Ep 49How To and How Not To Invest in Real Estate
The number one red flag: the guy throwing over-the-top parties
Joseph Kahn & Yudi Goldfein
How To and How Not To Invest in Real Estate
with Joseph Kahn & Yudi Goldfein
If a syndicator comes to you and tells you, you know, I've only made money on my deals and I've had a 25% return this and that, means he hasn't been through a down cycle or he's burning money.
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Quotes
“Math doesn't lie, Excel does. Right? I can make any deal look good in Excel.”
“You could never assume that that past performance is going to translate into into future success.”
“I would ask my worst enemy to put money in this deal. It was that bad.”
“It works great on the way up, but when you're on the way down, that's how you get wiped out.”
“Just because it's your friend and Shmuel and this and that or your, you know, friend that you know since childhood, that's usually where you end up with the most problems. Is that you trust them too much.”
“It's more important to see what they did when they had a bad deal than anything else.”
“I cannot fix if you're overleveraged or you're overpaid.”
Takeaways
- 1 In commercial real estate you buy income, not a building. Higher taxes, insurance or payroll cut the income and with it the value.
- 2 Cap rate = net operating income divided by price. The lower the cap rate, the higher the price. Cap rates are supposed to reflect risk, and in 2020-2021 that link broke.
- 3 Much of the post-2008 money in the community went into multifamily. Low rates and institutional money pushed prices up.
- 4 Friends, cousins and past investors who pitch a deal may be paid to raise money, or the sponsor may be stuck on a deposit he can't walk away from. Either way, their interest isn't yours.
- 5 Red flags: lavish spending and parties, too many deals at once, claims of no losing deals, 35% IRR projections, and a story that doesn't add up (like asking you to sign loans for him).
- 6 Leverage cuts both ways. At about 93% financing, a 10% rise more than doubles your money and a 10% drop wipes you out. REITs typically use 40-50%, syndications 75-85%.
- 7 Commercial loans run 5-10 years, often with floating rates and costly prepayment penalties. Many bridge loans taken at low rates are now in trouble as rate caps expire.
- 8 Offering memorandums follow no fixed rules. The guests have seen fake rent rolls and edited T12s, including from people in the same shul.
- 9 The two guests disagreed: Goldfein says leverage and illiquidity make syndications riskier than index funds. Kahn says real estate can ride out a downturn if you don't have to sell, and can make sense as about $50K of a $300K+ portfolio, but not your only $50K.
- 10 Expect about 8% a year on average, not 20%+. $500,000 at 20% for 45 years would be about $1.8 billion; at 10% it's about $36 million.