Do we have your attention? Great. Let’s start with the good news. Over 50% of High-Net-Worth Individual (HNWI) respondents to a recent National Real Estate Investor (NREI) report plan to increase their real estate investment allocations between 2% – 10% in 2017.
It’s true that real estate is one of the best investment bets today, in light of a volatile stock market and low-yielding bonds. Also, several primary, secondary and tertiary markets are experiencing downright real estate booms.
So, as a Sponsor, you’re looking at a robust market, with lots of capital just ripe for the investing. Right?
Well, sort of. These positive indicators don’t necessarily make your job easier. In fact, the bar is higher than ever. The era of smoothing over poor communication with a lunch at the country club is yesterday’s news. Being a big fish in a small pond is also a thing of the past. Investors have a myriad of options in today’s Commercial Real Estate Investment (CRE) marketplace, both online and offline, to find the projects and partners that best meet their goals.
At CrowdStreet, we talk with 1000s of investors every year. We know what they’re looking for in a Sponsor–and we know what makes them crazy. Read on for our insider tips about how to avoid the pitfalls and create a happy and lasting investor base.
Complaint #1: You Don’t Earn Their Trust
If you think Limited Partnership investors (LPs) put total faith in signatures on a contract, think again. Contractual safeguards aside, putting money in the hands of a stranger is a huge leap. This is as true for HNWIs as for anyone.
Investors also have vast resources at their fingertips to conduct research. They will do vetting on you, your firm and your deal. The country club has evolved into online marketplaces, forums and review sites. If you haven’t met the expectations of your investors in past partnerships, expect your reputation to precede you in the evaluation of your offering.
The Solution: Stress test underwriting, assets and business plans to the max. Pass background and bad actor checks with flying colors.
Complaint #2: You Don’t Communicate the Hard News
Real estate is a complex beast. Sooner or later, some aspect of a major development project will veer off-course.
Building a winning formula based on your successes is easy. It takes far more discipline to take a macro lens to your failures; to analyze what went wrong and why, so next time, you can anticipate the red flags before they fly.
It’s also human nature to avoid conflict. No one wants to be the bearer of bad news with cold, hard investment capital on the line. But, under no circumstances can you, as a trusted fiduciary, avoid transparency, even for a minute, when the going gets tough.
The Solution: Have the hard conversation. Step up in the face of adversity, and you’ll earn trust. State the issue, provide context, and present a plan to put things right.
Complaint #3: You Don’t Bring the Passion
Just like many CRE industry pros aren’t natural-born marketers, not all are “people persons.”
You might assume that your personality won’t shine through in an online CRE marketplace like CrowdStreet. Plus, at an average 23 investors per offering, it can be a challenge to offer a personal touch.
However, we hear from investors they prefer to work with firms that show passion and care for the people as much as the deal.
Why is this important? For starters, at CrowdStreet, 55% of active investors are repeat investors. They’re always looking for the next great project. This means they’re also looking for the ease of ongoing, lucrative partnerships, just like you are.
The Solution: Go all in. Show some personality. Make that extra personal touch. Get your hands dirty. Long-term relationships built on loyalty and repeat successes are the name of the game.
Complaint #4: You Don’t Put Them First
Relationship aside, you and your investors have one thing in common. You are each looking for a handsome payday. However, though you may have a variety of personal motivations to get your project off the ground, your investors have exactly one: in-place cash flow with an upside.
If your plan and timeline aren’t airtight, you may overpromise and under deliver. If you miss projections or don’t pay on time, you’re unlikely to get a second chance.
That said, it may not always pay to play it by the book. If your investors wanted red tape, they’d take their money to a more traditional institution or put it in a lower-risk venture. So, if it’s more prudent for the long-term viability of a project to miss a particular distribution, for example, communicate the issue. Then do what’s best for your investor, the project and you.
The Solution: Put your investors first, pay them first and protect their best interests above all else. Remember, this may be just the first deal in a long and beautiful partnership. Never stop looking for opportunities.
Details aside, the rules of engagement are simple. Cultivate relationships based on communication and respect, and you’ll enjoy the certainty and profit provided by a deep pool of repeat investors.