How to review fractional real estate deals

Wahed real estate allows you to invest in multiple properties without needing a large upfront investment. However, it’s crucial to make informed decisions when participating in the deals. Each property is different, with its own set of characteristics, potential returns and risk factors. 

This guide will help you develop a systematic approach to evaluating investment opportunities on the Wahed platform.
‍

Importance of a Thorough Deal Review 

Taking the time to carefully analyse each deal is highly important: 

• Risk Management: By understanding the specific risks associated with each property, you can make decisions that match your risk tolerance
• Return on investment: Thorough analysis helps you identify investments with the best potential returns relative to their risk
• Informed Confidence: When you've examined all aspects of a deal, you can invest with greater confidence

Even though all properties on the Wahed platform undergo rigorous vetting before being offered to investors, it’s still important to conduct your own due diligence. Different investors have different goals, risk tolerances and investment horizons, so taking the time to assess each deal is a key step in your investment journey.
‍

Key Investment Metrics to Review

When reviewing any real estate investment, pay close attention to these metrics:

Purchase Price and Valuation

• Purchase Price: The total cost to purchase the property itself, excluding transaction costs and fees
• Market Value: The estimated fair value of the property at the time of purchase
• Discount: When applicable, it shows if the property was acquired below market value We calculate this by using this formula: (Market value - purchase price) ÷ Market value
• Price Per Square Foot: Helps compare with similar properties. It’s calculated by dividing the purchase price by the property’s total area  

Returns and Yield

• Gross Yield: It’s the percentage return on investment before any expenses are deducted. Formula: (Annual rental income ÷ Total investment). Example: £30,000 annual rent ÷ £400,000 total investment = 7.5% gross yield‍
• Net Yield: It’s the percentage return from rental income after deducting all expenses. Formula: (Annual rental income − Operating expenses) ÷ Total investment. Example: £22,000 net income ÷ £400,000 total investment = 5.5% net yield‍
• Average Net Yield: The average annual net yield across the entire holding period. This is an estimate based on projections, as rent can increase over time. Example: around 5.75% average net yield over 5 years

Total Returns

• Total Gross Return: Overall return from both rental income and capital appreciation before fees and expenses
• Total Net Return: The overall return from both rental income and capital appreciation after deducting all costs and fees
• Annualised Net ROI: It’s an average annual return on an investment after deducting all costs and fees

Exit Value Projections

• Property Net Exit Value: The estimated value of property when it’s sold after deducting selling costs
• Capital Appreciation Factor: The ratio of the projected future property value to its initial value

Investment Costs and Fees

• Investment price: This includes the total capital required for investment, including the purchase price plus all acquisition costs. Example: £440,000 (£400,000 property + £40,000 in costs)‍
• Projected Acquisition Costs: Complete breakdown of the total investment amount
  • Stamp Duty Land Tax (SDLT): Government tax on property purchases
  • Conveyancing: Legal fees for property transfer
  • Survey and Valuation: Professional assessment of the property
  • Due Diligence and Admin Fee: Platform's fee for vetting the property
  • Transaction Fee: Platform's fee for facilitating the investment
  • Cash Reserve: Money set aside for unexpected expenses

Investment Documents to Review 

All investment documents can be found in the Documents section of each deal page in the Wahed app. Each document serves a specific purpose in your evaluation process.

1. One-Pager

The one-pager is a concise summary of the investment opportunity. It is ideal for a quick initial screening.

What It Contains and How to Use It:

• Property Details: This section succinctly describes the property's location, size, number of bedrooms and key features. Use this information to quickly determine if the property matches your investment preferences in terms of property type and basic characteristics
• Key Investment Returns: This section talks about the expected total return, annualised return, holding period and yield figures. These key metrics allow you to quickly assess the investment's potential performance
• Key Features: Important information about the area's amenities, transport links and development potential are summarised here. A property's location influences its long-term performance, so pay attention to factors that make the area attractive to tenants and potential future buyers

Use this document to get a quick overview before diving into more detailed documents like the investment memorandum. It is a fast way to determine if the property matches your basic criteria.

2. Investment Memorandum (IM) 

The Investment Memorandum is the most detailed document available for each opportunity. It serves as the primary reference for the property's features, investment strategy, financial projections and risk analysis.

What It Contains and How to Use It:

• Executive Summary: This section provides a concise overview of the investment opportunity, highlighting the property type, location and projected returns to quickly assess if the deal meets your basic criteria
• Property Details: Here you'll find more information about the property's physical characteristics, condition and features 
• Neighborhood Analysis: This section evaluates the property's surroundings, including transportation links, local amenities, schools and employment opportunities. A property in a desirable location with strong growth indicators typically offers better long-term investment potential
• Deal Overview: This summary helps you quickly grasp key financial metrics like total return, annualised return and holding period. Use this section to compare the investment against other opportunities and your own financial goals
• Comparative Analysis: This analysis compares the property's price (often presented as price per square foot) with similar properties in the area. This helps you determine if the property is fairly priced relative to the local market
• Sensitivity Analysis: This section shows how the investment might perform under different scenarios, such as lower occupancy or higher rental appreciation. Pay close attention to downside scenarios to understand how the investment can perform during challenging market conditions
• Cost and Fees Breakdown: This detailed breakdown is taken from the financial summary and it itemises all fees and costs associated with the investment. Make sure you're comfortable with the fee structure and that all costs are transparent and reasonable
• Endnotes - Investment Risks: The last section of the IM identifies potential risks associated with the investment 

3. App Offer Page 

The App Offer Page brings together key information from all other documents in a user-friendly format. In addition to that, here’s what to look for in the app page. 

What It Contains and How to Use It:

• Potential Risks and Mitigation Strategies: It provides a breakdown of specific risks associated with the investment and how they're being addressed. This section helps you understand both what could go wrong and the safeguards in place to potentially protect your investment
• Funding Timeline: This section outlines important dates in the investment process, including the expected closing date for finalising the purchase and the projected date of the first rental payment. This helps you understand when you can expect to start receiving returns on your investment.

4. Financial Summary 

The Financial Summary provides a breakdown of all financial aspects of the investment, focusing on projected costs, income and returns.

What It Contains and How to Use It:

• Projected Acquisition Costs: This shows all the costs associated with the acquisition including the purchase price, stamp duty, legal fees and platform fees. It's important to understand that not all of your investment goes directly toward property ownership; a portion covers necessary transaction costs and fees
• Projected Annual Income Statement: The year-by-year projection of rental income and expenses gives you a peek into the expected cash flow over the entire investment period. Look at how rental income is expected to increase over time
• Net Cash Flow: This figure represents the annual rental income after all expenses have been deducted. Pay attention to the net yield figures, as these represent the actual return on your investment after costs. Compare these yields with other investment opportunities to gauge relative performance
• Property Sale Costs: This section details all costs associated with selling the property at the end of the holding period, including agent fees, legal fees, potential taxes and Wahed exit fee 
• Projected Growth: This section shows the estimated increase in the property’s value over the investment period, including the starting value, appreciation factor and final exit value after deducting sale costs. Consider whether these projections are reasonable based on historical property price growth in the area and current market conditions
• Return on Investment: The calculation of total returns and annualised returns provides a clear picture of the investment's expected performance. Look at both gross and net figures to understand the impact of fees and expenses on your returns

Financial summary is important to understand the financial fundamentals of the investment. Take time to thoroughly examine all figures and calculations.
‍

Investment Decision Checklist

​​Before committing to an investment, ask yourself:

1. Do the returns match my investment goals?
   
   • Compare the projected returns with your financial objectives
   • Consider if the cash flow timing aligns with your requirements
     
2. Am I comfortable with the holding period?
   
   • Understand that your capital will be tied up for the specified period
   • Consider if you might need access to these funds during that time
     
3. Have I assessed the risk profile?
   
   • Evaluate if the risk level matches your risk tolerance
   • Consider how this investment fits within your overall portfolio
     
4. Do I understand all costs and fees?
   
   • Make sure you know exactly what you're paying for
   • Calculate the impact of fees on your net returns
     
5. Have I reviewed the property details?
   
   • Location quality and growth potential
   • Property condition and features
   • Local rental demand
     
6. Does this investment diversify my portfolio?
   
   • Consider geographical diversification
   • Think about property type diversification
   • Evaluate how this fits with your other investments.
     

Conclusion

After thoroughly reviewing all aspects of the deal, you should have a clear understanding of:

• The property details, condition and location
• The expected financial returns and their calculations
• The costs and fees involved in the investment
• The potential risks and how they're being mitigated

This detailed approach to reviewing real estate investments will help you make confident decisions that are in line with your financial goals and risk tolerance. Remember that diversification across multiple properties can help manage risk within your real estate portfolio.

Every investment carries its own set of risks, but thorough due diligence improves your chances of achieving satisfactory returns while managing the potential downside risks. Take your time with the deals and review all available documents before making any investment decisions. 

If you still have any questions, feel free to reach out to the support team at support.ventures@wahed.com. 

‍

‍