I noticed that a few people were landing on this website based on some variation of the following search: “What questions should I ask when investing in a real estate project?”
Here is the brief answer: Can your team successfully implement your investment strategy? To be more accurate though, we must define a few of the aspects your “project”. First, the fact that we are analyzing a project generally implies that there is a start and an end date which are known (or at least some projected exit date) in advance. Short term projects usually involve adding value through development of some sort, but the detail of the questions you should ask are significantly different than if you were investing in an asset for the long term. A real estate development project carries significantly more risk than a buy and hold strategy, so you should also expect a higher return in exchange for the additional probability incurring a loss.
- Most important in any real estate project, are the people (management) involved. What have your past experiences been with them? What type of experience do they have with similar projects? What experience is their team missing and how do they plan to compensate for this lack?
- What is the investment strategy? One would imagine that the solicitor was attempting to exploit some competitive advantage which they possess. Are there economic circumstances or scenarios which success is dependent upon?
- More specifically, what is the time frame and what are the investment terms? Hopefully they will have prepared a prospectus; otherwise, I would tread VERY lightly. You will want to see their financial projections, a sensitivity analysis and any key assumptions they’ve made.
- The last thing I would suggest, is that you speak to everyone you trust and ask for their opinion. Don’t accept what they say at face value, dig deeper until you truly understand why they feel the way they do. Not all opinions were created equally.
There’s much more detail one could go into, but now you know where to start, and knowing is half the battle. Go Joe!