If we had to guess, we’d assume that you first became interested in real estate syndications because of the opportunity to put your hard-earned money to work for you by creating good returns and growing your wealth over time. Does that sound about right?
Maybe that’s why you were attracted to your day job or career path too! We totally get it – we met in medical school, both going through to become Physicians Assistants because we wanted to help people and, of course, the anticipated income was attractive.
Before investing in their first real estate syndication deal, most potential investors want to know if they were to invest $100,000 with us, how much money they could expect to make in return.
While we love healthy returns, and those returns are a big part of why we do what we do, there’s another aspect that’s even more crucial to us. Returns are certainly important, but there’s another factor even more important that we focus on when evaluating potential deals.
We admit it’s not nearly as exciting as discussing passive income and double-digit returns, in fact, the topic is quite boring.
The most important thing we focus on in a real estate syndication deal is capital preservation. To put it simply, we focus on making sure that the deal has multiple plans in place to protect from any loss of investor capital. As boring as it sounds, protecting your money is our number one priority.
Why Capital Preservation is Crucial to Your Success
While capital preservation isn’t the most exciting part of investing in a real estate syndication, it’s definitely one of the most critical pieces.
It can be tempting to focus only on cash flow returns, potential earnings, and brightly colored marketing packages, but when an unexpected situation arises, you’ll be thankful for a sponsor team that holds capital preservation in the highest regard.
To preserve investor capital, risk mitigation has to be a top priority throughout the lifecycle of a syndication deal. Regardless of the type of investment you choose or who you invest with, you should know what questions to ask and what to look for so you can invest confidently with a sponsor team that keeps your best interest in mind with every decision they make.
The 5 Pillars of Capital Preservation
Capital preservation is at the core of every investment we participate in, here at 25/8 Capital. To keep capital preservation as our number one priority, we use a framework of five building blocks that make up our capital preservation strategy.
#1 – We raise money to cover capital expenditures upfront
Using cash flow to fund capital expenditures can create endless problems for a real estate syndication deal. When major repairs or renovations are funded purely by cash flow, any unexpected issue that arises inadvertently throws a wrench into the budget and consequently the renovation schedule as well.
For instance, if cash-on-cash returns, which we know vary based on occupancy and maintenance costs, had to fund a sudden HVAC repair instead of planned unit renovations, the business plan would likely fall behind schedule, having units not ready as planned, creating an increased vacancy rate.
In every deal, we make sure the funds for capital expenditures are raised and set aside upfront. More specifically, if we need $2 million for the down payment and $1 million for renovations, we will raise $3 million upfront. This means we have $1 million cash for renovations and will never have to rely on monthly cash-on-cash returns.
#2 – We purchase cash-flowing properties
A great strategy to preserve capital is to purchase properties that are already producing cash flow, even before improvements. That way if anything unexpected happens, like units not filling as planned or the business plan not going smoothly, just holding the property would still allow positive cash flow.
#3 – We stress test every investment
With every investment deal, we perform a sensitivity analysis on the business plan before investing. This allows us to see if the investment is strong enough to weather the worst conditions. For example, what if vacancy rose to 15% or what would happen if the exit cap rate ends up higher than expected?
It’s easy for properties to look wonderful when they’re featured in fancy marketing brochures with attractive projected budgets. Stress testing those numbers helps us analyze how the performance of the investment may change based on potential variability in variables.
#4 – We have multiple exit strategies in place
As with any disaster or emergency, you want to have several exits available. In case of a fire, for instance, you want a door and window easily accessible to you. The same concept holds for real estate syndications.
Although the plan may be to hold the property for five years, no one can predict what the market conditions will be at the five-year mark. It’s important to have contingency plans in place. Our backup plan may include holding the property longer or possibly preparing the property for different types of end buyers, like private investors or institutional buyers.
#5 – We put together an experienced team that values capital preservation
One of the most critical pillars in our strategy is to form a team that values capital preservation. This includes both the sponsor and operator teams, as well as the property management team. Ideally, everyone on the team should be passionate about their role and display a strong track record of success.
The more expertise the team members have in successfully navigating tough situations, the better they’ll be at protecting investor capital.
Why Capital Preservation Matters
Capital preservation isn’t the most exciting part of a real estate syndication, but it’s definitely one of the most crucial factors in building a solid investment deal. Every decision and initiative we make is rooted in preserving investor capital.
We don’t want to lose any of our hard-earned savings either, and since we always contribute capital into deals offered through 25/8, meaning we’re invested alongside you, if you lose money, so do we. If something goes wrong it reflects poorly on our business, our pocketbooks, and our reputation. So, rest assured we’re doing everything we can to mitigate risk in every syndication we offer through the 25/8 Investors Club, which ultimately benefits you and your returns!
Our five capital preservation pillars we use in every real estate syndication deal include the following:
- Raising money to cover capital expenditures upfront
- Purchasing cash-flowing properties
- Stress testing every investment
- Having multiple exit strategies in place
- Putting together an experienced team that values capital preservation
By using this capital preservation framework, we’re able to minimize investor risk as much as possible. We ensure that every decision we make regarding the property is rooted in protecting your money, first and foremost.