The best bargains and the worst deals can be found in real estate private placements.
Our hope, as an investor, is that we avoid the prospect of falling prey to a "bad" deal.
Like most things in life, there are no guarantees, and this is especially true with investing, since, in most cases, we rely on the use of pro-forma data when selecting partnerships.
That said, by considering the MATH, we can at least minimize the likelihood of unwittingly investing in a deal that is, at best, less desirable than other options we may be considering. Always consider the MATH.
This tool should only be used as as an early warning system.
The EQUALIZER™ uses only 3 numbers from the PPM to determine (1) how much investors are paying for the property, and (2) whether transaction is fairly priced.
Using this simple approach provides you with an easy method to compare "partnership purchase prices" and saves you hours of analyzing what may be superfluous numbers contained in assorted placement memorandums that compete for your investment dollars at any given time.
The EQUALIZER™ is meant to be used as a "screening" technique, which can help you quickly sort through the pro-forma data of multiple deals to pick those that merit further consideration vs. those that you should not waste your time with.
While there are other factors that should be considered, which will likely ultimately impact the actual/future results, those will take a bit more work on your part and will require the use of other analytical tools as you move forward with due diligence and, should you invest, track the progress of your partnership investments with information gleaned from the ongoing financial reporting of the Partnership.
Debt terms undertaken to acquire the property(s), the manner and type of Sponsor Compensation, the property's actual future financial performance including the relative allocations of cash flows to the Passive partners vs the Sponsor (including overrides) , and, in some cases, the tax laws, are additional factors that will also greatly impact whether your investments are successful.
The EQUALIZER™ is very straight forward: if the gross "partnership purchase price" is relatively too high (i.e. a low EQUALIZER™) at the outset, consider your other options because there is likely no "magic sauce" that will change the ultimate outcome.
The EQUALIZER™ does not predict the rate of return on investment. For this, we now look at some other tools.
Rate of Return
Over time, the cash flow, appreciation, and in some cases, tax benefits, must be considered to calculate the rate of return.
Two of the most common calculations for prospective analysis are: the Adjusted Rate of Return and the Internal Rate of Return.
We show you how to gather the necessary data and calculate both of these using a financial calculator on the Rate of Return page.
NOTE: One problem when comparing different investments using rate-of-return analysis is the probability of achieving the projected result.
For instance, a single-project research and development partnership could show a 38% internal rate of return. But, the odds of success are one in nine.
Buying "up and built" multi-family apartment buildings may show a 14% internal rate of return, but the odds of success are almost one out of one. As such, quantitative return calculations need to reflect the probability of success.