I am always building relationships with and teaching people who share a desire to invest into our ventures. In my many conversations, I’ve been keeping track of every question they have asked. Then, I’ve decided that I’ll limit my list of queries to the top 20 questions and sorted by (1) questions about the sponsor’s organization and organization, (2) financial metrics as well as related risk, (3) process / time frame along with (4) generally.
Q1: What is the Sponsor’s history?
A1 Answer: The solution to this question will differ according to the Sponsor. Each has their own background as well as business model, and therefore an individual experience. To address our Sponsors in particular we only work with those we believe to be the high-quality sponsors in their field with high-value values. With a primary focus upon Limited Partners (LPs) (i.e. Capital preservation, and protection against downside) and have a long-standing history of success. If you’d like to get a more precise breakdown of the five sponsors I’m happy to provide you with a single pager in the event that you request it by email.
Q2: Does the Sponsor make a commitment in their own deals? If so, why do they invest at a low amount?
Answer 2: The popular answer is yes. Sponsors invest in conjunction with LPs through their deals to demonstrate the alignment of their investments, and they’re keen on the substantial returns they anticipate. For small amounts of investment some of our Sponsors annual deal flow is extremely impressive, they’re not doing a couple of deals each year like the majority of individuals but they may be doing five or 10! A $50K investment in five or 10 deals over one year equals between $250 and $5000 in the course of the course of the year! This isn’t a tiny amount. Another thing to take into consideration is that a lot of Sponsors are the guarantors of the secured loan on the property, which can ease the requirement to have the liquid personal balance sheet.
Q3: what is the manner in which the deal is designed and do they allow non-accredited investors to join?
A3: The solution to this question differs. But, more often than not, syndicated deals are structured as 506(b) under SEC Regulation D with no spots for non-accredited/sophisticated investors. Check out my blog on this issue here to get a more thorough analysis.
Q4: What’s the hold strategy? And how do I anticipate investing in this?
A4: A typical hold strategy is 3–7 years hold, with an average duration of five years. A majority of sponsors have clauses in the legal documents which allows the possibility of a longer period of holding (say 100 years). The reason this clause is exaggerated is that we aren’t at any time compelled to sell due to external forces. Our aim is to maximize value, which allows us to stay in the downturn in the market and keep waiting until the market is back to normal.
Q5: what is the way in which the deal is designed with regard to profit sharing and both LP & GP?
A5 Our Sponsors design their deals to be the waterfall. One of the first “hurdle” in the waterfall is the preferential return (pref) in which LPs get 100% of the profits until they achieve an 8 percent return. After that hurdle, the majority agreements are designed with a split of 70/30 (you may encounter different splits for other sponsors) which means that all profits made after the pref of 8% are divided at 70 70% to the LPs, and 30 percent to the General Partnership (GP). It is possible to often see another IRR hurdle, in which after XX percent IRR (typically 15–18 15%) the split is the ratio of 60/40 and 50/50. If this adds some confusion, I would suggest that you focus on the expected yields (see A7) because they are much more straightforward and include the waterfall structure into.
The information will be provided in full detail and easily accessible in the summary of the investment.
Q6: What are the most common costs and how do the Sponsor make income?
A6: First of all the fees are all separate from projections of return. That means that fees have no effect on the returns that are included on any one of our deal decks. Also, the LPs do not have to pay any charges “out of pocket.” However, sponsors usually earn their money through three different ways. (1) A fee for acquisition (1–3 percent of the purchase cost) that is due at the time of closing and covers all the costs related to locating and placing the property on agreement. (2) Asset management fees (1–3 percent of monthly income) that covers the costs that are associated with the execution of the business plan, managing the property management company and the construction management company in identifying and implementing value add strategies, enhancing operational efficiency and more. (3) The profit split after the pref. The standard in this case is 70/30 (70 percent to the Property Management Company and 30% to percent for the GP) However, there are also 60/40, or 80/20.
Q7: What are the projected returns?
A7: Common estimates of returns are as the following:
Return preferred (pref): 8 percent (LPs are paid the entire profit up to them have reached 8 percent CoC)
Rate of Return (IRR): 16–22 percent (a time-sensitive percentage at which the cash increases annually over the course that the program)
Cash-on-cash (CoC): 8–12 percent (a yield which determines the cash return from, or the proportion to the amount of cash that is invested, which is measured annually)
Multiple of equity: 1.7–2.3x (on a $100K investment, LPs earn between $170 and $230K with the return of their the initial investment)
In reality, our Sponsors regularly exceed the expected return, which is possible because of our underwriting practices that are conservative.
Q8: Is there a minimum amount to invest?
A8: $50,000, with an increment of $5,000.
Vairt is a crowdfunding platform for investing, tokenizing and liquidating real estate assets through Blockchain. Once you are ready to make an investment, you can make an investment in less than 2 minutes. Sit back and relax as your property gets funded. Vairt analyzes Property Investment Opportunities using a 100-point proprietary screening tool and independent third-party market data to assess the investment attractiveness of each property. We give you the opportunity to invest in real estate for as little as $5000. All properties on our platform are listed for 30 days to give investors ample time to raise funds.