By Tim L. Edgar
Founder & President of Hotel Innvestor
For an Accredited Investor, there are many options available when it comes to investing ranging from the safety of U.S. Treasury bonds to high yield, high-risk junk bonds and differing variations in between. One of the growing options is investing in alternative investments through private placements of capital for emerging companies, as evidenced by the $1.3 trillion raised in Regulation D offerings in 2014. The SEC implementation of Reg D 506 (c) has only added to the options available to Accredited Investors.
As with any investment, the goal is for return on investment or yield, properly underwritten so as to produce a significant yet appropriate risk-adjusted return. Yet in the never-ending search for greater yield, a complete understanding of the risk involved is often understated or overlooked. Often times the risk is obscured by faulty underwriting due to little or no track record with the underlying asset class. Just as you would not ask your dentist for accounting advice, investing in real estate through a platform without a substantial track record in real estate can lead to poor results or the loss of your investment.
In a good economy, the rising tide lifts all boats as they say, which tends to make even questionable investments look good as the economy continues to improve. But what happens when the economy turns? In the search for yield, did you really research who was underwriting the next great investment with mid-30’s annual return? Did anyone actually vet this investment at all? All too often the projected return is all the research that a passive investor looks at before investing. The importance of the expertise and track record of the platform vetting the investment cannot be overstated.
Our modern economy is one of specialization in virtually every industry. Even in traditional commercial real estate product types like office buildings you now have medical office or creative office as distinct subsets. If you invest in a debt instrument through a private placement and the borrower defaults, who is going to be protecting your interests through the foreclosure and beyond? Do they have the requisite knowledge of the asset class to take over the property and create value while preserving your investment capital? With more and more options available for your investment dollars, it is more important than ever to truly research and understand who is vetting and underwriting these investments and their qualifications to do so. Take these steps now while the tide is rising so you don’t get left stranded when the tide recedes.