129. Customizing Your Fund Investments through InvestWise Collective
Want to make informed investment decisions? Join us as we unpack the secrets behind risk-adjusted returns with Paul Shannon. He talks about real estate investing in today's uncertain market, how he vets sponsors, looks for risk-adjusted returns, and the benefits of both active and passive investing.
Paul Shannon is the principal of Red Hawk Real Estate and fund manager of InvestWise Collective, a partnership between Red Hawk Real Estate and Left Field Investors. Since transitioning to real estate investing full-time in 2019, Paul has acquired over 200 residential units by recycling his equity and through joint ventures. A licensed realtor, Paul has experience in acquisitions, raising capital, and property management.
Here are some power takeaways from today’s conversation:
[02:00] Why Paul slowed down in investing
[11:10] Emerging Trends in Multifamily Financing: Longer Holds, Lower Returns
[18:00] How active investing makes you a better passive investor
[21:00] Understanding risk-adjusted returns
[26:45] About InvestWise Collective
[30:50] Tips for vetting sponsors and investors
[41:50] Being selective with higher quality deals
Episode Highlights:
[11:10] Emerging Trends in Multifamily Financing: Longer Holds, Lower Returns
Multifamily operators are shifting towards agency debt or fixed-rate products with stepped-down prepay penalties to avoid costly fees when selling before maturity. This change means longer hold periods, lower leverage, and loan-to-value ratios in the 50s to 60s. Lenders require properties to generate income 1.2 to 1.3 times higher than the debt service, leading to decreased loan proceeds and reduced returns. Despite this, there are still attractive investment opportunities, but investors must consider more than just high IRRs and cash-on-cash returns.
[21:00] Understanding Risk-Adjusted Returns: Maximizing Returns While Managing Risk in Investments
‘Risk-adjusted returns’ refer to the amount of return an investment generates relative to the amount of risk involved in producing that return. An investment with a higher risk-adjusted return means it generates more return for the amount of risk taken. Paul explains risk-adjusted returns by comparing potential returns from real estate investments to risk-free alternatives like high-yield savings accounts. The returns from real estate deals involve more risk due to factors like rising interest rates, cap rate compression, and reliance on sponsor pro formas. However, they must offer a high enough return to justify that additional risk compared to the guaranteed return from a savings account. Paul looks at variables like yield on cost, IRR, and cash flow to determine if a deal offers a sufficient risk-adjusted return for his investors.
[30:50] Tips for Vetting Sponsors and Investors
Paul places the most emphasis on trust, ensuring the sponsor will act as a fiduciary for investors' capital. He examines the sponsor's track record but notes that a longer track record does not necessarily mean better, focusing more on how the sponsor navigated past downturns. Paul analyzes the sponsor's financial spreadsheets in depth to understand their assumptions and whether they are conservative or aggressive. Rather than just looking at headline returns, he focuses on yield on cost, IRR partitioning and cash flows to determine the deal's risk level. Finally, Paul looks at the debt terms the sponsor is using to ensure it matches their business plan and exit strategy to minimize prepayment penalties.
This show is for entertainment purposes only. Nothing said on the show should be considered financial advice. Before making any decisions, consult a professional. This show is copyrighted by Passive Investing from Left Field and Left Field Investors. Written permissions must be granted before syndication or rebroadcasting.
Resources Mentioned:
Email: paulshannon@investwisecollective.com
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