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Is that investment a “great deal?”

The elephant in the room

Let’s get the awkward topic out of the way first: Remember that “investment” you made last year based on your coworkers hot tip? Well, that was not actually an investment, per sé - It was speculation (aka - gambling).

Did it increase in value? Chalk it up as a win. You’re a successful speculator. In casino terms: you ‘beat the house!’

Did it lose value? Lick those wounds and buckle down. Time to learn the difference between speculation and investing!

I’m not here to judge or throw stones. I’ll share a personal example to hit home on this point: We bought our home in October 2013. Over the course of ~4 years it increased in value 56%.

  • Friendly folks tend to comment: “what an awesome investment!”

  • My typical response to this is: “crazy, huh? Yep, we got lucky.”

Like many first time homeowners, we needed a place to live for a growing family… and that was why we purchased a house. We liked the price point, the community and the property itself. We made a consumer purchase, not an investment. Maybe if we had we sat down for a planning session, set investment criteria (e.g. target ROI, IRR, etc), agreed on discrete improvements we’d make to the property over time and locked on a solid exit strategy (e.g. sell/dispose in year 7)… then maybe we could argue that our house was an investment.

Labeling our home purchase a “savvy investment,” ex post facto… doesn’t qualify it as such. It skyrocketed in value largely because we caught a bull economy wave and a hot real estate market. Sure, we made some frugal, high-yield improvements (e.g. new kitchen, landscaping overhaul, etc), but we did so for lifestyle benefits… not to drive toward an exit strategy.

Is it a great deal… for you?

Now, I am stepping down off of the soapbox and getting down to business. Here are the steps to making an informed investment decision:

Step 1: Define your investment criteria (these are examples)

  • Annual ROI: 18%+

  • Must produce cash flow

  • Passive - will not require increased time commitment or stress

Step 2: Confirm your financial readiness

  • Can you afford this investment?

  • If you want to invest $50k in a syndication, do you have additional $50k in reserves in case a life event happens in the next 5 years?

Step 3: Look through the “3 lenses” - Market, Operator, Deal

Market - to analyze a market, you start by considering the asset class.

  • Example 1: Multifamily deals: you’d consider things like employment rates (are the trends positive or negative?) and industry diversity (is the local economy tied to a single, large company.. whose employees comprise 70%+ of the tenant-base? Or are there 2-3+ different industries contributing to a diverse and rich renter pool)

    • Example 2: Self storage deals: in addition to some of the variables mentioned above, you’d consider inputs like traffic count directly passing by the property

Operator - Also referred to as “the team” - the most important proof point in vetting the operator is their track record.

  • Have they managed this type of project before? … in this market?

  • How many similar projects have they managed?

  • What does their performance track record look like?

Deal - this is where your investment criteria comes into play. To analyze a deal, you’ll want to compare the financials outlined in the investment summary PDF against your investment criteria. If you set criteria ahead of time, it makes the analysis process unemotional and painless. At first, there’s some new language, but that’s what we’re here to help with. If you find yourself saying “this feels right”... i’d recommend stepping back from the pretty looking investment summary PDF and plugging in the raw numbers into a spreadsheet instead. The whole point of this blog is to make this point clear:

Investment decisions are made based on real data points. They are not made based on how a marketing brochure made you feel.

Note: a key benefit of investing passively in syndications - what we do at Madison Investing - is that you are reviewing a pro forma projection from the operator, not from a real estate broker or agent. You are not running a deep analysis of the properties potential performance. We take the leg work out of it for you and can help address any of the deep dive questions for the data-hungry investors.

To help you take the next step in setting your criteria, we’ve included a helpful scorecard of investment returns (courtesy of the timelessly wise, Gary Keller. Buy his book an amazon).

Take stock of how your current portfolio is performing. Set criteria that aligns with your goals. If you are hungry for more education on this topic, we are happy to share resources.

Reach out and connect:



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