What is Capital Preservation?
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If you're considering multifamily syndications as a viable alternative to the stock market, you’re on the right track, but maybe you’re asking yourself what you’re getting yourself into.
What should you be concerned about?
What do you need to pay attention to?
The first thing you will likely be concerned about is a pretty obvious one, you don't want to lose money.
You want to preserve your capital and prevent loss.
The good news is, when it comes to multifamily, the probability of losing capital is not very high.
It’s more likely that you won’t make the money you think you’re going to make. That’s bad enough, but losing capital is worse. That’s where the concept of capital preservation comes into play.
How do you keep your capital safe?
First, you want to consider the downside of any investment you're making.
The returns are always going to look great, and most likely they're going to be great, but you also want to look at the risk.
What are the risks and what is the sponsor doing to mitigate those risks?
This is capital preservation.
There are some other things you’ll want to consider:
First, you need to educate yourself. Now I’m not suggesting you have to go to school to become a multifamily investing expert. But you have to educate yourself a little bit.
You’ll want to know how much experience a sponsor has.
What’s their track record?
How well do they communicate with you?
How do you like their team?
Do you trust them? (This is maybe the most important one.)
Have they been through challenging times and how did they deal with that?
So, get to know the sponsor first, then turn your attention to the investment itself.
Is it a fit for your financial goals?
Is it the sort of asset and location you want?
How much control do you have in the deal?
How conservative is the underwriting?
How are you being protected from a possible market downturn?
What is your capital recovery return?
How credible is the exit?
This is how you keep capital preservation at the forefront – by educating yourself, evaluating the sponsor, and evaluating the deal.