Something I’m pretty bad at

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I’m pretty bad at doing deals for myself and my family (as opposed to doing them on behalf of investors).

Why?

With investor deals, we’re not capital constrained. We raise all of the cash necessary up front and are therefore in a position to make optimal choices vis-a-vis renovations, etc. With family deals, I’m always limited as to the capital available, so am forced to make trade-offs and suboptimal choices.

With investor deals, we never assume we’ll use leverage on the way in. We evaluate all deals on an all-cash basis. So, we have got used to thinking about, say, a 7% unlevered return as a good deal. With family deals, we’re using leverage, so, generally speaking the returns look better… but it’s not really fair to compare apples to oranges. So I’m more apt to get excited about family deals, when they’re actually not that great in the cold light of day.

Finally, there is the risk that’s associated with lack of diversification. Any one investor deal probably represents a negligible portion of the capital controlled by the investor(s). For my family, when we do a deal, it could represent 10-15% of the family capital. That means there’s a ton of pressure not to do anything stupid… and therefore a lack of the kind of dispassionate clarity I bring to investor deals.

There’s a saying among lawyers that any lawyer who represents himself in court has an idiot for a client. Not sure I’d go that far with respect to my family deals, but it’s not that far off, either!

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