There is always risk in any investment vehicle. This is an important consideration to have up front. Not every grape in the bunch is sweet.

This is also good reason to do your own due diligence on your sponsor and any deal they bring your way.

By due diligence, I mean make sure to look at the business plan and check that the numbers make sense.

I have a previous post on calculating NOI. Take your total income – operating expenses.

This can be used to find the cap rate or the appropriate property value.

A lower cap rate will probably be a buy and hold with minimal value add. The market is compressed.

A high cap rate means there is a lot more room for returns. It is also more likely to be value add.

If it is a buy and hold, make sure it has a healthy NOI. If it is a value add, pay attention to your sponsor’s business plan. They need to be able to execute that plan and stabilize it in a timely manner. This may take 3 years, but can also produce massive returns.

The biggest mistakes in real estate are made due to buying poorly and being ill prepared. Be sure your sponsors have buffers for the unexpected in their underwriting.

Don’t be afraid to ask if they have business insurance. Ask them about their legal structure, so you know who they have on their team.

Also, ask about their level of experience and that of anyone they are partnering with. A seasoned team may have had their sour grapes, and will know how to navigate through them.

Finally, make sure you know what you can afford to lose. Don’t invest your money if your financial house is not in order. Investing is not a financial nightmare cure. It is a tool that is best implemented once you’re ready.

Good luck, and happy due diligence. Be sure to follow for continued learning on navigating CRE.