Measuring and effectively communicating the success of your syndication deals is of paramount importance, as those metrics serve as key determining factors for future investors as they weigh their options and compare sponsors' track records.
Your future capital-raising success hinges on your ability to track your progress and transparently communicate your real estate investment strategy to accredited investors.
In this article, we will discuss how to assess your past or current real estate investments' performance, present meaningful data, address potential concerns, and celebrate successes, thereby empowering all involved parties with valuable information for making informed decisions about time value and cultivating lasting partnerships.
Real Estate Investors Care About the Money
During the first phase of their decision-making process, most investors are solely interested in the anticipated returns of a given real estate syndication. As they sort through their options in sponsors, asset types, and real estate classes, they'll look at cash flow estimates, the cap rate, loan-to-value ratio (also called LTV ratio), and anticipated property value increases on an annual basis, among other metrics.
Any real estate deal that aligns with their financial goals remains on the table, while those that don't are out of the running. Here are some key performance indicators (KPIs) serious real estate investors like to see:
Net Operating Income
One essential KPI is Net Operating Income (NOI). NOI is a measure of a property's operating performance and profitability. It is calculated by subtracting operating expenses from the property's total revenue. Operating expenses include items such as property taxes, insurance, maintenance costs, utilities, and property management fees. Revenue includes rental income plus additional income from the mailroom, parking, laundry, trash, and other on-site services that are offered to tenants for convenience.
NOI is a critical metric because it reflects the property's ability to generate income from its operations, excluding financing costs and income taxes. It provides a clear picture of the property's financial health and its potential to produce positive cash flow.
As an investor, monitoring NOI is crucial for several reasons:
- Assessing Property Performance: A higher NOI indicates that the property generates healthy cash flow and operates efficiently. It can be an indicator of a well-managed property.
- Cash Flow Projection: NOI helps in projecting the property's future cash flow, which is essential for budgeting and financial planning.
- Evaluating Investment Returns: NOI is a fundamental component in calculating the property's return on investment (ROI) and other financial metrics like the capitalization rate (Cap Rate) and cash-on-cash return (CoC). These metrics are vital for evaluating and comparing the property's profitability with other investment opportunities.
- Property Valuation: NOI plays a significant role in determining the property's value. In the income approach to property valuation, the property's value is directly linked to its NOI.
- Identifying Growth Opportunities: By analyzing NOI trends over time, a general partner (team) can identify opportunities to increase revenue or decrease expenses, thereby maximizing the property's income potential.
Other metrics individual investors care about:
- Return on Investment (ROI): ROI is a critical metric used to assess how much profit they have gained relative to their initial investment amount. It is typically expressed as a percentage and calculated by dividing the net profit by their capital contribution.
- Internal Rate of Return (IRR): IRR is another essential metric used to evaluate the profitability of a real estate syndication. To calculate IRR, you must find the interest rate at which all projected cash flows produce a net present value of zero. It represents the annualized rate at which the value grows over its holding period, taking into account the timing and size of cash flows. A higher IRR generally indicates a more attractive investment opportunity.
- Cash-on-Cash Return (CoC): CoC return measures the annual pre-tax cash flow generated by the investment vehicle relative to the amount of cash initially invested. It helps limited partners understand the income they are receiving relative to the money they have put into the deal.
- Equity Multiple (EM): The equity multiple is a ratio that indicates how much an investor is expected to receive in total cash distributions relative to the capital invested. For example, an EM of 2.0 means the investor expects to double their investment capital over the investment's duration.
- Distribution Frequency and Consistency: Investors appreciate clear communication about the frequency of distributions (e.g., quarterly, annually) and the consistency of those distributions. Reliable and timely distributions can enhance investor confidence.
- Total Return: Total return encompasses all forms of returns received during the investment's holding period, such as cash flow, appreciation, and other profits. It provides a comprehensive view of the investment's overall success.
- Operating Expense Ratio (OER): A financial metric used to assess the efficiency of a syndication's operations. It is calculated by dividing the total operating expenses by the property's gross operating income. A lower OER indicates better cost management and higher profitability, making it an important measure used to evaluate the syndication's operational performance and potential for generating favorable returns.
Rather than tracking and calculating these complicated metrics yourself, SponsorAdmin is here to help highlight positive aspects of your real estate syndication investing track record and provide accurate and timely reporting on current and potential real estate syndication deals.
Rather than crunching numbers, reconciling accounts, tracking distributions, and maintaining contribution records, with SponsorAdmin in place, your time can be better spent building relationships in the real estate syndication space, raising capital, and closing deals.
Good Communication About the Real Estate Investment Property
Beyond money and metrics, potential real estate syndication participants are looking at how you communicate.
- Are your responses timely?
- Do you avoid directly answering questions?
- Have you taken the time to really connect with them and show you care about their financial goals?
Generally speaking, investment decisions are made because of how someone or something makes them feel. You'll build trust and credibility with general partners and investors by demonstrating your systematic, consistent, and transparent communication skills (even about challenges) within the capital-raising process.
Next, investors want to know that potential risks have been identified and that plans are in place to address each during the life of the real estate syndication. Highlighting strategies to mitigate risks can instill confidence in the investment's long-term viability.
Many investors value comprehensive market and economic analysis that supports the syndication's business plan. Demonstrating a deep understanding of market trends and their potential impact on the investment can bolster investor confidence.
What's of Real Value to a Potential Limited Partner?
Initially, investors want to see how well your past syndication's actual performance aligned with the initial projections presented in the offering documents. Highlighting any significant variations and explaining the reasons behind them demonstrates transparency, property and asset management knowledge, and your awareness of any lessons learned.
Remember, each real estate investor has varying preferences for the level of detail and format of reporting. Offering a variety of reporting options, such as detailed reports, executive summaries, or interactive dashboards, can cater to an array of needs and preferences.
Once the metrics have their attention, your personality, communication style, organization, and transparency will win them over. Let SponsorAdmin take care of the fund administration, tax compliance, and investor relations (things you CAN outsource) while you shine doing the things only you can do!