Episode 2: How to Define Your Investment Criteria

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create true financial freedom through passive commercial real estate investing. I'm Wayne Courageous III, founding and managing principal of Crei Partners, a leading commercial real estate company. I created CreiColin, an AI powered resource to serve as your investor education guide. Built on the insights and experience we've developed at Crei Partners, CreiCollen is here to educate you through passive invest tax strategy topics to help your journey in passive investing. Just a quick disclaimer. This podcast and CRA Colin is for educational purposes only and is not legal tax or investment advice. Always consult with your attorney, CPA and financial advisor before making any investment decisions. I've spent nearly two decades helping investors understand the power of commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, simple to follow and and packed with insights to help you grow your income and protect your capital without becoming a landlord. If you're ready to learn quickly and invest smarter, you're in the right place. Welcome to Building Passive Income. Let's build wealth together. Here's creicollen.

Hey there. I'm Crei Collin and welcome back to Building Passive Income. Last episode we talked about how to set realistic passive income goals for the year ahead. Today, we're taking the next critical step, defining your investment criteria. Here's the most new Passive investors make one of two mistakes. Mistake number one they have no criteria at all. They chase every shiny deal that comes across their inbox. Mistake number two they have criteria that's way too rigid. They're waiting for the perfect deal that doesn't exist. Today we're going to help you avoid both of those mistakes. We're going to walk through how to define clear, focused investment criteria that will help you filter opportunities, make confident decisions, and avoid bad deals. By the end of this episode, you'll know exactly what you're looking for in a passive real estate investment. And that clarity will save you time, money, and a whole lot of stress. Let me tell you about Jennifer. Jennifer is a physician earning about $400,000 a year. She's been thinking about investing in real estate syndications for two years. Every time a deal crosses her desk, she spends hours analyzing it. She reads the entire private placement memorandum. She reviews every page of the investor presentation. She creates spreadsheets comparing projected returns. But she never invests. Why? Because Jennifer doesn't have clear investment criteria. She doesn't know what she's actually looking for. So Every deal feels like it could be the one or it could be a terrible mistake. She's stuck in analysis paralysis. Then one day, Jennifer sat down and defined her investment criteria. She decided. I'm looking for multi, family or self storage syndications in the Sun Belt. I want deals with experienced sponsors who have completed at least 5 successful exits. I want a projected cash on cash return of at least 6%. I I want a projected internal rate of return of at least 15%. I want a hold period of five to seven years. I want deals in markets with strong population and job growth. Once Jennifer had those criteria, everything changed. Deals that didn't meet her criteria, she passed on them in five minutes. Deals that did meet her criteria, she conducted deep due diligence and made confident investment decisions. Within six months, Jennifer invested in three high quality syndications. She stopped overthinking. She started investing. That's the power of having clear investment criteria. So let's talk about the three critical areas where you need to define your criteria. Critical area number one Return expectations. You need to know what kind of returns you're looking for. Here are the key metrics you should define cash on cash return. This is the annual cash distribution divided by your initial investment. You invest $100,000. The deal pays you $7,000 per year. In distributions. Your cash on cash return is 7%. What's your target? For most syndications, a realistic cash on cash return is 5 to 8%. Some value add deals might have lower cash flow in the early years, but higher returns at exit. Define your minimum acceptable cash on cash return internal rate of return or irr. IRR measures your total annualized return over the life of the investment, including cash flow and profit. At sale, a deal projects a 15% IRR over five years. What's your target? For multifamily value add deals, a typical IRR target is 15 to 20%. For stabilized deals, it might be 12 to 15%. For higher risk deals like development, it could be 20% or more. Define your minimum acceptable IRR equity multiple. This is the total cash you get back divided by your initial investment. You invest $100,000 over five years. You receive $25,000 in distributions and $120,000 at sale. Your total return is $145,000. Your equity multiple is 1.45x. What's your target For a five year hold, a typical equity multiple is 1.7 to 2.0x. For a seven year hold, it might be 2.0 to 2.5x. Define your minimum acceptable equity multiple hold period how long are you comfortable having your capital tied up? Typical syndication hold 3 to 5 years for value add multifamily 5 to 7 years for stabilized assets 7 to 10 years for longer term investments Define your preferred hold period range. Pro tip don't just focus on the highest projected returns. A deal promising a 25% IRR is probably taking significantly more risk than a deal projecting 16% balance return with risk critical area number two markets and asset classes. You need to know where and what you want to invest in. Geographic markets do you want to invest locally, regionally or nationally? Do you prefer specific states or metros? Sunbelt markets like Texas, Florida, Arizona, the Carolinas, Midwest markets with affordable housing do you want to avoid certain markets due to regulations, taxes or economic concerns? I'm comfortable investing in Texas, Florida, Georgia, Arizona and Tennessee. I'm avoiding California and New York due to landlord tenant laws and taxes Define your target markets Asset Classes what types of commercial real estate are you interested in? Multifamily apartment complexes the most common syndication asset class Consistent demand Easier to finance Self storage Storage facilities Recession resistant Lower operating costs Growing demand Mobile home parks Manufactured housing communities Affordable housing demand Strong cash flow Less competition Retail shopping centers Higher risk post pandemic requires strong sponsorship Industrial warehouses Distribution centers E commerce Growth driver Longer lease terms Office Office buildings currently facing headwinds due to remote work. You don't have to pick just one, but you should have a clear understanding of which asset classes you're comfortable with and why. I'm focusing on multifamily and self storage because they're recession resistant and have strong historical performance. I'm avoiding office and retail due to current market conditions. Define your target asset classes. Investment Strategy what kind of deal strategy are you comfortable with? Value add Buying underperforming properties and improving them Higher risk Higher potential returns Repositioning and rent Core plus Buying Stabilized properties with some upside Moderate risk Steady cash flow with some appreciation Ground up development Building new properties Highest risk Highest potential returns Longer hold periods Opportunistic distressed assets Heavy repositioning Very high risk requires experienced sponsors. Most passive investors focus on value add or core plus deals. Define your preferred strategy. Critical Area Number 3 Sponsor Qualifications this is the most important part of your criteria. You're not just investing in a deal, you're investing in a sponsor. Here's what to look Track Record how many deals has the sponsor completed? Minimum Recommended at least five successfully exited deals have they been through a full market cycle? Did they deliver on their projections? Do they have experience in the specific asset class and market. Example Criteria I only invest with sponsors who have completed at least five full cycle deals in their target asset class with an average IRR of at least 15%. Experience and team how long has the sponsor been in business? Do they have a full team? Acquisitions Asset Management Investor Relations Finance do they have strong relationships with lenders, brokers and property management companies? Are they full time in real estate or is this a side business? Example Criteria I require sponsors with at least 10 years of experience and a dedicated full time team. Skin in the game does the sponsor invest their own capital in every deal? Minimum recommended at least 5% of the equity. This ensures alignment of interests. If they're not willing to invest their own money, why should you? I only invest with sponsors who co invest at least 5% of the total equity. Communication and Transparency how often does the sponsor communicate with investors? Monthly Quarterly do they provide detailed financial reports? Are they transparent when things go wrong? Do they respond to investor questions promptly? Example Criteria I require monthly or quarterly investor updates with detailed financials and transparent communication. Deal Structure and Fees what's the sponsor's fee structure? Acquisition fee typically 1 to 3% of purchase price asset management fee typically 1 to 3% of revenue or investor equity annually typically 1 to 2% of sale price profit split typically 70 to 30 or 8020 in favor of investors Preferred Is there a pref? Typically 6 to 8% make sure the fee structure is fair and industry standard. Be wary of sponsors with excessive fees or no preferred return I require a preferred return of at least 7%, a profit split of at least 70 to 30 in my favor and total fees under 6% of the deal. What do other investors say about this sponsor? Can you speak to at least three references who have invested with them before? Are they active in the investor community? Do they have any complaints, lawsuits or red flags? Do your homework. Check reviews, ask for references and trust your gut. Putting it all together your Personal Investment Criteria Checklist now let's create your personal investment criteria. Here's a My Investment Criteria Returns Minimum cash on cash return 6 to 8% minimum IRR 15 to 18% minimum equity 1.8x over 5 years preferred hold 5 to 7 years markets and Asset Classes Target Markets Texas, Florida Arizona Tennessee, Georgia Asset Classes Multifamily and self storage Investment Strategy value add and core plus sponsor minimum 5 completed deals with successful exits at least 10 years of experience full time dedicated team minimum 5% co investment monthly or quarterly investor updates Preferred return of at least 7% profit split of at least 70 to 30 clean reputation with Strong investor references. That's your criteria. Write it down. Print it out. Keep it visible. Use it to filter every deal that comes your way. Common mistakes to avoid Let me share the most common mistakes investors make when defining criteria. Mistake number one Being too rigid. I will only invest in Dallas multifamily with sponsors who have completed exactly 10 deals and project exactly 16% IRR. That's too narrow. You'll miss great opportunities. Mistake number two being too loose. I'll invest in anything that looks good. That's not criteria. That's a recipe for bad decisions. Mistake number three chasing returns. I only invest in deals projecting 25% IRR. High projected returns usually mean high risk. Many of those deals underperform or fail. Mistake number four Ignoring the sponsor. The deal looks great on paper, so I'm investing. The sponsor is more important than the deal. A great sponsor can turn a good deal into a great outcome. A bad sponsor can turn a great deal into a disaster. Not updating your criteria. Your criteria should evolve as you gain experience and as market conditions change. Review and update your criteria annually. How to use your criteria here's how to use your investment criteria in Step one Initial filter When a deal crosses your desk, you do a quick five minute review. Does it meet your basic criteria? Market asset class Sponsor experience Projected returns if it doesn't meet your criteria, pass immediately. No guilt. No second guessing Deep dive if it passes your initial filter, conduct deep due diligence. Review the private placement memorandum. Analyze the market and submarket Review the sponsor's track record Talk to investor references Review financials and projections Assess risks Make a decision if the deal meets your criteria and passes due diligence, Invest if it doesn't pass, Trust your process. The bottom line Defining clear investment criteria is one of the most important things you can do as a passive investor. It will help you filter deals quickly. Avoid analysis paralysis. Make confident decisions Build a diversified, high quality portfolio Sleep well at night. Don't skip this step. Take the time to define your criteria before you invest another dollar. Here's what I want you to do this week. Step 1 Block one hour on your calendar. Step 2 Use the template I shared to define your personal investment criteria. Cash on cash IRR Equity Multiple hold period markets and asset classes Sponsor qualifications Step three Write it down. Print it out. Share it with your spouse or investment partner. Step 4 Use it to evaluate your next investment opportunity. That's it. Simple but powerful. If you want help defining your investment criteria and building a personalized investment strategy, join our free Passive Investor coaching program@ passiveinvestorcoaching.com we'll walk you through the process step by step. You can also visit Creipartners.com or email us@InvestReipartners.com Remember, clarity is power, and having clear investment criteria is the foundation of successful passive investing. Let's build wealth together.

Thanks for tuning in to Building Passive Income. Today's episode helped shift your mindset or gave you a new tool to grow your wealth. Do us a favor and like, subscribe and share this podcast with someone you care about. Want to go deeper? Join our free Passive Investor coaching program@ passiveinvestorcoaching.com it's the perfect next step to start building wealth through commercial real estate the right way. Remember, financial freedom isn't a dream, it's a decision, and it starts with building Passive Income. We'll see you in the next episode. Sam.