This week we're continuing with our analysis of the Investment Summary, the all in one marketing package for any real estate deal. We go into financial projections and how to understand the equity multiple and how that plays a role in your toll returns. At the core of every investment is the financials. It comes down to the business plan, the expenses and how the projected income will play a role together in achieving the returns that are being projected by the sponsor. It's super important to understand how these financials work and how they affect you and the investment you're involved in. So join the community and grab this free information that can help you gain even more knowledge when it comes to your investment strategy.
This week we're continuing with our analysis of the Investment Summary, the all in one marketing package for any real estate deal. We go into financial projections and how to understand the equity multiple and how that plays a role in your toll returns. At the core of every investment is the financials. It comes down to the business plan, the expenses and how the projected income will play a role together in achieving the returns that are being projected by the sponsor.
It's super important to understand how these financials work and how they affect you and the investment you're involved in. So join the community and grab this free information that can help you gain even more knowledge when it comes to your investment strategy.
KEY TAKEAWAYS
1. At the core of every investment are the financials. We look at how the expenses and projected income are going to work together to deliver the type of returns that are being projected by the sponsor.
2. When looking at the investment summary you should be asking questions such as: What is the exit cap? What are the reserves that the operator has in place? What construction projects are they going to do? How conversative are the projections?
3. It's vital to know what your investing goals are so you can analyze whether the answer to your questions align with those goals.
4. Real estate investing doesn't fail simply due to the economy, it fails when operators can't pay the bills when the economy isn't what they expected it to be. So make sure there's enough reserves/capital to provide security in the deal.
5. The equity multiple: how quickly are you going to double your money and at what multiple are your returns going to be at? A longer timeframe relates to a safer lower return investment and a shorter period generally indicates a higher more lucrative risk.
6. It's easy to fall into the trap of just wanting the highest return but what you want to ask is: How does the return I'm going to receive relate to the risk I'm taking to get said return?
BOOKS
The Passive Investing Playbook - https://theinvestormindset.com/passive
LINKS
Learn more about investing with Steven at
https://theinvestormindset.com/invest
Title: E141: Investment Summary - Financial Projections - Steven Pesavento
Host: Steven Pesavento
Duration: 14:10
Steven (00:01):
Welcome back to this week's episode of the mindset minute’s episode with the investor mindset and I'm your host, Steven Pesavento. Each week I share mindset tips and investing strategies to help grow your business and take it to the next level and this week we're focusing on continuing our conversation about Investment Summary, the all in one marketing package for every commercial real estate deal. Last week, we dove into deal structure and track record and this week, we're going to be continuing that conversation, understanding financial projections and the importance of understanding the equity multiple and how that plays a role in your total returns. So if you're just joining us on this series, make sure you head back and listen to all of the episodes related to passive investing, to really lay a phenomenal foundation, you know, once you finish this one right now. So join us each week as we share more mindset tips and investing strategies to help you build true financial independence through real estate, by hitting that subscribe button down below and making sure you never miss another episode. And of course, remember to grab the full passive investor playbook, The Ultimate Guide to Passive Real Estate Investing at theinvestormindset.com/passive. You can grab that in the link, right down here, in the show notes, and you're gonna want to do that because, it's chocked full of all the information that we've been talking about over the past few episodes, for me, diving deep into the details about the five core benefits of investing in real estate, about active versus passive investing, about how to go and find sponsors, about how to vet those sponsors and about how to understand all the details that are going to be necessary for you to lay the foundation to go and work with any sponsor that's out there, right? This is a really valuable resource. We're excited to be able to put together. So make sure you go grab that at theinvestormindset.com/passive. So let's dive right into it.
Narrator (01:54):
This is the investor mindset podcast and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better and how we can do better. And each episode, we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven (02:16):
So when we're looking at financial projections, at the core of every investment is the financials, right? It comes down to what is the business plan? And how are the numbers, the finances, the expenses, as well as the projected income, going to play a role together into being able to deliver the type of returns that are being projected by the sponsor? It's really important to understand what goes into these financials and how the different pieces end up playing a role, right? So, you know, if you were to go and talk with three different underwriters and give them the exact same deal, they're most likely going to come up with slightly different views on that, because of the type of assumptions they're going in with. And it really makes a big difference based on the local market, the local market dynamics, the details of the business plan, the debt terms, the capital expenditures, the type of renovations you are planning on doing, the other value add components, how stabilized it is.
There's a lot of different pieces that end up playing a role and you're going to compare the business plan that they're talking about with the financials that are actually being shown here. So, you know, you should always want to ask some questions to understand, what are the assumptions that are being made? And you're asking those questions to yourself when you're reviewing the investment summary. So, as you're reviewing this summary, you're asking yourself, what is the exit cap? In other words, what is the price that they're going to sell the property for in the future? Are they expecting to sell it at a lower exit cap rate than they're currently purchasing at? A lower exit cap rate means it's more expensive. Or are they planning on selling it at an exit cap rate that's higher? Meaning that the market is actually softened. It's more conservative to go down the path of, you know, focusing on an exit cap rate that's softer than the reverse. So what you want to be doing is, you want to be looking through and looking for some of these key indicators that indicate that they're being conservative or indicate what is going into the underwriting that they're thinking about here. So you should be asking these questions to yourself first, and then you should be writing these questions down to make sure that you can ask them to the sponsor, either on the due diligence call or on the webinar or whatever format. Your sponsor, the one that’s reviewing that deal is able to provide those answers. And it's important because you want to know the answers to these questions before you invest. It's not necessarily the fact that you had the question means you shouldn't invest, it's rather, what's the answer going to be? And does that answer come into alignment with your investing goals? Again, it's critical to know what your goals are so that you can get in the right vehicle and go down the right path in order to end up getting there. And some of these common assumptions that we like to look at or underwrite more conservatively to might be, what we just talked about, the higher exit cap rate than the going in cap rate. In other words, the cap rate or the price that we're purchasing the property at, you know, what are the sufficient reserves that the operator has in place? Are these enough for one month, for two months, for five months, for a year? What are those initial reserves that the team is holding back? That's going to indicate how conservative they are going to be, because remember, nothing goes bad in real estate, just because of the economy, it's actually because operators aren't able to pay the bills when the economy isn't quite what they expected it to be. So it's really important that you're looking for those reserves, you know, are they raising significant or sufficient capital in order to do whatever kind of capital expenditures or construction or renovations that they are planning on doing, you know? Or are they banking on making money on cash flow in order to be able to fund that? It's important, I think, from a conservative standpoint that you're raising that capital, you're making sure that the property is not constricted from a lack of money to be able to get the job done that you need to get done.
And there's many more that go into everything from what kind of construction projects are they going to do? How conservative are the projections? Who is actually going to execute the construction projects and what experience do they have on that front, specifically, dealing with keeping budgets in line. All those kinds of things are really important, all things that you can definitely learn about by looking at the investment summary and the financial projections, and then diving deeper with the sponsor or the operator with the general partners of that opportunity. So a part of the financial projections is going to be, what are those investor returns? And we talked about deal structure, we talked about what you're going to be expecting out of that IRR - internal rate of return - you would be looking at well, what is my actual return going to be? What's my annualized return going to be? What's my cash on cash or cash flow that's going to be paid out to me every month or every quarter every year, going to look like? And are those going to be in alignment with my goals? There's no right or wrong answer. Going conservative is going to be great for somebody and going, you know, extremely aggressive is going to be great for somebody else. It's important to know what you're looking for.
And one of those metrics happens to be something called equity multiple and it's a very simple thing to understand, but sometimes people forget about looking at this. One of the things is how quickly are you going to double your money or at what multiple of a return are you going to get? And so, the simple calculation shows, what's expected over the life of the investment, you know? The longer somebody holds the deal, the more those returns are adding up and giving you the ability to increase your equity multiple. Oftentimes they think a lot of people seem to agree that if it's a short timeline and a bigger return, there's probably some more risk involved. So what I'm looking for in deals depends on the type of deal that I'm looking for. Am I going for high risk, high reward, appreciation only or appreciation hybrid that is really focused on more value add that I might expect a higher equity multiple maybe a two; maybe I'm looking to double my money in the period of three to five years, or maybe I'm looking to triple my money or quadruple my money. Now I'm not taking those kinds of risks personally, in my portfolio, I think it's great if you're the kind of person who wants to go and take that kind of risk, but what I'm recommending for a lot of people, especially if you're new or you're getting started out or you not sure about your risk profile, I recommend starting a little bit lower risk. And so your equity multiple might be lower depending on how long that property is being held. So you might look for something like a five-year hold. Maybe it's a 1.7 or 1.5 equity multiple, maybe it ends up coming out to a two, like you're doubling your money, you've got a 15% annualized return on a two. And so these are things that you want to be thinking about yourself when you're deciding what the kind of returns that you're looking for. And it's always easy to fall into the trap of thinking, I'm only looking for the highest return. No, what you need to be looking for is how does the return that I'm receiving relate to the risk that I'm taking in order to get that return? If I could guarantee you that if I gave you a dollar, you'd give me a dollar and one penny back, I would take it all day because that's free money, right? And so as you're starting to show an example of, hey, well, if I give you $1 and I get $2 back, and my risk is medium, or medium high, then, okay, well, that's something I can take on. Or, you know, if I'm going to give you $1, I may give you a $1.70 back or, you know, essentially a 1.7 equity multiple, or 1.6, you know, then I'm going to look at that. I'm going to say, okay, that is probably a medium to low type of risk, or maybe it's a low risk, it depends on the type of deal. And so you're going to look at that and you're going to have to decide what is going to be the best fit for you by knowing some of these numbers, and then, you know, obviously being able to talk with the sponsor team to answer some of the questions we talked about is going to be really important.
And the final thing, but definitely one of the most important things, to understand is the business plan and that business plan is developed during the underwriting stage, right? So when somebody is sitting down and analyzing the numbers and understanding what they're going to be putting together, they're going to be essentially coming up with a plan of attack. What is it we're going to do with this property? How are we going to add value, or how are we going to decrease expenses or increase income? What are the different levers that we're going to pull and how are we going to end up delivering that for our investors? And so that's where the business plan is going to come in. And so you're gonna want to understand what's going into that and how it plays into the financial projections and really, the overall investment summary. So to really put this all together, the investment summary is an all-in-one marketing package, it's an all in one explanation of what you would expect as an investor.
Now there's some other documents called a Private Placement Memorandum, a PPM, and an Operating Agreement that are come out and that's going to dictate the specific legal pieces that go into whatever that offering is. And you want to make sure that the two lineups, with great operators, they are gonna line up crystal clear. So you're just going to look for a couple of key things in there to make sure that the returns are lining up, that the voting structure is as you expect it to, and that the timeline is what you expected, but once you wrap all that up together, you can, and you've done your vetting, you can start to decide, hey, is this an opportunity that I want to invest in? Or is this one I want to pass on and, and look for another? And so, you know, nothing wrong with passing a deal. I think it's great to pass until you're ready to invest and you've got confidence in yourself and confidence in the partners that you're looking at. Then at some point you pull the trigger and you invest either the minimum or you invest what you feel comfortable with, based on the deal, and you go along for the ride and you see those returns start to come in and then, you invest in the next one and the next one, you don't have to put all of your money into one deal. That's one of the big advantages of investing in syndication is that, you're able to actually diversify across maybe different deals, different geographies or different operators. So those are things that I highly recommend you take a look at.
So if you got value out of this, I highly recommend that you go grab yourself a free copy of The Ultimate Guide to Passive Real Estate Investing and of course, remember that's available right here at theinvestormindset.com/passive. You know, it's got a bunch of great information diving much deeper than the stuff we talked about today and in past episodes of this passive investor series, take advantage of it. We put a lot of time into it, a lot of experience, interviewed a lot of folks to make sure that we could pull together the best thought leaders into one place, one resource for all of our friends, our investors, and all of our members.
So with that, I want to remind you guys to take action, to live a life worth inspiring others, and go apply this in your life. Go figure out, hey, what is an investment summary that I'm going to go take a look at and start getting comfortable with this, start asking questions and start getting yourself to a place where you're ready to say, hey, you know, I'm going to start investing, or I'm going to start going down this path, or I'm going to start talking about this with friends so that they can start learning about some of the opportunities so they can start building the financial freedom and financial independence that they know as possible.
So I'll leave you as I always do. Thank you so much, I'm so grateful to have you guys here and thank you for all the support. If you love what we're doing definitely go drop us a review on iTunes or your favorite platform. It really helps us reach more people. And I will see you guys on the next one.
Narrator (13:41):
Thank you for listening to the investor mindset podcast. If you like, what you heard, make sure to rate, review, subscribe, and share with a friend, head over to theinvestormindset.com to join the insider club, where we share tools and strategies from the top investors and entrepreneurs, and how to take it to the next level.