Founder of Vive Fundsa unique multi-family investment firm that specializes in building high-quality assets for our investors.
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Wealthy investors tend to be the most sought after individuals by private investment opportunities. They have the money to invest and many of these individuals are experienced investors. Over the years I have been fortunate to have many such individuals invested in my projects. Not surprisingly, many of these individuals share common traits and concerns when it comes to investment. They have experience and many have sound financial advisors to ensure prudent actions. In my experience as an owner-operator of a large multi-family syndicate, here are some of the areas high net worth individuals focus on when investing in private opportunities:
Head protection:
One of the core components of their investment strategy is the need to provide ‘head protection’. While all investors aim for a return on their investment, many want to ensure they get their principal back at the end of the investment period. While all investments involve risk, multifamily opportunities can be relatively safe investments compared to other investment vehicles. All investments are structured in such a way that they are backed by the underlying asset. High net worth individuals know this fact and invest with confidence that their principal is protected.
Load Efficiency
Taxes are always a major concern for this class of investors. They are often looking for profits that lead to minimal taxes. Although each individual case is different, a deduction for property on a K-1 statement may allow for tax foreclosure. This is a powerful magnet for wealthy individuals. I suggest you consult your financial advisor or tax accountant to determine your obligations.
Risk-adjusted return
A risk-adjusted return is the profit made relative to the risk incurred by the investment during the period of the investment. US Treasuries are considered the standard of very low risk investment, and measuring the risk of an investment against it is a prudent basis for analyzing the risk of investing. Based on this, a multi-family home can be an attractive investment, provided it is properly insured.
Sponsorship experience and trust
This is an area that multi-family project sponsors neglect at their own risk. I’ve found that for the most part, high net worth individuals are pragmatic financial investors. They don’t give up their trust easily. Sponsors have to work hard to get to this level, and once trusted, it’s a continuous journey. Ongoing interaction with high net worth investors is mandatory to maintain a high level of trust. This is especially true during uncertain macroeconomic financial conditions such as high inflation, rising interest rates, pandemic, etc. Many questions will be asked and sponsors must answer them quickly and openly.
These investors understand that some conditions that negatively affect investments are not the sponsor’s fault, but in my experience investors are comforted by honest, open discussions about the cause and effect of these situations. Of particular interest, they look for actions sponsors take to minimize the effects of pernicious conditions. For example, during the pandemic, it could be foreseen that many jobs would be lost and, as a result, default rates would rise. Thus, protecting cash flow and deferring costs becomes a primary concern. Investors should know that sponsors are proactive in this regard. Communication is key.
Long-term outlook
Wealthy individuals look at the long-term horizon when investing. They understand that investing is a long game. Many investors make the mistake of looking only at short-term gains. But high net worth individuals use internal rate of return (IRR) and other financial instruments to analyze whether investing with immediate returns is better than long-term gains. They are often willing to delay immediate gains for the long term if they get a higher IRR.
Geographical diversity
Many high net worth investors want their investments to be spread over a large geographical area. This is an interesting observation, but not surprising. By investing in multiple states, the vagaries of a single state’s economic situation won’t have as much of an impact on a multi-family portfolio. However, a project analysis must consider several factors, including job growth, salary dynamics, types of jobs in places, and current and future legislation. This kind of rigorous acceptance tends to minimize such effects.
There are many other important factors that wealth investors value. However, I’ve noted that the above are almost always the top concerns for my seasoned investors, and for good reason. Having the trust of high net worth individuals is important for all investment opportunities, and I propose maintaining this by understanding what drives these individuals.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
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