Break Of Day Capital

Break of Day Capital - Real Estate Investing Made Easy - Multifamily Investing - Passive Income

Sponsor Due Diligence

Occasionally I hear from new investors that our projected IRR, Internal Rate of Return, or cash flow isn’t as high as another deal and they are right. We will never have the highest projected IRR or cash flow as a lot of deals out there. We focus on de-risking the asset first which means we don’t account for a perfect scenario to woo investors. We know things won’t go perfectly smooth as life doesn’t work that way though we will try our darndest to make it happen. The numbers aren’t the most important aspect to look at in a deal, it is the operator.

Think of the operator as a sports team’s coach. While the physical property is akin to the star player, garnering attention and praise, the operator’s leadership is what truly shapes outcomes. A skilled operator can maintain high occupancy rates, maximize rental income, control costs, and adapt to market changes and regulations. Conversely, an inexperienced or ineffective operator can lead to poor property management, increased vacancies, reduced rental income, and rising costs, similar to how a misguided coach can lead a team to failure.

Inexperienced operators often make common mistakes, such as mismanaging variable debt, lacking understanding of market hedging, overly aggressive underwriting, misjudging loan agreements, and being unprepared for market downturns. Moreover, they might fall prey to flashy yet ineffective strategies promoted by self-proclaimed real estate “gurus.” Even high-profile operators are not immune to challenges, as ambitious assumptions and unrealistic projections or growing way too fast can lead to major issues.

For more on questions to ask a sponsor before investing, please see our investor tools page to download our evaluating a sponsor/deal spreadsheet.

Leave a Comment