But can you see past the cold metrics and “on paper” factors?
See, your sharpest investment weapon comes from thinking on a higher level than everyone else.
Going just a little bit beyond what is simply written on the deal summary.
And when you come at it from some of the different angles I’m going to show you, you’ll start to tune up your radar for the truly massive ROI potential of certain deals, sponsors, and markets.
Now these are my personal deal filters.
Everyone has their own “motivating principles”. When I look at our most successful deals, the ones that generated a ton of goodwill and positive energy (beyond just solid returns), I see a pattern of these three things happening over and over again.
Hopefully this list will get you thinking out of the box to find the best deal for you.
1. Ride The Trust Highway
This one applies mainly to deals where we have a co-sponsor, or are not the lead sponsor.
It’s very straight forward:
We all prefer to do business with people we like and trust.
So when I evaluate a deal, my relationship and past experience with a co-sponsor is a major deciding factor. I mean, there is no point fighting human nature. Having a trusted partner with whom you have a track record is always going to feel better than doing a deal with new people.
Of course, if you’re just starting out, you’re going to have to choose a partner that you feel has potential for a long-term relationship.
But more on that later.
2. Do A Neighborhood Gut Check
Stick with me here, because this one is more art than science.
When I’m staring down the barrel of a new business plan, there’s a certain magic in driving through the neighborhood.
Do I get the feeling of excitement about implementing that business plan and bringing value to the community? If not, what is my gut trying to tell me?
Once the numbers look right, you need to ask yourself if this investment means something beyond the money you’re going to make.
In the end, we all want to make a difference and impact people in a positive way. A deal that pumps me up about getting going is better than a deal with slightly better projected returns but no gut response.
It’s not always easy to answer “why am I really doing this?”.
But it’s in those moments when you find out if the deal is really for you.
3. Fire Up The Opportunity Generator
The investment opportunity doesn’t conclude once the deal closes.
Actually, it’s just the beginning.
Instead of investing for the sake of investing, we do best when we look for deals that will continue to bring in future opportunities.
Like I said above, when you invest with a new sponsor you should be assessing the potential of a long term relationship. Often these even develop into friendships.
With a “numbers are not everything” model, we can start to see each deal as one step of growth to a larger total. Their value increases with each new opportunity that comes up.
For instance, if I’m looking to partner with a new syndicator and bring their deal to my investors, of course I first look at the numbers. But the long term view protects me from getting seduced solely by projected earnings. It could be that they are way too hopeful to begin with.
Then let’s say there is a lesser deal with a more experienced operator in a more attractive submarket nearby. And they know every aspect of that submarket. Well this is our chance to get a foot in that door. We’ll forgo the bright shiny appeal of the slightly higher returns, knowing full well that as more deals appear in the submarket, we’re positioned to be more efficient, to scale up, to have serious hands-on data and direct examples of solving problems in that particular space.
Suddenly the good-not-great looking (on its own) deal becomes bulletproofed through the holding period. If we get a future deal across the street, both properties benefit from cheaper management. Or better chance for higher distributions, or more protection from random destructive events, and so on.
So asking the question if it’s a good deal or not is rarely enough.
Instead, I’ll ask something like “does this good deal give my investors access to even better deals in the future?”.
Just like a curated and active network, these things tend to build on each other. So focusing on long term returns is actually a faster and more efficient way to level up than just focusing on the gains of one single deal.