Investors have sought opportunities to invest in real estate for decades because of the asset class’s reputation for generating passive income and long-term appreciation, producing performance uncorrelated to public equity markets, and having attributes that make it an inflation-resistant investment.
Investors have sought opportunities to invest in real estate for decades because of the asset class’s reputation for generating passive income and long-term appreciation, producing performance uncorrelated to public equity markets, and having attributes that make it an inflation-resistant investment. However, not every real estate investment manager or sponsor (Sponsor) is created equal, especially when it comes to their investor relations program.
Before diving into the attributes of a strong investor relations program, let’s first take a look at three ways investors can invest in real estate.
- Some investors prefer to do it alone and purchase single-family or multifamily properties to build their real estate “empire.” This can be a challenging way to invest in the asset class, especially if the investor has yet to gain experience investing in or managing investment properties.
- Investors can choose to invest in a single project through a syndication. With this type of investment, the investor identifies a Sponsor they trust and invests directly into a holding company structure, typically an LLC. The LLC holds a single real estate asset or project, and the investment horizon is generally less than three years.
- Investors can choose to invest in a private real estate fund. Real estate investment firms tend to be more sophisticated with robust policies and procedures, experienced teams with decades of experience and provide regular reporting on the fund and the individual assets. Fund strategies and structures can vary, but generally, the investment horizon is 5 – 7 years, and the Sponsor invests in a single asset class (i.e., commercial real estate).
Investors should assess which type of investment is best for them and then identify a reputable Sponsor with a solid track record to invest alongside. A further description of the differences between syndications and investment funds can be found here.
Building strong investor relationships in real estate is an art that requires a combination of communication skills, honesty, transparency, and a commitment to delivering results. In the following paragraphs, we share six attributes that we believe are the foundation of a strong private real estate investor relations program.
Do Your Research
It’s essential to understand who your investors are—their goals, preferences, and risk appetite—before raising capital. This knowledge helps formulate the strategy and identify assets that align with investor preferences. Of course, it is important that the strategy includes investing in assets the Sponsor is familiar with. For example, investing in hotels entails a different approach than investing in multifamily assets. Aligning the investment strategy with investor preferences will help the Sponsor tailor communications and approach to meet their needs and expectations.
Build Genuine Relationships
This may seem obvious, but investing time in building genuine, long-term relationships with investors is critical to the Sponsor’s success. Be authentic, responsive, and professional. Promptly respond to messages, emails, and calls. Prepare thoughtful responses to investors’ questions and put time into establishing a regular check-in cadence. Remember, the Sponsor isn’t just raising capital for this fund. They’re raising capital for funds two and three.
Transparency is King
Transparency fosters trust. Be transparent about the fund’s investment strategy, goals, returns, and market research. Every Sponsor encounters challenges. Establishing open communications and detailed reporting from the beginning will instill investor confidence and help them weather any storms along the way.
Establish a Communications Cadence
Keeping investors informed of investment performance on a regular cadence is essential to establishing a long-term relationship built on trust. Although quarterly reporting is most common in private real estate investing, it is important to be consistent and timely with both the reporting and what information is being shared. Regular reporting provides investors peace of mind knowing their investment is being managed professionally.
The Proof is in the Pudding
Investors are looking for more than just financial returns. They want to see a tangible product, such as a well-managed and profitable real estate portfolio. Include pictures of the properties in quarterly reporting, and when applicable, provide before and after photographs of projects. Invest time into building a strong portfolio that delivers results.
Private real estate investing is a long-term commitment. The Sponsor should ensure to align themselves with investors that have a long-term investment horizon, not those looking for “quick hits.” These investors tend to be sophisticated and understand that there will be ebbs and flows, especially with value-add investments.
Establishing an effective private real estate investor relations program is an art. Careful attention must be given upfront to develop relationships with investors aligned with the Sponsor’s strategy and goals. Ongoing reporting, check-ins, and other communications will strengthen the relationship and potentially lead to them investing in future funds or projects.