In order to secure your spot in a real estate syndication deal, you’re investing a big chunk of your hard-earned money. Here at YESMF, I don’t take your investment or my role as your sponsor lightly.
While generating returns for you as fast as possible is one of my top priorities, there is something that’s even more important. It’s not flashy or nearly as exciting to discuss as steep returns, but to me, capital preservation is the unsung hero of any real estate syndication deal.
In order to create the amazing returns we all want and to grow your wealth over time, capital preservation is paramount. In a nutshell, I preserve your capital by putting multiple risk mitigation plans in place. When evaluating real estate investment opportunities, be sure to examine what strategies will be used in an effort to protect your capital.
At YESMF, I value trust and transparency above all else and do my best to reflect those values in every decision I make on behalf of my investors.
Why It’s Important to Talk About Capital Preservation
Sure, capital preservation isn’t the most exciting part of investing in real estate syndications, but it is one of the most critical pieces.
It’s easy to just focus on cash flow returns, potential earnings, and brightly colored marketing packages, but when an unexpected situation arises, you’ll be thankful (for this article and) for a sponsor team that gives capital preservation the attention it deserves.
Capital preservation is all about mitigating risk, and as Warren Buffett puts it, there are two rules to investing:
Rule #1: Never lose money
Rule #2: Never forget Rule #1
No matter what you invest in or who you invest with, you should know what to ask and what to look for so you can invest confidently with a team that holds your best interest.
5 Capital Preservations Pillars
At the core of every investment in which we participate, capital preservation is our number one priority. There are 5 building blocks that make up our capital preservation strategy.
#1 – Raise capital for expenditures upfront
Imagine the avalanche of problems that can accumulate when capital expenditures (like renovations) must be funded purely by cash flow. In this case, cash-on-cash returns, which vary based on occupancy and maintenance costs, would have to fund sudden HVAC repairs instead of unit renovations according to the business plan. In this case, the business plan falls behind schedule, units aren’t ready as planned, and vacancy persists.
Instead, we ensure the funds for capital expenditures are set aside upfront. As an example, if we need $2 million for the down payment and $1 million for renovations, we will raise $3 million upfront. This means we have $1 million cash for renovations and won’t have to rely on monthly cash-on-cash returns.
#2 – Purchase cash-flowing properties
One great option to preserve capital is to purchase properties that produce cash flow immediately, even before improvements. If units don’t fill as planned or the business plan isn’t going smoothly, just holding the property would still allow positive cash flow.
#3 – Stress test every investment
Performing a sensitivity analysis on the business plan prior to investing allows us to see if the investment can weather the worst conditions. What if vacancy rose to 15% and what would happen if the exit cap rate was higher than expected?
Properties look wonderful when they’re featured in fancy marketing brochures with attractive proformas (i.e., projected budgets), but stress testing those numbers helps us take a look at how the performance of the investment may adjust based on potential variability in variables.
#4 – Have multiple exit strategies in place
In any disaster or emergency, you want to have several ways out. In case of a fire, you want a door and window. The same goes for real estate syndications.
Even if the plan is to hold the property for 5 years, no one really knows what the market conditions will be at that 5-year mark. So, it’s important to account for contingency plans, in case you need to hold the property longer, and the possibility of preparing the property for different types of end buyers (private investors, institutional buyers, etc.).
#5 – Put together an experienced team that values capital preservation
Possibly the most critical pillar of all is to have a team that values capital preservation. This includes both the sponsor and operator team(s) and the property management team. All of these people should be passionate about their role and display a strong track record of success.
The more experience they have in successfully navigating tough situations, the better and more likely they will be able to protect investor capital.
Capital Preservation Is Key
Capital preservation can quite literally make or break a real estate syndication deal. While it’s tempting to ignore this boring step and move on to more exciting aspects of multifamily real estate, in the end, you’ll be thankful YESMF had your back.
To recap, I’ll rely on the five capital preservation pillars to ensure I’ve covered all the bases in protecting your investment. Every decision I make on your behalf will be rooted in preserving your capital.
The five capital preservation pillars used in YesMF real estate syndication deals include:
- Raise capital for expenditures upfront
- Purchase cash-flowing properties
- Stress test every investment
- Have multiple exit strategies in place
- Put together an experienced team that values capital preservation
I do my due diligence to protect your capital by using these five pillars. While every investment holds some degree of risk, the strategies I mitigate that risk as much as possible. I value your business and the trust you place in me as your sponsor and make protecting your investment my top priority.
Great questions to ask GPs, thanks! I’m curious about different exit strategies. What are some real scenarios where deals went sideways and GPs were able to get things back on track?