To evaluate an investment project, check who's behind it, read its documents, test its numbers in worse scenarios and understand how you'd get out.
You can do it at your own pace, without being an expert. This checklist works for property and for solar projects, and it includes a made-up example of how to stress-test a projection.
How to evaluate an investment project: start with who's behind it
Before the figures, look at the people and the companies. What to check before investing starts here, and this short answer gives you a first idea.
The company
Ask for its certificate of existence and legal representation, issued by the Chamber of Commerce. Confirm its name, founding date, line of business and legal representative. An SAS can be set up quickly, so its age tells you something too.
The people
Look up the partners and managers by name. See what they've done before and ask to be shown finished projects.
The operator
Whoever runs the project shapes much of the result. Check their experience with that type of asset and what they charge.
Who owns what
Ask which company owns the asset and what exactly you'd be acquiring. Ask too whether the project is ring-fenced from the assets of whoever is promoting it.
The documents you should read
A summary isn't enough. Ask for the full documents and read them calmly, with a lawyer if the amount warrants it.
Certificado de tradición y libertad
For a property, this title certificate shows who owns it and whether there are mortgages, liens or other limits. It should be recent and match what you've been told.
The contract
The participation agreement or equivalent should state what you contribute, what you receive, when, which costs come off and what happens if the project changes.
The risk disclosure
The risk disclosure statement lists what can go wrong. If it reads as generic, ask about the risks specific to that project.
Source of funds
The source of funds declaration confirms where your money comes from. Being asked for it, along with identity verification, shows the project is careful about who it partners with.
The project sheet
The project sheet sums up the term, assumptions and status. Compare it with the contract and ask about any gap.
Asset permits
These vary by type: a building permit and land use for a building, the RNT for nightly rentals, and a connection agreement for a solar project.
How the numbers are built
A projection is a chain of assumptions. Your job is to find them and ask whether they're reasonable.
Assumptions
Look for occupancy, the nightly rate, production or the energy price, and where each comes from. A figure with no source is an opinion.
Scenarios
A serious cash flow projection shows a central case and a harder one. For solar, look at the P50 and P90 scenarios.
Costs
Check CAPEX, operating expenses, operator fees, taxes and reserves. What isn't in the table still gets paid.
The timeline
A year's delay changes the result even if the business works. Ask when income starts and what happens if it's late.
The metrics
IRR, payback and ROI sum up a project, but they're only as good as their assumptions. Here's how to calculate them.
Value at the end
If part of the result comes from appreciation or a residual value, separate what the operation produces from what depends on selling well.
An example: stress-testing a projection
A made-up example: a building of 10 short-term rental apartments, with total capital of 6,000,000,000 pesos. Here's the projection you're shown for one year.
| The projection, per year | Value |
|---|---|
| Available nights (10 × 365) | 3,650 |
| Occupancy | 70% |
| Nights sold | 2,555 |
| Average nightly rate (pesos) | 300,000 |
| Income (pesos) | 766,500,000 |
| Variable costs, 25% of income (pesos) | −191,625,000 |
| Fixed costs (pesos) | −240,000,000 |
| Result before taxes (pesos) | 334,875,000 |
On capital of 6,000,000,000 pesos, that result is about 5.6% a year. It leaves out taxes, debt and appreciation.
| If occupancy falls | 70% | 60% | 50% |
|---|---|---|---|
| Nights sold | 2,555 | 2,190 | 1,825 |
| Income (pesos) | 766,500,000 | 657,000,000 | 547,500,000 |
| Variable costs (pesos) | −191,625,000 | −164,250,000 | −136,875,000 |
| Fixed costs (pesos) | −240,000,000 | −240,000,000 | −240,000,000 |
| Result (pesos) | 334,875,000 | 252,750,000 | 170,625,000 |
On capital, that's about 5.6%, 4.2% and 2.8%. Occupancy drops 20 points and the result falls by almost half, because fixed costs don't move.
| Other tests | Result (pesos) | On capital |
|---|---|---|
| Nightly rate 10% lower | 277,387,500 | 4.6% |
| Fixed costs 15% higher | 298,875,000 | 5.0% |
| 60% occupancy and rate 10% lower | 203,475,000 | 3.4% |
The first two tests keep occupancy at 70%.
The operational break-even point is about 1,067 nights a year, or 29% occupancy: 240,000,000 ÷ (300,000 × 75%). Below that, the operation loses money.
If you put in 30,000,000 pesos, 0.5% of the capital, your share of the result would go from 1,674,375 pesos in the projection to 853,125 pesos in the 50% case, before taxes. Ask yourself whether that figure would still seem reasonable for the term and the risk.
The same test works for other assets. In a solar project, swap occupancy for production and the nightly rate for the energy price.
Warning signs before you invest
If you see one of these signs, stop and ask questions before going further.
A figure presented as a certainty
A future result with no scenarios or conditions tells you nothing. A projection always depends on how the project performs.
Pressure
You're asked to decide today or pushed along with no time to read.
Documents that never appear
You're shown a presentation but not the contract, or the subject changes when you ask for a certificate.
Payouts that don't come from the operation
If payments depend on new partners coming in rather than on the asset's income, there's no business behind them.
An asset that's hard to verify
You can't confirm it exists, there's no exact address or the owner's name doesn't match.
A personal account
You're asked to transfer to an individual's account rather than to the company you're signing with.
How you'd get out and what you'll be told
Before deciding, ask how and when you could exit, and how you'll know what's happening with the project.
Liquidity
Liquidity is how quickly you can turn your stake into cash. In private projects it tends to be low, and that's a risk in its own right.
Term
Look at the recommended holding period and only put in money you won't need during that time.
Rules for selling
The contract should say whether you can sell your stake, to whom and on what terms, and whether other partners get first refusal.
Reporting
Ask which reports you'll receive and how often. They should show income, costs and how both compare with the projection.
Sharing out results
Confirm who decides on distributions, how often and what's held back first. Distributions vary with how the project performs.
If the project doesn't happen
Ask what happens to your contribution if construction is cancelled or runs far behind schedule.
Solar energy guides
Related questions
Projects to review with this checklist
Practice on a real project: its information, its term and its risks.
Project in Construction
Project in Structuring
Project in Operation
Project in Structuring
Project in Structuring
Project in ExplorationCasa Lago
La Pintada, Colombia
This project is currently under study. We will notify you when it becomes available for participation.
Keep going
- How to calculate a project's returnIRR, payback and cash flow, explained calmly.
- Fractional real estate investmentWhat it is and what you acquire when you take part in a fraction.
- See the projectsGo through each one's information at your own pace.
Educational content. It is not financial, legal or tax advice, nor a public offering of securities. The figures in the examples are made up. Every investment carries risk and its results may vary.