Today, we dive into investor reporting. In particular, pro-quality reporting. One of the top complaints that we hear from value real estate investors is poor reporting and lack of transparency.
If you look at the stock market, information on stock investment is updated almost instantaneously. What about your real estate investment? You rely on the sponsor to show you the numbers and tell you how things are doing. So, even though there’s no universal standard reporting, what kind of details should investors look out for as the rule of thumb?
When my father first started, before he started asking me for guidance, he went off on his own and began trusting new sponsors without doing his proper due diligence. He didn’t ask questions about their reporting procedures and received zero ongoing communication. He was receiving quarterly checks, but there was no communication on the progress or specific details of the projects.
He’d regularly get calls for cash infusions, and my father would consistently bail them out. Later on, as we began to do more research, we quickly discovered that some of these properties had previously been sold. He had no idea. This led to significant losses, and my father was completely in the dark. Not a single update!
You should know everything that’s going on behind the scenes. It’s important to do your due diligence. Figure out what’s going on. Look, things happen, and there are going to be losses. But, you must be aware of what’s happening.
It’s important to carefully vet your potential sponsors because oftentimes, you’re stuck with these sponsors for some time. I’m not saying these are bad people, but they don’t have investor reporting systems in place. It’s a thousand-foot view of the experience without adequate reporting in place.
The industry-standard reports should be frequent. Quarterly is the industry standard, and reports should contain an informative narrative describing pertinent data. It should include other relevant details like: We had a leak in the plumbing, we had to put up some new sheetrock, or we had to renovate the flooring.
What investors care about are important things. What’s going on with my money? What’s going on with the projections versus the actual return? Are we making or losing money? Am I expecting a dividend this quarter, or not? Tell me some high-level stuff.
With every sponsor, it’s important to ask the right questions. With our experience researching and properly vetting sponsors, we learned to ask, “How’s your reporting?” every single time. You want to know the level of transparency that’s being offered in their reporting.
There’s no exact science to it, and everyone has their style, but there should be clear transparency. Detail about the reports and when you can expect this information is important. Is the information provided online or through a helpful platform?
Most sponsors have some kind of online portal, and you can easily see what’s going on with your investment. Projections, documents, and clearly defined explanations of your current portfolio should be readily available. When you ask for accounting documents and other relevant information, they shouldn’t have a problem sharing this information with you!
We’re very passionate about one of the sponsors that we invest with. This sponsor provides us with a monthly report that goes beyond the standard information. They tell us the good, the bad, and the ugly. If a sponsor is telling you everything is beautiful, that is complete BS. We’re in the headache business, and there are always going to be problems.
What are the specific problems? Are tenants not paying because of Covid? There’s an eviction moratorium, and there are going to be problems. How are you dealing with these problems? This is that important stuff that sponsors should be talking about. Not that the world is beautiful and nothing bad ever happens. That’s just not realistic.
Give us detail about what’s going on. Don’t leave us guessing. If you ask a question to a sponsor, you should expect clear communication and multiple details. With our trusted sponsor, they are very detailed and always provide extra information. They have an online portal, and they’re always open for a call. They’ll even invite me into the investor meetings, and share the highest levels of detail!
With this incredible sponsor, we recently joined a Q&A session discussing one of the investments we are involved with. This Q&A involved the entire investment team and was filled with useful information. Investors could interact, ask questions, and more.
Instead of going back and forth via email, having our questions answered on the spot is great. It’s super helpful to hear the status of acquisition and their solid action plans. Everything was laid on the table. This is the kind of transparency that you should be looking for.
When reporting is done properly, whether written or verbal, that’s how you’ll see if your expectations are being met. My expectations are met with this specific sponsor. It’s important to understand if the plan’s on track, or if there are challenges along the way.
Is the sponsor willing to deliver the bad news, not just the good news? Nothing should be a complete surprise at the end of the day. If you keep hearing only good news, that’s a red flag. You might want to think twice before investing with that sponsor.
Reports should be transparent, informative, and easy to find. Nothing should be hidden. There should be a clear narrative about the performance, and a comparison of the projected versus actual. Reports should include a balance sheet and income statement.
If an investment’s a fund with multiple properties, we should be able to see which properties we own. Give us some addresses. One of our completely transparent sponsors recently uploaded pinpointed addresses for the exact property investment locations!
Unfortunately, not all managers give you this high level of detail and will leave you guessing. When you start to do your research, you might learn things you don’t like. Protect yourself by asking for sample reports with lots of detail. A good sponsor will have that.
If they don’t have an online portal, it’s not the end of the world. But, it’s important to ask about their data reporting. You want to see the amount invested, specific ownership percentages, and other industry-standard tools like clearly defined charts and graphs detailing relevant information. The more detailed, the better.
If you’d like to learn more, email us at Adam@Levinecapital.com or Lei@Levinecapital.com. We’re happy to share samples of our investor reports for a clear picture of the transparency you should expect from a thorough sponsor or fund manager.