Before you entrust your funds to a real estate investment partner, ask some questions.
First: Is your real estate investment partner an Allocator or an Operator? There is a big difference.
Allocators distribute capital on your behalf to Operators. Allocators seek the best operators and invest, on your behalf, in whatever funds and deals operators bring to them. Allocators make sense if you are a pension fund (or similar) with no expertise in real estate investment. You are basically outsourcing that function and knowledge; however, it comes at a cost. You have no input in asset selection or fund strategy. And of course, the Allocator charges fees. This adds an additional layer of costs to you, and these fees come out of the investment thus reducing your returns. An Operator, on the other hand, is the preferred solution if you have the resources to analyze a specific fund or an individual deal. If you invest directly with a real estate operator, you will not only save a layer of expensive fees, but also get to choose a fund investment strategy, (or particular asset), its geography, investment term, and even the potential returns. But be careful how you choose an operator. They are not all the same.
Six questions you should ask your operator:
- Focus. What asset class do you specialize in?
If the answer is “retail, industrial, and student housing…” Run! An operator must be an expert in a specific asset class.
- Market. What markets do you specialize in?
The same applies to markets. A real estate operator must have a physical presence in the target market to really understand its nuances and trends.
- How long have you been in business? In the specific asset class? In the specific market?
Experience is priceless.
- How many economic cycles have you experienced? How did you weather the market crashes of early ’90s and ’08?
Real estate is great while the market is booming. Does your operator know what to do in a crash?
- Who manages your investment properties? Do you outsource to a 3rd party management company?
There is no substitute for your own, on-site management of your assets. As a wise farmer once told me, “The best fertilizer is the farmer’s foot on the soil.” This applies to property management, as well. You must have your foot – and your hands, eyes, and ears — on the property, at all times. The 3rd party manager has no skin in the game. It’s not his money at risk if there is a budget shortfall.
A word about property management: It is local, hands-on, and very difficult – and probably the most important aspect of a real estate investment. Your management team, especially at the site level, is critical to your property’s success. Few investors/operators pay enough attention to this fact. Let me assure you, it’s very, very difficult to assemble the right team. I can hire 1,000 financial analysts more easily than one, excellent on-site property manager. It’s that hard.
- How much of your own money are you putting in the deal?
Most sophisticated investors want to see the operator have money in the deal. It gives them comfort knowing that if the investment is not successful, the operator will share the pain.
At Lloyd Jones Capital, we always invest alongside our real estate investment partners, but, in fact, maintaining our good reputation and strong track record is what motivates us to succeed. With the transparency in the market today, an operator’s reputation is far more valuable than his money.
In summary, when choosing a real estate investment partner, ask these questions and remember:
Real estate is local and hands-on. Your partner should be, too.
Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real estate operator that specializes in the multifamily and senior housing sectors. Headquartered in Miami, the firm acquires, improves, and operates multifamily real estate in growth markets throughout Texas, Florida, and the Southeast. Its affiliated management group is an Accredited Management Organization (AMO®) with a thirty-five-year history in multifamily real estate.