When I speak with potential capital providers, I hear two very different ways of thinking about investing in our projects.
The first group of investors thinks about things in terms of a return target. These investors trust us and like what we do. They are concerned about where we are in the real estate cycle (probably late) and therefore want to err on the side of caution. They therefore put in place a target unlevered yield target that’s on the high end and wait for us to bring them deals that clear the target… (eg, “We’ll do a 6.75% unlevered, if you can find one.”)
Implicit in the above is that these investors are willing to do no deals, if we can’t find ones that hit the threshold. Either they have other investment opportunities that are more compelling or, more likely (because everything is expensive right now), they are content to build up cash, because they think there will be better opportunities coming along shortly.
The second group of investors takes a different tac. They say, effectively: “We want to fund the best deals you can find.” In other words, they have already made the decision to allocate a certain portion of their available cash to our kind of multifamily deals AND they trust us to find the smartest deals for them. Obviously, for these investors, doing no deals is not an option… they’re hiring us to put out money and they want it put out.
Which type of investor is “right”? Well, it depends on what happens going forward.
If we’re on the verge of a correction where prices will drop materially, then the first type of investor will have been right. They sacrificed some current yield in order to keep dry powder to buy things when they get cheaper.
If, on the other hand, we’re in for several more years of growth, then the investors who move forward now will have been better off.
Anyone who tells you he knows, with certainty, when we’ll have a market correction is either stupid or lying. So I think whether you fall into the first or second camp mainly comes down to whether you are fundamentally an optimist or a pessimist.