Let me ask you a question. What first interested you in real estate investments? Most likely, it was the potential to put your hard-earned money to work for you to create a good return and thus grow your wealth over time.

And in fact, that’s the number one question that most of our investors ask when they first consider investing in a turnkey real estate property with us. They want to know if they were to invest $100,000, how much money they could stand to make.

And believe me, I love good returns, and those returns are a big part of why I do what I do. However, while returns are certainly important, there’s an even more important aspect that I focus on when evaluating potential deals.

I’ll give you a hint. It’s not nearly as exciting as passive income and double-digit returns. In fact, it’s more boring than taxes and K-1s.

The most important thing I focus on in any real estate investment offering is capital preservation. In other words, I focus on making sure that our deals have multiple plans in place to protect from any loss of investor capital. That’s my number one priority, as boring as that might sound.

Why It’s Important to Talk About Capital Preservation

Sure, capital preservation isn’t the most exciting part of investing in real estate syndications, but it is one of the most critical pieces. 

It’s easy to just focus on cash flow returns, potential earnings, and brightly colored marketing packages, but when an unexpected situation arises, you’ll be thankful (for this article and) for a turnkey provider and sponsor team that gives capital preservation the attention it deserves. 

Capital preservation is all about mitigating risk, and as Warren Buffett puts it, there are two rules to investing: 

Rule #1: Never lose money

Rule #2: Never forget Rule #1

No matter what you invest in or who you invest with, you should know what to ask and what to look for so you can invest confidently with a team that holds your best interest. 

5 Capital Preservations Pillars

At the core of every investment in which we participate, capital preservation is our number one priority. There are 4 building blocks that make up our capital preservation strategy.

#1 – Cover capital expenditures up front

Imagine the avalanche of problems that can accumulate when capital expenditures (like renovations) must be funded purely by cash flow. In this case, cash-on-cash returns, which vary based on the type of property (duplex vs fourplex, for example) and maintenance costs, would have to fund sudden HVAC repairs.

To combat major capital expenditures, we provide newly constructed or fully renovated turnkey rentals that have had all major repairs already completed. This allows our investor owners to build up a capital expenditure account using a smaller percentage of monthly cash flow to cover expenses in the years ahead. 

Our experienced property managers also know the properties intimately and act immediately when maintenance calls come in. This prevents major costs from escalating – and draining an investor’s reserves. 

#2 – Offer cash-flowing properties

One great option to preserve capital is to start with properties that produce cash flow immediately. This may sound obvious, but too many real estate investors get caught in the appreciation promise. They fall for snazzy properties in so-called “hot” markets that have the false promise to appreciate drastically in value.

Unfortunately, these markets also have the potential not go up in value. If there is no cash flow from day one, then there may never be any cash flow. 

We find the markets that need rentals now, show increasing rental demand, and strong job growth, among other things. With tenants already in place when you purchase the rentals, you’ll see rental revenue from day 1. 

#3 – Stress test every investment

Performing a sensitivity analysis on the development business plan prior to constructing our turnkey rental properties allows us to see if the investment can weather the worst conditions. We protect both our land development fund capital and the capital of our turnkey rental property investors this way.

For developing the land, what if we only sold half of the properties? Would we still provide a great return for our investors?

 For the turnkey rentals, what if we had to lower our rental rates to fill the properties? Would our investors still see a good cash-on-cash return each month? 

 Properties look wonderful when they’re featured in fancy marketing brochures with attractive statistics, but stress-testing those numbers helps us take a look at how the performance of the investment may adjust based on potential variability in variables. 

#4 – Put together an experienced team that values capital preservation

Possibly the most critical pillar of all is to have a team that values capital preservation. This includes both the land development team and the property management team. All of these people should be passionate about their role and display a strong track record of success. 

The more experience they have in successfully navigating tough situations, the better and more likely they will be able to protect investor capital. 

Conclusion

While capital preservation may not be very exciting, it certainly is one of the most critical building blocks of a solid deal. Every decision and initiative by the sponsor/operator team should be rooted in preserving investor capital.

The four capital preservation pillars used in turnkey real estate investing and land development fund deals we do include:

• Cover capital expenditures upfront
• Purchase cash-flowing properties
• Stress test every investment
• Put together an experienced team that values capital preservation

By putting these four pillars in place, we minimize risk as much as possible and ensure that every decision we make around the property stems from making sure that we are protecting your money, first and foremost.