The Real Estate Syndication Show WS1514: The Importance of Deal Structure | Rob Beardsley
What is a deal structure? How do debt and equity play a part in it? What are the different ways to look at those things as we look at structuring a deal to make it make sense? And, how much risk is too much risk? In this second episode of our three-part series with Rob Beardsley, he answers all these questions.
Rob says debt is your number one source of risk in a real estate deal. He then talks about how to avoid being forced to sell when you don't want to in a down market, how you can set yourself to more success by doing loan-to-value, loan-to-cost, debt service coverage ratio, stress tests, and sensitivity analyses, and how to familiarize yourself with options you have while structuring a deal. Listen now!
Key Points From This Episode:
- What is deal structure and why should real estate investors care about it?
- Why is debt the riskiest source in a real estate deal?
- How to avoid being forced to sell when we don't want to in a down market?
- Set yourself to more success by doing loan-to-value, loan-to-cost, debt service coverage ratio, stress tests, and sensitivity analyses.
- What questions does Rob ask before getting a loan?
- Why does Rob try to avoid recourse as much as possible?
- Rob shares preferred equity or any type of gap financing is interesting these days.
- Rob talks about how mezzanine debt and preferred equity are the same economic concepts.
- How does Rob structure a deal?
- Rob discusses what a joint venture scenario looks like.
Tweetables:
“In my opinion, debt is your number one source of risk in a real estate deal. And I would guess something around 98% of real estate deals include that in one shape or another. So, it is in your best interest to be well versed in the nuances of it and why it is the riskiest part of the deal, and what is attributed to that risk.”
“Our number one concern when investing is the preservation of capital. Now, what does that really mean? Well, that means we want to avoid permanent loss of capital.”
“What we must avoid is being forced to sell when we don't want to in a down market. And that is often debt related.”
“Real estate is a business built on debt, and unleveraged returns, which means no debt involved is not an attractive return profile for investors to invest in, so they just won't invest.”
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