You’ve got to love investment summaries. For every commercial real estate syndication deal, they’re the all-in-one marketing package and business plan, underwriting, photo gallery, and why-you-should-invest-in-this-deal bundle that everyone loves and hates. When deal sponsors are raising money for their deals, they frequently put together investment summaries to explain to potential real estate investors why the commercial real estate deal is so great, what they plan to do with it, and how much passive income the investors stand to gain by participating.
The executive summary is a section of the confidential Private Placement Memorandum (PPM) that quickly and as briefly as possible summarizes the real estate investment opportunity.
Real estate investment summaries are like snowflakes. No two are the same. Some real estate investment summary documents consist of gorgeous graphics and iconography, professional photos of the real estate project, and clear tables reflecting the projected returns. Others are written like textbooks and include haphazard low-resolution phone pictures someone probably threw in at the last minute.
But here’s the thing: Regardless of the appearance of an investment summary, you must be able to swallow your first impressions (good or bad) and examine the figures and business strategy to determine what the real estate investments are. If you decide to invest only on the basis of the investment summary, you may be putting yourself at risk if you haven’t done your due diligence on the project and the team.
Likewise, if you write off a deal because the investment summary looks like your Aunt Ida’s tax returns from last year and causes your eyes to glaze over, you might be missing out on a great opportunity.
It’s fine if the investment description appears to be some bizarre document written in a foreign language right now; even if you’ve owned rental properties before and have all the experience in the world locating tenants, it’s probable you’ve never seen anything like it.
Let’s look at an example of an investment summary. I’ll walk you through my thought process when reviewing an investment opportunity so you’ll know what to look for the next time one arrives in your inbox. Please note that, for the sake of simplicity, I’m using a one-page executive summary instead of a full-blown investment summary, which may be dozens of pages long.
As a real estate investor, regardless of your experience level and even though every investment summary is different, there are some basic elements that are pretty common across all multifamily real estate syndication investment summaries:
In a one-page executive summary, you get bits and pieces of each of these elements, though you would need the full investment summary to get all the details. If this executive summary landed in my inbox, here’s what I would do. I’d start by skimming through the whole thing.
In skimming this executive summary, here are the things that would jump out at me as a passive investor:
When an asset is purchased off-market, the seller has chosen not to make the asset publicly available. Perhaps the seller didn’t want the tenants to know the building was for sale because he didn’t want his rental income to be disrupted (this is quite common). Perhaps the seller needed to sell within a certain amount of time. Or perhaps the seller already had a serious buyer in mind. Off-market is almost always a positive thing, anyway. As a result, the deal sponsor’s team did not have to compete on price with other potential buyers. As a result, the buying price is likely to be low, or at least quite affordable.
A value-add investment is precisely what it sounds like: an asset with the potential to add value in some way. If the previous owner hasn’t raised rents in ten years, the rents may be drastically below market rates. Perhaps the kitchens are still from the 1990s and need to be updated. It’s possible that more apartments might be added or that living conditions could be improved.
Whatever the case may be, value-add means that the deal sponsor team has more control. Even if the real estate investing market remains stagnant, they can do things to build additional equity rather than relying exclusively on market appreciation.
The requirement to upgrade the units is one of the most prevalent value-add scenarios. Let’s pretend the flats haven’t been upgraded in ten years and the monthly rent is $1,000. Even if the team stayed on track, the $1,000 per unit would be enough to cover the mortgage and make a small profit. Isn’t it a good deal? But who gets out of bed for pennies on the dollar? I’m not one of them.
This is a true value-add because there is an opportunity to add value and improve living circumstances while also increasing investment returns. The team will go in, finish the renovations, and then rent out the renovated units for $1,200 per month, for example.
When you total up the $200 per month gains across all 250 apartments, you get a lot more equity in the building, not to mention a lot more value for the occupants. Residents are typically ready to pay higher rents once they see the improved spaces and begin to take pleasure in their community.
“Similar to Sugar Grove Apartments (purchased just last year and currently undergoing renovations)…” is the next thing that catches my eye. This indicates to me that this is not the team’s first rodeo. They’ve done it previously and are currently in the trenches alongside another asset.
In the Investment Highlights section, I also see that they’ve started implementing their business plan at Sugar Grove Apartments and that their initial estimates have been exceeded. This indicates that their business approach is working, and that they will most likely be able to continue to build their reputation through Homestead Apartments. This also indicates that they have a strong reputation in the area with brokers, property managers, and other apartment owners. They wouldn’t have gotten this off-market offer if it hadn’t been for them.
I don’t know about you, but if I’m going to invest in an apartment building, I want it to be in a growing and developing area. The fact that this submarket is the “#1 fastest growing” within this fictional metropolitan area tells me that things are moving and shaking here. I would likely open a new browser tab and immediately google that metro area and that particular submarket, to learn more about them.
What am I looking for? Things like proximity to major employers in the area, shopping centers, decent schools, population growth projections, any news about developments in the area, what it looks like on Google street view, what nearby houses are selling for, and anything else I can find. Much of this will be in the full investment summary, but I always like to do a little of my own research on prospective investments too.
Have you noticed it? “Ten units have already been updated, and rent premiums of $150 are being achieved.” Jackpot. What is the significance of this? The value-add proposition is now free of all guesswork and assumptions. The proof of concept had previously been prepared by the previous owner. They updated a certain number of apartments and were able to charge higher rents as a result. This is fantastic news. All we have to do now is go in and finish the renovations in order to obtain the same rental increases. This indicates a considerably lesser risk in a value-add opportunity to me.
Any investment summary contains a lot of figures, and they might be overwhelming. What do percentages, splits, and predicted returns all mean? The equity multiple is one metric I’ve grown to rely on. The estimated equity multiple in this scenario is 2.1x. This indicates that my money will be more than doubled during the course of the project. That is, if you put $100,000 of your hard-earned money into this project, you will end up with $210,000.
This total of $210,000 includes your $100,000 initial investment as well as $110,000 in profits. This $110,000 includes the quarterly cash-on-cash returns you’ll get as long as you keep the asset, as well as your share of the asset’s profits when it’s sold. This one passes my test, as I usually aim for an equity multiple of roughly 2x.
I’m always interested in knowing how many units I’m buying. Homestead Apartments, in this example, has 250 units. This is a reasonable size. This means the group would be able to benefit from economies of scale (i.e., increasing efficiencies by leveraging shared resources across the many units). Anything over 50 units usually gets my attention. I prefer to see over 100 units to maximize economies of scale.
My immediate next step would be to decide whether or not to seek the full investment summary now that I’ve completed my initial review of the executive summary.
In this scenario, I would seek the entire investment report because this opportunity meets most, if not all, of the criteria I look for in a multifamily investment – good team, strong submarket, and opportunity to add value.
In the meantime, I’d conduct additional research into the submarket as well as the deal sponsor team. I’d look up Alpha Investments on the internet and discover more about the people who make up their real estate investing team, as well as other investment properties in their portfolio, and see if there are any unfavorable reviews or stories about the individuals or the real estate team.
It’s important to act quickly once you’ve found a real estate investment property that satisfies your investment criteria. Why? Because these real estate investments are offered on a first-come, first-served basis, they fill up quickly. If this investment opportunity fits your requirements, it likely meets the criteria of other investors as well. Prepare to make a soft commitment to book your position, and then thoroughly understand the investment summary.
Pro tip: Because there are no penalties for canceling a real estate investment later, it’s in your best interest to reserve early to ensure you receive a position in the deal. If you wait until you are absolutely certain, others will have leapt ahead of you in line, and you may be placed on the backup list.
If you’re interested in seeing a sample of a full investment summary, or to gain access to the real estate deals in our pipeline, consider signing up for the Crown Capital Investor Club. We are here to support you in your investment journey and will never pressure you to invest. Our goal is to help you gain the knowledge you need to invest with confidence (whether in our deals or not), so that together, we can change the world, one investment at a time.
Whether you prefer active real estate investing with rental properties or passive real estate investing with real estate syndications is entirely dependent on your particular personal goals. Whether you’re interested in office buildings or another type of real estate asset depends on whether you’re looking for cash flow or appreciation. No matter what type of property a potential investor is looking for, there are a plethora of options for them to get involved in real estate investing and find a good deal.
Start here if you’re just getting started and want some advice on the types of real estate to pursue as your first investment.