You placed your investment. You have your first distribution. Success! You are now a passive real estate investor.
But your journey has only begun. As a limited partner, you now must track the performance of your portfolio. As someone who understands the power of alternative investments, I’m thrilled to share some valuable insights with you. So, let’s get started and discover the best practices for monitoring and evaluating your private real estate equity investments.
How to Begin Tracking Your Investments
After performing due diligence on your investments prior to investing, tracking the performance of your portfolio becomes the next step to guarding and growing your wealth. Here are eight areas to concentrate on as you set up your tracking process.
1. Establish Clear Investment Objectives
Before we delve into tracking your private real estate equity portfolio, it’s crucial to establish clear investment objectives. Ideally, you have set your objectives before making any investment. However, I speak to many investors who already hold several passive investments and have not clearly defined their goals. They wonder why their portfolio isn’t meeting their expectations and needs. If this is you, don’t fret! Ask yourself, “What are my financial goals?” Are you looking for consistent cash flow, long-term capital appreciation, or a balanced combination? Defining your objectives will help you select appropriate benchmarks and metrics to measure your portfolio’s performance against.
2. Monitor Investment Returns
Once you have your objectives established, tracking your investment returns is essential to gauge the success of your private real estate equity investments. Passive real estate investments typically generate returns in two ways: cash flow distributions and capital appreciation upon exit. Even as a passive investor, you should regularly monitor these returns and compare them to your initial investment to assess performance. The best way to do this is to utilize the detailed financial statements and reports provided by the investment manager or sponsor.
3. Evaluate Cash Flow Distributions
Even if you determined that equity is your number one goal, you shouldn’t forget to track cash flow. Cash flow distributions are a vital component of private real estate equity investments. These distributions represent the income generated by the underlying real estate assets in the portfolio. Track and analyze the consistency and magnitude of your cash flow distributions over time. Comparing actual distributions to projections and benchmarks will give you insights into the performance of your investments and help you make informed decisions when an operator asks if you want to participate in future deals or a 1031 exchange.
4. Assess Total Return, Internal Rate of Return (IRR), and Cumulative Preferred Return (Cumulative Pref)
Cash flow, total return, IRR, cumulative pref, and equity multiple are essential metrics for evaluating the overall performance of your private real estate equity portfolio. The total return combines both cash flow distributions and capital appreciation upon exit. The IRR measures the annualized rate of return you receive on your investments. The cumulative pref (if offered by the operator) represents the cumulative amount of preferred return owed to investors. The equity multiple calculates the total return multiple relative to your invested capital. You should regularly calculate and assess these metrics to understand your portfolio’s profitability, efficiency, and alignment with the investment objectives. This will help you make informed decisions when an operator asks if you want to participate in future deals or a 1031 exchange.
5. Track Portfolio Balance and Allocation
As a passive investor, monitoring the balance and allocation of your private real estate equity portfolio is crucial for maintaining a well-diversified investment strategy. A passive investor can truly diversify in three areas: who they invest with (the operator), where they invest (the market), and the deal (the asset type and business plan). This means you should regularly review the allocation of your investments across different property types, geographic locations, and investment strategies, even operators. Assessing the balance of your portfolio and adjusting as necessary to ensure appropriate risk management and maximization of returns.
6. Monitor Investment Lifecycle and Exit Strategies
When crafting and monitoring yourportfolio, pay attention to the specific lifecycle and exit strategies you are investing in. This means staying informed about the investment’s progress, including critical milestones and potential exit opportunities. Monitor the investment manager’s updates and communications regarding the potential sale or refinancing of properties in the portfolio. Evaluating the investment’s progress against the projected timeline will help you assess performance and make timely decisions.
7. Stay Informed about Operator Communications, Tax Document Delivery, and Potential Issues
I have learned to covet this often overlooked tracking metric. As your deal progresses, track how easy it is to maintain open communication with the investment operator or sponsor. This could be as simple as staying informed about their regular updates on the performance of the investments, strategic decisions, and any operational changes that may affect your portfolio. However, if you need more information or if reporting is incomplete, track how easy it is to get your questions answered. Additionally, ensure you receive timely delivery of tax documents and financial reports related to your investments. And, of course, stay proactive in addressing any issues that may arise, such as paused distributions or capital calls, and work closely with the operator or sponsor to resolve them.
8. Utilize Technology and Professional Assistance
Once you have scaled between 15-20 passive investments, you may want to consider leveraging technology and assistants (professional or virtual) to streamline and enhance your tracking efforts. This could be as simple as utilizing investment management platforms, portfolio tracking tools, and reporting systems provided by your investment manager or sponsor. These resources can provide real-time updates, comprehensive reports, and analysis of key metrics. Another alternative is hiring an assistant part-time to help track performance for you (my personal virtual assistant spends about ten hours a month completing a spreadsheet I designed; however, his efforts allow me to review my entire portfolio in one hour or less each month and know exactly where everything stands). Additionally, consider seeking advice from mentors or consultants specializing in private real estate equity investments to help you navigate upcoming decisions.
Tracking your private real estate equity portfolio’s performance is crucial to ensure your investments’ success and growth. By establishing clear investment objectives, monitoring investment returns and cash flow distributions, assessing total return, IRR, cumulative pref, equity multiple, portfolio balance and allocation, staying informed about operator communications and tax document delivery, and utilizing technology and professional assistance, you can gain valuable insights into your portfolio’s performance.
Passive real estate investments can provide unique opportunities for income generation and capital appreciation. Stay proactive, embrace these tracking techniques, and make informed decisions based on your portfolio’s performance. With dedication and strategic monitoring, your private real estate equity investments can help you achieve your financial goals and build long-term wealth.