If you’re considering investing in our fund, you’re probably not new to the world of commercial real estate investments. You’ve been successful in the stock market and other real estate deals, and you’re not looking for fluff or basic real estate investment talk.
You want to know what your return will look like when you invest in our pre-REIT. In fact, that’s the number one question that most of our accredited investors ask when they first consider investing with us.
Investor returns are obviously extremely important to our existence. However, while returns are important, there are other aspects that we focus on when structuring our portfolios and evaluating potential deals.
One of those that we think is vital is capital preservation. We focus on making sure that the deal has multiple plans in place to protect from loss of investor principal. We are committed to mitigating risk as much as possible to preserve your initial capital investments.
Why It’s Important to Talk About Capital Preservation
Capital preservation is one of the most critical components of your investment, no matter what you’re investing in. It’s easy to just focus on cash flow returns, potential earnings, and beautiful marketing packages, but when an unexpected situation arises, you’ll be thankful for a team that puts an emphasis on capital preservation.
Capital preservation is all about mitigating risk, and as Warren Buffett puts it, there are two rules to investing:
Rule #1: Never lose money
Rule #2: Never forget Rule #1
No matter what you invest in or who you invest with, you should know what to ask and what to look for so you can invest confidently with a team that holds your best interest. At the core of every investment in which we participate, capital preservation is our number one priority. Below are 5 pillars that shape our strategy on how to preserve your capital.
5 Capital Preservations Pillars
#1 – Raise money to cover capital expenditures up front
Imagine the avalanche of problems that can accumulate when capital expenditures (like renovations) must be funded purely by cash flow. In this case, cash-on-cash returns, which vary based on occupancy and maintenance costs, would have to fund a sudden HVAC repair instead of unit renovations according to the business plan. In this case, the business plan falls behind schedule, units aren’t ready as planned, and vacancy persists.
Instead, for each asset, we ensure the funds for capital expenditures are set aside upfront. As an example, if we need $2 million for the down payment and $1 million for renovations, we will raise $3 million upfront. This means we have $1 million cash for renovations and won’t have to rely on monthly cash-on-cash returns.
#2 – Purchase cash-flowing properties
One great option to preserve capital is to purchase properties that produce cash flow immediately, even before improvements. If units don’t fill as planned or the business plan isn’t going smoothly, just holding the property would still allow positive cash flow.
PPT is also a diversified fund owning properties in several different asset classes. This helps create a buffer should one property under perform. Diversification in our properties provides us with a way to preserve your initial investment.
#3 – Stress test every investment
Performing a sensitivity analysis on the business plan prior to investing allows us to see if the investment can weather the worst conditions. Example: What if vacancy rose to 15% and what would happen if the exit cap rate was higher than expected?
Properties look wonderful when they’re featured in fancy marketing brochures with attractive proformas (i.e., projected budgets), but stress testing those numbers helps us take a look at how the performance of the investment may adjust based on potential variability in our assumptions.
#4 – Have multiple exit strategies in place
In any disaster or emergency, you want to have several ways out. In case of a fire, you want a door and window. The same goes for any investment, including any real estate investment.
Even if the plan is to hold the property for ten years, no one really knows what the market conditions will be at that ten-year mark. Because of that, it’s important to account for contingency plans. You may need to sell the property sooner or extend the hold period, then you may need to prepare the property for different types of end buyers (private investors, institutional buyers, etc.).
#5 – Put together an experienced team that values capital preservation
Possibly the most critical pillar of all is to have a team that values capital preservation. This includes both the investment and operator teams and the property management team. All of these people should be passionate about their role and have a strong track record of success. The more experience they have in successfully navigating tough situations, the better and more likely they will be to protect investor capital.
Risk Mitigation is Key to Your Success.
Capital preservation is one of the most critical building blocks of a real estate fund. Every decision and initiative by the team should be rooted in preserving investor capital.
The five capital preservation pillars used in our commercial real estate trust include:
- Raise money to cover capital expenditures upfront
- Purchase cash-flowing properties
- Stress test every investment
- Have multiple exit strategies in place
- Put together an experienced team that values capital preservation
These five pillars allow us to minimize risk as much as possible and ensure that every decision we make protects your money. With a strong capital preservation strategy in place, your investment in PPT can be a part of making your future more financially rewarding.