5 Questions to Ask a Real Estate Operator Before Investing
Investing in private real estate can provide opportunities to participate in properties and investment strategies that may not be accessible through traditional investments. But before committing capital, it is important to look beyond the investment opportunity itself and consider the team responsible for executing the strategy.
A real estate operator may oversee property acquisitions, financing, improvements, day-to-day operations, and the eventual sale or refinancing of an asset. Asking the right questions about the operator can help you understand how the investment will be managed and whether the opportunity fits your investment objectives.
Why Evaluating the Real Estate Operator Matters Before You Invest
In a passive real estate investment, you are not handling the day-to-day decisions involved in managing the property. The operator takes on that responsibility and puts the investment plan into action throughout the holding period.
Getting a clear picture of who is managing your investment can help you decide whether the opportunity deserves a closer look. It also gives you a better basis for evaluating the details presented in the investment offering.
Before committing your capital, here are five questions worth asking a real estate operator.
1. The Operator’s Track Record
Start by looking at the operator’s experience with investments similar to the opportunity you are considering. Experience alone does not guarantee future results, but a relevant track record can give you a better sense of whether the operator has worked with comparable properties, markets, and investment strategies.
When reviewing that track record, look beyond how long the operator has been in business. Consider the types of properties they have invested in, the markets they have operated in, and how previous investments performed. Where available, compare actual results with the original projections to see how closely investments performed against the initial targets.
2. The Investment Strategy
You should understand how the investment is expected to generate returns before committing your capital. Ask the operator to explain the business plan, including why the property was selected and what actions are planned during the holding period.
Depending on the investment, the strategy could involve renovations, improving occupancy, increasing rental income, controlling expenses, refinancing, or selling the property after creating additional value.
Pay attention to the assumptions behind the strategy. Projected rent growth, occupancy, renovation costs, financing terms, and the expected exit value can all affect potential returns. Understanding these assumptions can help you evaluate whether the business plan is realistic for the property and market.
3. The Approach to Investment Risk
Every real estate investment involves risk, so projected returns should never be considered in isolation. Ask the operator to identify the main factors that could affect the investment and explain how those risks are being addressed.
Depending on the opportunity, risks could include changes in property values, interest rates, occupancy, operating expenses, financing costs, or local market conditions.
It is also important to consider what could happen if the original business plan does not go as expected. Look for contingency plans that address potential challenges and consider how the operator has responded to similar situations in the past.
You cannot eliminate every potential risk, but understanding how an operator identifies and manages uncertainty can give you a clearer picture of the investment.
4. Investor Communication and Transparency
Communication matters when you are investing passively because you are not managing the property yourself. Before investing, ask how often you will receive updates and what information those updates will contain.
Investor reporting may include financial performance, occupancy, operating results, distributions, capital improvements, or significant changes to the business plan. You should also understand how you can access important investment documents and who to contact when you have questions.
Transparency is particularly important when an investment faces challenges. Understanding how and when the operator communicates significant developments can help you know what to expect throughout the investment period.
5. Alignment Between the Operator and Investors
Take time to understand how the operator participates financially in the investment and how it earns compensation. Ask whether the operator invests its own capital alongside investors and how the ownership structure works.
You should also review the fees associated with the investment. Depending on the structure, these could include acquisition, asset management, property management, financing, or performance-based fees.
The goal is to understand how the operator’s incentives work and what you are paying for. A clear explanation of fees, compensation, and financial participation can help you evaluate whether the investment structure makes sense for your objectives.
Real Estate Investment Due Diligence: What to Review
The questions you ask the operator give you a starting point, but the next step is to review the investment documents in detail. Look beyond the headline figures and read through the information that explains how the deal is structured and how the projections were developed.
Pay attention to the assumptions behind the financial projections, the terms of the investment, and any fees or obligations that apply. If the documents contain information that differs from what you were told, or if something is difficult to understand, raise it with the operator and ask for clarification.
Explore Your Real Estate Investment Options
The right investment starts with understanding the opportunity and the team behind it. Once you have reviewed the investment details, considered the potential risks, and asked the questions that matter, you can decide whether the opportunity fits your goals.
Bighorn Capital Fund provides access to private real estate investments for investors looking to participate in professionally managed opportunities.
Review the available offerings to learn more about the investment structure, strategy, and terms.
Frequently Asked Questions
What does a real estate operator do?
A real estate operator manages the strategy and operations associated with an investment property. Depending on the investment, this may include acquisition, financing, property improvements, operations, asset management, and disposition.
How do I evaluate a real estate operator's track record?
Review previous investments, including comparable properties, markets, investment timelines, and outcomes. Where information is available, consider how actual performance compared with the original projections.
What factors can affect returns from a private real estate investment?
Property performance, rental income, occupancy, operating expenses, financing costs, interest rates, market conditions, and the eventual sale price can all affect investment returns.
Is passive real estate investing really passive?
Passive real estate investing generally means you are not responsible for the property’s daily management or operations. However, you still need to conduct due diligence and understand the investment before committing your capital.
Why is investor communication important in private real estate investing?
Regular communication can help investors stay informed about financial performance, property operations, distributions, and significant changes to the business plan.