Cash-flowing private real estate deals can make great investments. However, with the space being highly unregulated and access to deals/sponsors fragmented, there’s a belief that investors must be real estate experts to make educated investment decisions.
I think those expectations are crazy and the narrative prevents many individuals from investing in private real estate deals. Instead of expecting investors to be real estate experts, I believe investors should know just enough about real estate to ask the right questions, assess a Sponsor, and make informed investment decisions. Of course, in addition to their own real estate knowledge, they should consult their lawyer and accountant before making any investment decisions.
Rather than providing another deal-screening checklist and an overly detailed post on evaluating opportunities, I reached out to 19 of the top real estate professionals and asked them to share their ‘best piece of advice for passive real estate investors’. I compiled their advice into a single eBook, which serves as a great starting place for individual investors interested in investing in private real estate deals.
I recommend you download and read the full eBook, but I also wanted to share a few of the core themes that were repeated.
Focus on identifying a high-quality Sponsor. This was the single biggest piece of advice I heard from real estate investment professionals. I see it first-hand every day. Real estate is an operational business and the quality of the Operator is the single biggest determinate of success.
“Real estate isn’t rocket science – we buy low and sell high. It’s what happens between those two liquidity events that makes or breaks a deal. Find someone that knows the product and the market inside and out, make sure they’re co-invested in the deal with personal cash, and try to get in on the GP side of the ledger when you can. A good operator can turn a 6 into an 8 and a bad operator can turn an 8 into a 0. Pick the right horse.” – Jimmy Love, Distribution Realty Group
Recognize what needs to go right for the investment to be a success. Any deal can look great on paper, so it’s important to understand the detail behind the key assumptions which drive investment success.
“Really focus on the sponsor’s strategy: what are the potential paths the investment could take, and what does that mean for the potential range of outcomes, particularly as they relate to the project’s total cost, stabilized NOI, and quality of asset? Is there a lot of optionality in the investment or is the business plan focused on one path? This may help you better identify the risks and understand if you and the sponsor are prepared for various outcomes.” Sujit Sitole, Cambridge West Partners
“Before investing, try to understand the big-ticket items you’re betting on. Try to decipher how many of these variables need to go your way for the bet to pay off (and for you to achieve proforma returns). And maybe more importantly, what happens if these factors don’t go your way? A quality Sponsor should easily be able to tell you what assumptions move the needle for the deal. Be weary if more than one or two things need to happen for the deal to perform well, especially if a bunch of these items are beyond the Sponsor’s control.” Benjie Moll, Arx Urban Capital
Ensure your investment objectives are clear before making your first investment. Private real estate deals can vary greatly, so make sure you pick the deals and strategies that align with your goals. Furthermore, make sure if you maintain the liquidity to jump at great opportunities when they arise.
“Manage your investable cash so that you can participate in multiple projects. I tend to see investors, especially those new to commercial real estate, get excited about the first opportunity they see and want to put most (if not all) their available cash into the deal. I suggest managing your money so you can invest in a minimum of 3-5 projects, which will provide the benefits of greater diversification.” Scott Scharlach, Progression REI
“Your investment objectives should be clear, so you can match the right investment (and/or speculation) to your objectives. For example, your hold period, risk tolerance, and return targets (from current yield vs. appreciation) should align with the prospective investment opportunity.” Jiho Lee, Drake Real Estate Partners
Investing in private real estate deals can be a great way to diversify your portfolio and build long-term wealth, but requires effort on the part of the investor to identify quality Sponsors, sift through deals, and select opportunities that with their investment objectives.
I want to thank all the real estate operators who continue to act with integrity, build trust with investors, and raise the bar for all real estate investment firms.
What advice do you have for passive real estate investors?