Most Common Rookie Investor Mistakes & How to Avoid Them

most-common-rookie-investor-mistakes-how-to-avoid-them-january 2021-blog-1-1

Whatever you do, don’t lose money on your first private equity real estate investment!

I know this seems sort of obvious, but your first investment really is your most important one. Think about it, when you make that first investment, you will probably be the least confident about your decision, and a failure on that first investment may cause you to never make a private equity real estate investment again. The result could be that you would miss out on a lifetime of huge returns realized by real estate investors every day.

The best way I know to avoid losing money is to avoid the rookie mistakes investors make. I have had 23+ years to observe, first-hand, what investor mistakes people make, and I know which investment mistakes to avoid. Almost all those mistakes fall into two buckets.

  1. They didn’t do their research and trust their gut.  
  2. They didn’t make sure the real estate asset class they were considering matched their own personal appetite for risk.

Investor Mistake #1 – Not Researching or Trusting Your Gut

In the world of private equity real estate investments, we call this “vetting the sponsor.”  There are a couple of obvious things you should consider when vetting a real estate firm.  

EXPERIENCE MATTERS!

Please do not discount this. Real estate is more complex than people realize. Many of the important things I have learned over the last 23 years, I learned from actual, hands-on experience. 

  • It is this experience that allows me to predict what is probably going to happen with a property type, a neighborhood, renter preferences, etc. 
  • It is experience that helps me understand why a certain neighborhood isn’t investable.
  • It is experience that helps me select the right time to sell a property.
  • It is experience that helps me interpret the data from multiple sources to set a terminal cap rate when I analyze a potential investment.

You know experience when you see it, but there are plenty of scenarios that I have seen where new investors put trust in the wrong people.

  1. Many people attend real estate seminars and then go out and try to raise money to make private equity real estate investments. There are seminars everywhere. Some are very good and some are not. Just because a sponsor went to a seminar or went through a training program does not mean he or she knows what they are doing. This sounds obvious, right? But right now, there are people raising millions of dollars to invest in real estate and they have never successfully turned a deal or made a dime in real estate! And even worse, people are giving them money! Please don’t do this!
  2. Oftentimes you will see a person who bought one property and then brags to everyone about how well it’s doing. Because of that, they are able to convince their friends that they are an expert and talk them into going in on the next deal with them. That second deal doesn’t go well or even loses money. The result is a disaster and a friendship is strained or even worse. Please don’t do this!
  3. Finally, another very common scenario is someone who made a bunch of money on a duplex they owned in California or another hot spot. They then jump into sponsoring large multifamily deals on the premise that they now know real estate. You can guess the likely outcome. Please don’t do this!

These scenarios are real-life examples of investment mistakes to avoid.  Interesting to note that when I talked with each of these investors after the investment didn’t turn out well, every one of them said that they “should have trusted their gut.”  So please, trust your gut!

TRACK RECORD MATTERS!

Ask the Sponsor or Private Equity firm to review their track record with you. If they are unwilling to let you do this, you probably shouldn’t invest with them. Here are a few questions you should ask: 

  • Have they ever lost money on a deal?
  • How long have they been in business?
  • How many deals have they done?
  • Have they ever given a property back to the bank?
  • How do they manage the properties they own?
  • How many properties have they managed to date?
  • What types of returns have their investors made historically?

The answers to these questions are extremely important and, please, whatever you do, don’t ignore common sense. If they don’t have any real experience, don’t give them your money. Let them cut their teeth in the real estate business with someone else’s money, not yours!

Investor Mistake #2 – Not Matching the Asset to Risk Tolerance

Most people think about risk when investing in the stock market or bitcoin, but they oftentimes don’t think about it when considering private equity real estate investments.  

Let me explain why risk is important, even with private equity real estate investments.

Some types of real estate are definitely riskier than others. For example, an investment in a retail property that only has one tenant is definitely riskier than an investment in an apartment property with lots of tenants in an economically diverse neighborhood. In this example, the retail property is riskier because there is only one tenant and it is part of a real estate asset class that is undergoing enormous changes right now with the continued migration to online shopping. If that one tenant has financial difficulties or moves, the asset will have no income until a new tenant is found. I call this a binary investment. You either do well or you lose a ton of money.

If you are comfortable with that level of risk, then by all means, go for it. In fact, some argue for investing in a riskier class of real estate in order to achieve those higher returns. Here at KRI, we disagree with that mindset. Instead, we prefer to invest in multifamily apartments. We like this asset class because we can generate returns normally consistent with much riskier assets.  Historically, we have been able to generate 20%, 25%, even 30%+ annual returns for our investors.  

In our company, we understand our tolerance for risk and we stick to the asset class that is relatively low risk. You see, we are conservative by nature, and we believe most investors are as well. So when we are able to earn extraordinary risk adjusted returns with multifamily assets, we believe it is a win-win for everyone!

I hope this article helps you to avoid the biggest mistakes people make when making private equity real estate investments and that this is just the beginning of many years of lucrative real estate investing for you and your family. If you’d like to learn more about investing with KRI Partners in our Multifamily Real Estate Fund, please don’t hesitate to contact me directly.

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