If it’s such a good deal, why don’t you buy it?

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I get asked this question a few times per week, so I figured I’d post my answer here so that I can just refer people and save my breath.

Let’s start out by saying I fall in love with a lot of properties, many of which don’t necessarily have such great numbers on the surface. There is a magical combination of location, price per square foot, GRM, unit type, availability of parking, availability of leverage, etc. that causes me to occasionally like deals with returns that don’t look that great.

But let’s throw those deals out, because I usually don’t try to sell them to my clients (unless they are particularly savvy).

Instead, let’s focus on the ones where the numbers are good AND there are several other strong, qualitative upsides to the property. Those are the deals I do try to sell my clients. And those are the deals that tend to evoke the question above.

So, why don’t I buy the deal myself? Here’s why:

  • I do have a fund through which I can buy apartment buildings;
  • However, I have to pay my investors a very high annual preferred return for using their money;
  • Therefore, I am IRR (“internal rate of return”) driven (in other words, I need to think about profits AND time, with minimizing time often being more important than maximizing profits);
  • To maximize IRR, I usually need to get into and then out of deals relatively quickly (unless I manage to leg into a yield on costs that is so ridiculous that I can pay the investors their return without selling – which does happen sometimes);
  • Getting out of a deal means paying transaction costs (brokers, escrow fees, transfer taxes, etc.); so,
  • The deals I do are ones where I can get in and out while still making a large enough profit to cover the transaction fees, deliver a healthy profit to my investors AND make some money for myself

These deals exist (I’ve done two of them in the past six weeks or so), but they’re rare. And, when I do find them, unlocking the value always requires full-time, aggressive management backed by boatloads of cash.

Most of the deals I do are therefore basically off-limits to my clients, who tend not to have unlimited cash and time.

Fortunately, on the flip side, there are plenty of deals which are really good (have good numbers plus good qualitative aspects) but which do not quite have the “pop” in them to make them candidates for my fund. Those are the deals I push my clients to do.

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