Review A Deal Alert In 5 Minutes or Less
We all receive a ton of emails. Most of it we don't care about. In fact, I feel guilty sending you emails, even though I think it is precious stuff, because I know how much crap we all get… sorry. Consider for a moment the deal alert email. Think about how valuable that could be to you. To potentially double your money in five years. That seems worthy of our time. Yet, we all feel time-restricted, so we might even procrastinate on reading through an exclusive opportunity that could be the first step to changing our financial trajectory.
Remember those commercials on speed reading? I would see them as a kid, and I thought, man, if I could get through my homework in ten minutes, that would change my life. In this article, I will attempt to teach you how to speed read through a deal alert. Why put off important decisions. Reading, learning, and comprehending need a rhythm. Meandering through something at a snail's pace does us no good. Let's get to the point where we can efficiently cruise through this.
The First Glance
New deal alert emails are like a surprise gift. You had no idea it was coming, but you can't wait
to rip it open and see what's inside. The emails you receive about new deals are full of valuable information, but a few highlights you’ll want to pick out at first glance are the type of asset, market, hold time, minimum investment, and funding deadline.
If you open the email to extract only these pieces of information, you've already
avoided unnecessary information overload. All you're trying to do at this point is to find out if
these data points match your investing goals. If not, there's no reason to waste any further time
or energy. As an example:
You receive a deal alert and pull these details:
- Asset Type: C-class multifamily
- Market: Austin, TX
- Hold time: 5 years
- Minimum investment: $100,000
- Fund Deadline: 3 weeks from today
With this simple, at-a-glance information, you're able to immediately see that although this is the
perfect asset class and market you wanted, you are aiming for a longer hold or an emerging
market. Or perhaps you already know you need more than three weeks to access your capital.
If an initial look aligns with your goals, it’s time to dig further into the investment summary and explore.
As an example, you might learn that this particular deal is offering:
- 8% preferred return
- 9% average cash-on-cash return
- 17% IRR
- 20% average annual return including sale
- 2.0x equity multiple
But what does all that mean for you and your $100,000? In time, you'll get lightning-quick at this and know right away what all of that means, but right now, let's pretend this is your first go.
Preferred Return & Cash-on-Cash Return
Preferred return, a common structure for deals, means that the first percentage (in this case,
8%) of returns go 100% to the limited partner passive investors. Sponsors don't receive any returns until the property earns more than that.
This means that if you invested 50K and everything went according to plan, you should see 8%
of $100,000 or $8,000 this year, which breaks down to $666 per month.
Since cash-on-cash returns are projected at 9%, that tells you that this deal is projected to pay
out above the 8% preferred return at some point.
The next metric on the list is the equity multiple. This number quickly tells you how much
your investment is expected to grow during the project.
Continuing on the example above, your $100,000 investment with a 2x equity multiple should
work out to $200,000 once the asset is sold. This accounts for the principal, the cash flow distributions, plus the profits from the sale.
We typically aim for a 1.75x - 2x equity multiple on deals so that you can use that as your
benchmark. Lower equity multiples are acceptable for shorter holds because you can reinvest that money more quickly and get your money growing more rapidly.
Average Annual Return & IRR
Two other key metrics - the average annual return and the IRR.
The average annual return takes the total return and averages it out over the hold time.
In the example above, we discovered that your $100,000 is expected to double to $200,000 over
the next 5 years. That total return is 100% of your original investment, and when divided over
the 5 year hold period, we see that your average annual return is 20%.
The IRR (internal rate of return) is the average annual return (in this example, 20%) and factors in time. Since most of your earnings are expected later, at the sale, and time has cost associated with it, the IRR takes that into account. An IRR of 14% or more is a great target. The shorter the time, the higher the IRR. Conversely, IRR decreases as the hold-time increases.
After this 5 minute analysis of these data points, you should tell if this deal will meet your criteria. This isn't a final decision, and it doesn't mean you're putting in a wire transfer this afternoon, but it does mean you can take a deeper dive into the investment summary. Now that it meets your expectations, you can vet the team and the market.
If these numbers align with your investing goals, you can go ahead and let the sponsor know that
you're interested in requesting the full investment summary or submitting a soft reserve.
Okay, maybe you are not a speed-reader now that you made it through this article, but hopefully, it taught you, or reminded you, what to quickly scan for. Whether you’ve had funds ready for weeks or are still in limbo getting them rolled over into a self-directed IRA, it’s imperative to know exactly what you’re looking for so you can jump on the perfect deal and minimize wasted time. You have too much spam to delete (this isn’t spam!). Now you are ready for your next deal alert. It may come sooner than you think.