All Forum Posts by: Vince DeCrow

@Account Closed, I agree with your colleague. If the investment strategy is to buy and hold, then a sponsor who has held an asset for 15 years and kept it performing well among it's comp set over that period would certainly indicate to me that the sponsor is well versed and skilled in operating that type of property. 

@Orita Issartel I would invest the $500k based on strategic diversification to assets whose returns are comparatively un-correlated with each other. This might not provide 40%-50% annual returns that some might try and promise you but the risk-adjusted returns you could achieve by doing this would far exceed the gamble of betting on one 1 or 2 fix-and-flips or making a couple hard money loans. I would split the $500k into 5 buckets:

1. Real Estate-Equity: $150,000

2. Real Estate-Debt: $150,000 

3. Stock Market: $100,000

4. Commodities: $50,000

5. Cash: $50,000

I would invest the real estate allocation into a real estate fund whose managers have a proven strong record of producing returns for their investors. I would choose to invest in a fund over 1 or 2 specific properties in order to add diversification through investing in more properties and geographical markets, thus lowering overall risk without giving up returns. I would follow the same principal with the real estate debt allocation. I would choose real estate debt over bonds or other forms of debt because real estate floating-rate funds are easily obtainable and eliminate risk of rising interest rates in the future (unlike bonds where principle investment basis is lost if interest rates rise). I would invest in a handful of ETF's in the stock market which diversify my investment into different industries that have uncorrelated performance. I would also invest the commodity allocation into different commodity focused ETF's. If you are wondering why I have included a somewhat historically volatile asset class like commodities, it's because their values tends to be uncorrelated with the systematic risk adherent in the stock market and other asset classes. I would set the cash on the side to apply to any of the other 4 buckets (or a 5th bucket) down the road as new investment opportunities arise. While private real estate funds have largely been unavailable to the vast majority of investors in the past, there are now several avenues to gain access to these types of funds (in addition to the funds posted on RE crowdfunding platforms), feel free to reach out to me if you are unaware of the various other avenues. 

-Vince

@Account Closed

Hi Rachel,

One thing that I didn’t see specifically mentioned in all the great advice you received here is the importance of the syndicator’s experience within the specific market/sub-market where the investment is being made.

If the syndicator has 10 years of experience running successful multi-family value-added deals in the sub-markets of Miami, this may not necessarily guarantee success for the syndicator doing the same type of deals in the sub-markets of Atlanta. Market fundamentals can vary widely based on location and it’s important that the syndicator is knowledgeable on how the market functions and what the future of the market looks like. For example, if the syndicator is not aware of a silent rash of new inventory that will hit the sub-market in 3 years but underwrites a value-added investment to make capital improvements which will drive increases in occupancy at their property, they may be in for a surprise. If the new inventory is comparable to the syndicator's property then this may result in the syndicator having to lower rents below pro forma to win the new tenants, and thus lowering returns from what was originally expected...potentially significantly.

In addition, if the syndicator does not have a footprint in a certain market it’s also possible that they are not connected with the broker community in that market. Lack of strong broker relationships could lock them out from getting access to potentially more lucrative off-market deals and could limit their pool of prospective buyers once their business plan has been executed.

All of this said, if the syndicator does not have prior experience in a specific market or compelling reasons why they are highly knowledgeable in the market they are investing in, then this should be considered as another layer of investment risk.

-Vince