risks
Attorneys who work on complex real estate deals and other significant business transactions can help potential passive investors minimize their risk. Failure to draft underwriting and financial agreements that protect the investor can lead to unintended consequences.