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3 Red Flags to Look for When Evaluating a Private Real Estate Investment Opportunity

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3 Red Flags to Look for When Evaluating a Private Real Estate Investment Opportunity

It’s natural to have concerns if you’re investing in private real estate for the first time: You may be overly cautious about investing in private real estate due to its high fees or concerns about Ponzi schemes.

You don’t want to fall prey to red flags you should have seen before you invested in private real estate.

If you find a company the target of fraud investigations, hidden risks or tucked-away fee structures, keep shopping. These three major red flags should be able to help you find a safer alternative.

Fraud Investigations

Clearly, you want to avoid any company that shows evidence of fraud investigations. You want to thoroughly Google the following:

  • The CEO and past connections
  • The company and its team
  • Look for self-dealings, FBI investigations, previous investor complaints and more.

Hidden Risks

All investments involve risk, but you want to consider any not-so-obvious types of risk:

  1. No clearly defined strategy. Make sure the company you plan to invest with limits deals to asset classes that complement their expertise.
  2. Overpaying for a property. Does it adhere to the same stringent underwriting standards used by pension funds and institutional investors to meet projected returns?
  3. Not using leverage responsibly. How is borrowing done to ensure cash flow? It's easy to manipulate returns by borrowing irresponsibly. Origin Investments, a real estate fund manager, warns that more leverage can mean more risk and cautions investors to ensure they are adequately compensated for the level of risk taken.

When it comes to assessing risk in real estate investing opportunities, ask yourself the following questions:

  • What is my investment timeline and liquidity requirement?
  • How do I research and evaluate private equity opportunities?
  • What types of strategies and allocations make sense based on my existing portfolio holdings and risk tolerance?
  • How can the company anticipate industry trends and opportunities for growth?

Hidden Fee Structure

Scour the prospectus to find any telling language that suggest commissions and organizational costs are smuggled into page 324 of the prospectus:

  • Look for fees in a private placement memorandum.
  • Find fees in marketing materials.
  • Ask about transaction fees and performance-based fees.
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In fact, all risks, return opportunities and financial projections should be outlined. Read them, perform independent analysis, and look for these specific elements to ensure the company’s transparency. If you discover hidden fees, walk away. Look for alignment between how the firm and the investor make money. For example, Origin Investments' fee structure is largely performance-based so they make money only when the investor makes money.

Ask yourself:

  • Am I comfortable with the fees?
  • Once I invest, how does the company communicate ongoing performance information?
  • What will the company do to generate returns, such as reducing operating expenses, optimizing assets or additional acquisitions?
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Trust Origin Investments

Origin Investments is a real estate investment firm that acquires and builds multifamily properties in eleven fast-growing markets: Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, Nashville, Orlando, Phoenix and Raleigh.

The firm is Chicago-based, with additional offices in Charlotte, Denver and Nashville. Origin has executed more than $1 billion in real estate transactions. The firm, originally founded in 2007, recently raised more than $150 million for Origin Fund III and is currently fundraising for their open IncomePlus and Qualified Opportunity Zone Funds for accredited investors.

 

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Posted-In: Real Estate