3 Reasons I’m Not Pursuing Real Estate Right Now
I’ve been involved with real estate since 2009, when I started as an economist at Fannie Mae. Since then, I have held roles in acquisitions, asset and investment management, and raising capital. US real estate has historically been one of the most approachable ways to build and preserve wealth, but it’s not for me right now.
After working in and building real estate companies over the past 15 years, I know how difficult it is to run a deal. I know how many people and what types of people need to be involved to make a value-add deal work well. Most importantly, I know how critical back-office systems are for effectively scaling a real estate business.
I found that the best operators can become the best investment managers. That’s why I want to build the back office before I start syndicating capital for real estate investments. Below is a little more detail on why I’m staying out of real estate right now.
1. Limited Database of the Right Investor
I led the capital raise for a hotel deal that we closed about a month before the world shut down in 2020. It was possibly the worst time to invest in a hotel. Still, we didn’t have to call capital from investors or negotiate a short sale with the bank. After a lot of thoughtful asset management and a great location, that deal will harvest this year as a win.
Those situations are always at the back of my mind when looking at new investments. It’s also why I shifted from the modern private equity model to a family office model. The buy, fix, and flip model has its merits, but it depends too heavily on market timing, which doesn’t always align with the execution plan.
The family office approach focuses more on long-term holding and value creation over time. While the investor benefits from a value-add execution, we get the flexibility to harvest returns when the market is most receptive.
This blog and other content that I will create are designed to build that new database of aligned investors. I want to invest with people whom I know well and share a similar worldview.
2. Deal Availability
As a family office, I am product agnostic and focused primarily on geography. My initial targets are close to home – Western Broward County, Florida – and aligned with my perspective on both how the business cycle and secular trends intersect. While I have no problem pursuing marketed deals, I haven’t seen anything too attractive.
In my experience, the traditional marketing process squeezes most of the value out of the deal. A great broker will do what they’re hired to do – extract the highest possible price with the most favorable terms for the seller. It’s easily the best way to sell an asset, but as a buyer, I’m looking under different rocks.
Buyers need to be more patient to get the best deals. I’m focused on building relationships where we can pick up broken auctions, pre-marketed deals, and off-market opportunities. These special situations take time to develop, and you need to kiss a lot of frogs to find your prince.
3. Infrastructure First
As mentioned above, I’ve experienced first-hand the benefits of strong infrastructure and the challenges of insufficient infrastructure. The three pieces of infrastructure that I found are most important – and most mishandled – in any business are:
- Sales & Marketing
- Accounting
- Human Resources
The most significant failure points for each usually come down to maturity and focus. None of these functions is ever fully built and ready for growth. As a small business, you’re always going to be chasing a new reality until you reach stabilization (whatever that means). That said, if you know what the most important item is at any given time, you can direct the right energy toward getting that problem resolved.
I had mixed experiences working with external partners in all of these areas. I also spent a lot of time building these functions in-house. I know the value of having a deep bench to call on when working with an external partner, and the struggle of navigating a bureaucratic maze to get the right people. My goal over the next year is to build these functions into third-party services that will form the foundation for a diversified property management business.