The top questions an Investor should be asking as to why invest with JMG
The problem with relying on projections to make investment decisions is any deal can look great by tweaking one or two variables. So, the challenge for investors trying to figure out which deals will meet or exceed expectations, and which ones will become a “learning” experience is finding a good asset manager.
It’s the manager who decides what price to pay for an asset, how to build value, appropriate capital structure, how to course correct when things go wrong and when to exit. A good manager will be realistic and thoughtful about the assumptions. Finding someone like JMG who will behave reasonably and responsibly is paramount to success in this investment.
That makes asking the right questions critical during the due diligence phase to understand if the JMG investment strategy fits your personal risk profile. Open-ended questions are great as they force the manager to think about what they are going to say instead of offering up a scripted answer. So, what to ask? Basic due diligence questions include probing the real estate manager’s historical track record, the quality of their team and their strategy.
# 1 Question every assumption
One of the best ways you can ascertain a manager’s approach is by questioning every assumption in the model. Projections are only as good as the inputs, and every one of them is at the discretion of the manager. How a manager underwrites a deal will be a telling sign of how aggressive or conservative they are.
The first thing to note is the projected IRR. If you look at ten opportunities in the same industry and the IRR projections range between 16% and 19%, what is the likelihood that another sponsor can achieve a 30% IRR? The market is generally efficient, so beware of aggressive marketing tactics.
What is their exit cap rate assumption, and is there a built-in cushion for expanding rates? Are market CAP rates going up or down? Buying the right property at the right time is critical. It’s easy to make a pro forma look great by simply tweaking the exit cap rate. Generally, exit cap rates should be 50 to 100 basis points higher than today’s cap rates to account for risk. Make sure that the value creation is not financially engineered. Good managers create value by increasing net operating income. How are they going to achieve this? JMG understands current rental vs. the market. Net operating income is impacted most by occupancy and rental rates. What is their assumed growth revenue rate, and how do they determine it? What is their terminal occupancy rate? Every pro forma has an occupancy assumption at stabilization. Make sure the property is in line with the rest of the market, or slightly below it. If you can’t get past this section, don’t bother with the other 5 questions below.
# 2 “How much of your money are you investing in the deal?”
Alignment is everything. Your manager should be investing a significant amount of his or her own capital (not capital funded by others) right along with you. And the bulk of his or her earnings should come from investment returns — not transactional fees. “Skin in the game” ensures that they are motivated by the right outcome.
# 3 “What is your competitive advantage in the market?”
What does JMG believe his or her team does better than anyone else in the market?
- Our employees most of which have been working here for many years.
- One of the best maintenance teams in the industry.
- JMG pays special care to all tenants at each property. If they don’t have a competitive advantage, then why invest with them? A competitive advantage is generally something quantifiable.
- JMG usually looks at 5-8 properties before deciding on buying 1 doing this ensures better financials going in.
# 4 “How do you ensure that my capital is protected in a down market?”
What is it about their strategy and their track record that makes you feel comfortable?
- Good LTV (loan to value) usually 67-75%
- Have they consistently beaten their own projections? How much leverage do they use?
- JMG invests 10-15% on a given deal
- Great and verifiable track record of over 20 years of multifamily investing.
# 5 “Can I speak with some of your current investors?”
Try to pick a random investor instead of one they give you. A current investor can help answer questions like how long have you been an investor with JMG? What was their experience? Would they recommend JMG?
- Currently investors are referenceable upon request.
# 6 “How is your company funded?”
This question is designed to determine whether or not the company has ample cash flow to pay the bills. Is there risk that they will go out of business? JMG has been in business for over 20 years. What does their balance sheet look like?
$1.4 – $1.7 million annually
If the project runs out of money, will they lean on you for additional capital? Avoid managers who operate on shoestring budgets or are just starting out. If you are buying into a fund, it’s best to wait until Fund II or III, after the kinks have been worked out. But whether investing through a fund or not, experience matters. It may be best to wait until the management team is more experienced and better financed.