How to invest in real estate if you don’t know anything about real estate – finance and banking


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One of the things happening today is that a lot of investors would love to be exposed to real estate but – to be honest with themselves – don’t know how to figure out where to invest or how to assess the risk and the reward. Of course, they could buy a public REIT but would have no real ability to value the REIT or what it owns. They could invest in a deal but are logically afraid that they have no way of knowing if it is a good dealor not a good deal.

One conclusion is to ignore real estate as an investment class, but with stocks rushing to the moon and bonds almost zero yielding, there is a dangerous risk / reward profile for both investment classes. assets, and real estate stands out as one of the few alternatives where the risk / reward profile can make a lot of sense.

I can’t help you with investing in public companies; However, here’s a look at how you might invest in private real estate in a way where you can deal with your lack of underlying real estate knowledge while still ending up with a smart risk / reward profile. The steps are as follows:

First of all – don’t try to Makemoney – focus on not to lose money. It may sound sophisticated, but trust me, it is not. I’ve seen a lot of it come and go over my long real estate career, and those who tend to last for the long haul invariably think that way. They don’t swing for fences, but neither do they.

Second – don’t waste your time trying to choose real estate or real estate markets. You can’t do it, and even if you try, you are competing against players who (i) have deep knowledge of the market and (ii) have probably been doing so for many years. You are the sucker at Warren Buffett’s poker game if you try.

Third – do not listen to pitches until you follow these remaining steps. By the way, this includes your brokers, wealth managers, and the like.

Fourth – dive deep into the party you’ll be giving your investment dollars to. Evaluate very carefully if they have both

  1. A long-term roadmap that is clearly disclosed to you. This should be a minimum of 10 years and hopefully over 20 years or more. Make sure the disclosure is clear and complete; and
  2. In-depth expertise in the specific asset class in which you are investing.

As you assess the track record, determine if the sponsor was lucky with a big deal that skewed their results or if it is consistent that that sponsor almost always walked away with an advantage and at least one result. moderately successful.

Fifth – dive as deep as you can to see if there’s even a shred of dishonesty in the sponsor’s track record. I hate to say it, but I guess the worst. If the sponsor has been accused of something in a lawsuit, it’s not worth hearing the explanation – just move on. There is an old saying that a man who steals a chicken will steal a horse. And even if the alleged dishonesty dated back more than 20 years, I would go anyway.

Sixth – assess the risk / return profile of the investment, i.e. whether it is an ultra-safe coupon-clipper with a risk close to zero and a low concomitant increase. Or is it a development deal where there is development and other risks and presumably a higher upside? My theory here is that you should be “overpaid” for your risk. And, of course, the risk / reward profile must be consistent with your investment objectives. Coming back to my second point above, you are not trying to choose real estate itself, but you are reducing it in order to have a risk / return profile that is consistent with your goals.

Seventh – ask the sponsor two critical questions:

  1. Does the sponsor put real skin in the game? This means that you want to know – very clearly – how many real investment dollars are invested in the business by the sponsors of the sponsor. This does not include his friends but may include his wife / husband, children and close family members. Be careful here, the sponsor could say they are investing, say, $ 500,000, but could also receive a sales charge of $ 500,000 at the close, which means their risk is zero. The bottom line is that if the sponsor isn’t risking large sums of money on the deal, then you’d be stupid to do so; and
  2. How is the sponsor treated differently from you economically? Of course, the sponsor should have a better deal than you because, after all, they found the deal, set it up, and do all the work. The question is to what extent is the sponsor treated better than you. It is a judgment that you must make. As you rate it, consider the fees the sponsor receives and the so-called promotion (that is, the extra benefit the sponsor gets for a successful deal). Consider if the deal turns out to be a dud or a “blah” artist in the future, but the sponsor still does very well by removing the fees while you rip your hair out in frustration.

Eighth – do not put all your eggs in one real estate basket. Even after doing the above, there is a luck factor that you cannot quantify. So if you have, say, $ 1 million to invest, divide it into four or five investments of $ 200,000 to $ 250,000 each.

To conclude, while it is very difficult to invest in an asset class that you do not have extensive knowledge of if you invest within these guidelines, I suggest that you have your best chance of success. You will have:

  • A quality sponsor
  • Do what she does best
  • With very aligned interests
  • On multiple transactions

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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