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Two CRE Investing Rules You Can't Ignore

It is possible to invest with confidence, peace of mind and stable return on investment by following two rules.

Have you ever lost money on a stock or limited partnership investment that your broker hyped as a “hard to come by” portion of a “you can’t lose” deal? It is possible to invest with confidence, peace of mind and stable return on investment by following two bedrock commercial real estate investing rules:

1) First, invest only with the most experienced and successful individuals.

By experience, I mean that an individual has been intimately involved in a particular commercial real estate sector on a full-time basis for an extended period, at least five to 10 years. Length of tenure is important because it demonstrates an aptitude and willingness to manage through various economic environments. Strong performance in a bull market is a poor indicator of overall competence.

Interview all the major players in the deal to determine whether they have the requisite experience. Ask about the following:

  • successes and failures in the past and what they learned from their failures
  • most recent activities and the results
  • substantial investment of their own in the investment you are contemplating
  • plans and expectations for the investment.
  • who you could contact regarding their prior performance.

Even before experience comes the need for your investment partner to possess three characteristics: integrity, intuition and instinct.

  • Integrity. Even before experience comes the need for your investment partner to possess integrity—honesty and strong moral principles. It is quality of character that is not easily identified through credentials or transaction histories, and often reveals its presence or absence in subtle ways. Always scrutinize your potential investment partner’s behavior and be sure that it is consistent with your value system. If the investment partner’s behavior doesn’t adhere to your sense of integrity, then find another investment.
  • Intuition is not innate, but rather learned after extensive long-term training. It is the ability to understand something immediately, without the need for conscious reasoning. Intuition is the product of both wins and losses, and reflects an individual’s capacity to apply knowledge gained from prior experience in new or different contexts. While there are a few exceptions, it is highly improbable that anyone in the business world will have developed sufficient intuition in less than five to seven years. Ask the management group with whom you may invest if they have intuition that will guide them in their decisions, and ask for examples.

Based on lessons learned, your intuition should guide you as you employ these three methods when evaluating your investment partner(s).

a) Get it in writing. Get all information that is given by the entrepreneur, company, broker or investment advisor in writing, or write a letter to them confirming what information was provided. A verbal recitation of an investment’s attributes is promotional and inadequate as a means of investment due diligence.

b) Take notes. It’s not that anyone would deliberately mislead you, but they are liable if they do! Request each team member’s resume and track record (a compilation of specific projects in which the management group or entrepreneur had been involved).
c) Confirm specialization or specific subject matter experience to identify the degree of expertise necessary to manage the risks inherent in all businesses. This means they have earned their living in the specific commercial real estate investment vertical (i.e., hotel, retail, office) in which you are being asked to invest and their mistakes have been made as principals in the industry.

d) Instinct. The natural ability that helps you decide what to do or how to act without protracted contemplation defines instinct. Instinct helps each of us recognize and react to circumstances that endanger our well-being or support our desires. It allows us to assess risk and opportunity. We are all capable of assessing people or circumstances in micro-seconds. Trust your instinct because it is your first, oldest and most important method of self-preservation.

2) Before making any investment decision, conduct exhaustive due diligence.

  • Evaluate the integrity, expertise and managerial capability of the project’s principals.
  • Thoroughly analyze the economics and risk-reward ratio of the project; if the data is accurate and if the financial projections and assumptions are realistic. For example, verify the legal and tax assumptions printed in the offering materials for a limited partnership.
  • Whenever you are examining an investment outside your own area of expertise, consult with independent experts.
  • Once you have reviewed all the information and expert opinions, trust your own judgment.
  • After you have committed your funds, conduct ongoing due diligence to protect your investment. 

Accurate, detailed information is an investor’s most precious asset and performing due diligence will better position you to consistently earn healthy profits while putting yourself at minimal financial risk. If the size of your investment does not justify taking the time to complete due diligence, decline to invest.

Stay true to the two simple rules of investing covered in this post 1) invest only with the most experienced and successful individuals and 2) conduct exhaustive due diligence. Apply these rules and team up with commercial real estate investment partners with integrity, intuition and instinct to position yourself for winning investments.

Robert Kantor served as the chairman and CEO of a succession of real estate investment and development companies over the past 40 years. In this capacity, he has acquired and managed investments in excess of $1 billion in real estate partnerships.

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