In this video, we delve into the essential tactics and key considerations that every real estate investor must be aware of to safeguard their investments from the pitfalls associated with inexperienced operators.
Whether you’re a seasoned investor or just entering the real estate market, the invaluable insights shared here will empower you to make informed decisions, mitigate risks, and ensure the long-term success of your real estate portfolio.
Don’t let inexperience jeopardize your financial goals – join us and fortify your real estate investments with knowledge and strategic planning!
Transcript:
Chris Bounds 00:00
offline, we talked about a deal that went bust, it was a portfolio in Houston, very unfortunate. And I didn’t know that operator, I don’t know them. I kind of heard some of the, you know, rumors after the fact. But then at the end of the day, what I hope comes out of that is invest the passive investors, the LPs, that they take on themselves, more personal responsibility to underwrite the operator, and not chase IRR. It’s a lot of operators, investors out there, they’ll look at three or four deals and be like, 1516 Ooh, 2020 an hour, and you don’t want that one. And it’s, it’s not that simple. And it’s really dangerous.
DL Campbell 00:50
It is. And the limited partners are the passive investors don’t have the underwriting experience. And if it’s a syndication, the, the deal sponsor doesn’t have the experience, either. They haven’t been through a couple decades of market cycle. So there’s a couple of really good key points that you mentioned. And we like to say, you underwrite the horse, and you underwrite the writer, that’s the team. And if a property doesn’t have an excellent team, you got to, you got to team up with people who do, even if you have to give away a larger portion of the deal, you know, you want to be able to sleep at night, because your investors are getting paid well. And they are also safe, and they’re secured by the collateral of the property. So we want to do that risk mitigation in a number of ways, so that the investors are safe. With Can I add
Chris Bounds 01:56
something to that, too? Yeah, absolutely. When investors are looking at a business plan or an opportunity, and they’ll see the management team, the sponsor team on the business, plan, the PowerPoint, and it’ll have some probably well known faces. And there’s usually a couple of faces on there that they’ll tell their experience, they should have that, but ask their level of involvement in the deal, because there are some organizations, coaching groups and all that that will lend the primary coaches or mentor lend their credibility to help close a deal. But their involvement is very little, and maybe even none outside of helping get it closed. So the last thing that you want is thinking, hey, there’s someone on here, it’s got 20 years of experience, and they you know, they have 3000 units under management, while they must be a good operator, but they’re not the run when doing it. It’s the other guy, or the other gal, who they just started a year and a half ago, and they’re really, really green. So it’s not that that deal couldn’t be good. But bad operators can ruin a good deal.
DL Campbell 03:21
So we’re no, we’re not a good deal. Or it’s just not a good deal. And it shouldn’t be done. Yeah, I agree with everything that you’ve said, because they’re very inexperienced people who are ruining the investment market. And it’s concerning for the investors. So, you know, listening to what you’re saying is so important, is to drill down in there. And it’s not about familiarity and recognizing somebody at all. I think that the bottom line is that over the last three years, there are so many deals that should not have been underwritten. The interest rate hasn’t been at 2% or 3% for a very long time, and it stayed too low too long. So anybody new in the markets and other we can anybody can do real estate, this is easy.
But what about when that interest rate normalizes at 5% or whatever. So we have to be underwriting our interest rate when it’s not 5% We have to underwrite it too high. We have to adjust our gross operating expenses too high as a buffer. We have to have our inflation rate at 3% or 5%, not six or eight or 20% because that over valuates Our property, what the way that we underwrite our deal and we have underwritten the prestige is We have five or six places where we’ve mitigated risk. And we said, Okay, what if everything goes wrong? How will the property operate.
And as a former engineer, I have to give the property a little bit of credit and go okay, on the rinse, we’re gonna go medium to medium low, we’re not going to go, you know, we’re not going to project high rents. And so based on those numbers, that’s where we get our IRR. But any other deal? I know, they have pain of lipstick on that pig. And they’re projecting blue skies on everything. So, buyer beware. Yeah,
Chris Bounds 05:39
no, unfortunately, some of those will come back. Um, I think banks will probably be a little bit more willing to do what they can to negotiate before just taking back in mass having learned from those names, yeah, but they’ll take him back if they need to, or if they have to. Now for newer operators, this doesn’t mean you can’t do deals, it’s just means like, if I’m going to go do a new development deal, especially class, a new development primaria, I’m just not going to go try to do that do myself, I’m going to, I’m going to call you deal or someone that I know that knows that market, and that that type of exit strategy. And we’re going to work on that from a JV perspective.
And I’m gonna take a back seat a little bit, and learn while swinging a hammer, learn, learn, learn while operating. And as you go along and get a few of those under your belt. Then, even though you still might be green, because you’re only three years in or four years, and that’s experienced, but it’s also experienced enough where could be dangerous. That’s when you can start hiring. You can hire not the entrepreneurs like like us, you go hire someone who has an incredible experience in asset management, project management, property management, capital raising, you can hire those a level players to join your team. And then that helps solve some of those credibility gaps. And then you can start exactly
DL Campbell 07:05
right longing. That’s you’re exactly right. And that’s what we’ve done at the prestige is we have 402 years of commercial and construction experience. And these people are are sharp. They have industry experience. It’s that credibility gap for somebody who doesn’t have the 20 years of commercial, but it’s also that knowledge gap. Because my morning was spent with our civil engineer, our general contractor, and our CO developer. And we all in our certified arborist to solve this issue. And it is so fun to be in that kind of room where iron sharpens iron. So just like you said, we’re we’re solving that credibility gap, but we’re also solving that skill set out and the skill set is what has been missing in this market for a couple years. Definitely, definitely