Capital Preservation - The Most Overlooked Component of a Syndication Investment
For those who aren’t familiar with Real Estate Syndications, it involves multiple investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor.
Unsurprisingly, the most common question we receive from prospective real estate investors is what they can expect as a return on their syndication investment. While it is critically important to find investments that maximize returns, our team here at Limitless Investing believes that it is even more important that each syndication opportunity mitigates risk and ensures the investor’s initial investment is as safe as possible. This strategy is also known as capital preservation.
To simplify our philosophy, we often refer to one of Warren Buffett’s most famous sayings:
"Rule Number 1: Never lose money. Rule Number 2: Never forget rule Number 1."
Let’s take a look at 3 risk mitigation strategies that we look for in each of our syndication investments to preserve capital and make Mr. Buffet proud:
Strategy #1 - Find a Sponsor that Focuses on Capital Preservation
The first risk mitigation strategy seems obvious, but you’d be amazed at how many investors flock towards sponsors that are mainly focused on projecting the highest returns, regardless of the risk profile for that syndication opportunity. Alternatively, we look for sponsors that make capital preservation their number one priority.
These types of sponsors can be identified by closely vetting their experience and track record with previous syndication opportunities. Having a sponsor that has gone through multiple market cycles, dealt with unexpected issues and successfully navigated them to protect their investor’s capital is invaluable.
Strategy #2 - Find a Property that Cash Flows
The next risk mitigation strategy is to ensure that the investment property produces positive cash flow from day one, prior to any value-add renovations or operating improvements that are planned as part of the business plan.
This protects investors as the performance of the property is based on a strong foundation that can weather delays with construction, operational changes and any other planned improvements. The positive cash flow also provides investors with an immediate return on their syndication investment as they will start receiving monthly or quarterly distributions soon after the property is purchased.
Strategy #3 - Find a Business Plan that is Stress-Tested
The final risk mitigation strategy is to stress-test the business plan of the syndication investment by modeling multiple return outcomes that account for different scenarios. One of the most valuable tools for this is a sensitivity analysis, which calculates the return on investment based on different factors such as: cap rates, annual rent growth, occupancy and interest rates to name a few.
This analysis is critical as it forces sponsors to plan for potential issues and ensure that the target investment property can still protect their investors capital, even if everything doesn’t go as planned. For this reason, we require all sponsors we partner with to provide a sensitivity analysis as part of the investment summary.
While there is no way to completely eliminate risk, these 3 risk mitigation strategies help protect your initial investment by focusing on capital preservation.
Our team here at Limitless Investing independently reviews every syndication opportunity through this and many other lenses prior to sharing with our investors to ensure they are only receiving high-quality, pre-vetted opportunities.
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