In this episode, Shane shares insights on raising capital for real estate investment projects. He emphasizes the importance of transparency and honesty when approaching potential investors, acknowledging that no property is perfect. Shane delves into 10 crucial questions that smart investors ask before committing their money to a project, and discusses various factors that investors need to consider, including the experience of the GP team, contingency plans, and sensitivity analysis. He also addresses the challenges that real estate investors face in today's shifting market and the importance of considering potential scenarios such as interest rate increases.
[00:01 - 02:41] Uncovering the Real Risks and Challenges
Smart investors ask questions to evaluate risk and assess the loan-to-value ratio of a property
Building credibility by avoiding overselling a property is important
Ten questions to be prepared for when raising capital
The first two questions are related to risk and commitment
[02:41 - 4:50] Questions to Ask Before Investing in a Property
Investors should discuss both the pros and cons of a property
Honesty is key; don't only focus on the positives
Understanding the exit strategy is important, and there are different types of exits that may attract different groups of investors
Consider who else is involved in the deal, particularly high net worth investors
[4:51- 07:04] Smart Investing in Real Estate Projects
Unexpected issues and insufficient funds can lead to project failure, so investors want to know if other experienced investors are also involved
Cash on cash return is important for limited partners
Investors consider the GP team's track record and experience working together
Contingency plans and sensitivity analysis are crucial to manage potential project risks
[07:05 - 10:19] Investors Becoming More Cautious in Today's Shifting Real Estate Market
IRRs were previously based on cap rate compression and rent increases, but investors are becoming more careful in the current market
Limited partners seek adequate compensation for the project's duration, while also balancing fairness
It's important to consider potential scenarios, such as an increase in interest rates
You can connect with me on LinkedIn, follow me on Twitter, and watch my videos on YouTube. If you want to go even deeper into the world of commercial real estate, head over to Shane Melanson, a roadmap to investing in commercial real estate! Get my book Club Syndication - How The Wealthy Invest Their Money
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Tweetable Quote:
"Smart investors know that no property is all sunshine and rainbows. Like there are going to be challenges. Like nothing is perfect." - Shane Melanson
