How to Derisk your RE Entrepreneurship journey
Have heard that the best entrepreneurs/investors aren't the ones who necessarily take on the most risk but are the best at managing that risk. With that in mind I'd love to hear from you all about what you've seen in terms of people applying this to RE investing?
Become the GP instead of the LP and charge fees that are larger than your investment. That way heads you win tails you win.
Yes definitely interested in GP perspective as well.
wow havent hear that before
bump
House hacking, BRRR, and living in your flips are strategies to do your own deals and also mitigate risk. Another way to mitigate risk is if you can continue working at your W2 while pursuing real estate on the side
The best advice is also the simplest and most generic.
You manage risk by understanding where it comes from, not from specific strategies. Speaking broadly, people who get into trouble and take on too much risk are people who want to do too much (read: make a lot of money) very quickly, and who don't understand that real estate as an industry is a vehicle for building wealth over long time spans. It is not a business in which huge fortunes get made week to week, generally.
Think about the stories of people who go bust. They take on too much debt, trying to juice returns as much as possible to get into their promotes. They do too much without the ability to actually execute, and instead of doing one or two projects well, do a dozen poorly. I see lots of people buy into their own underwriting and not understand that the numbers on your screen when you underwrite a deal have no actual connection to conditions are the property/site. Doing deals 3-12 feels great when you're raking in acquisition fees, but that's like a sugar rush. Eventually you spend or distribute the fees and you're left with a lot of assets taking on water.
I've seen lots of colleagues or competitors who end up going bust because they aren't well capitalized enough. It's something you see in the news, or at conferences, as well. The minority co-GP partner running around bragging about the deals they're doing (but really don't have a role in), about the huge distributions they're taking, house in the Hamptons, etc. It is more important to them to seem like a big shot than it is to actually become one.
The eventual end point of all this seems to be a refusal to admit anything could be wrong, and then some downright fraudulent shit where money is being shunted across accounts, trying to keep every ball in the air despite the obvious fact that it isn't possible, ending with a perp walk or at the very least a series of highly embarrassing lawsuits.
Why did anyone MS this? lol
Off-Topic trolls and general weirdos following people around throwing MS for fun at people who they disagree with politically. They can't separate the professional forums from the slop pit because they only post in Off-Topic.
Eh, who cares. If someone doesn't like or agree with that advice (which wasn't presented particularly coherently, I must say) then they should feel free to do the opposite.
I couldn’t agree more - we saw the “sprint before you walk” effect many, many times amongst our operators when I was on the LP side.
If you want to “de-risk” your journey as a GP, take the time now to truly know and understand a niche strategy or approach at a micro and macro level so you can responsibly scale it. Take the time to set up the “machine” and clean processes so when you add more “raw product” (deals in the real estate world), production keeps up.
@Ozymandia is right — the basics are what sink people. You need proper corporate liquidity and excellent execution. Those both take time and discipline.
That’s what a good promote structure does. It pushes most of the risk to the LP and insanely outsized upside to you. Fees keep you above water in the event the project is a stinker
I have three sayings that are related to this:
#1 and 2 are related in that increases your chances of getting paid early on via giving up control and also negotiation leverage. If you are starting out without much capital to your name, it is likely you will be partnering with; working with people with more experience, unique experience, relationships, and money than you. Nobody mentioned partnerships, but that is one way to get your start.
My very first venture as a co-founder, my partner’s net worth was able to satisfy the loan guaranty. I also had recourse risk as I brought to the table significant operating credibility. Derisking for your first venture, often involves having partners that you are accountable to, while spreading risk and return.
The #3 saying relates to creating a management company to 1) earn a living doing work but in an entrepreneurial way, 2) while gaining exposure to opportunities (being in the game), and 3) over time building an organization and importantly corporate balance sheet, which could supplement or reduce the need for personal recourse (or divert it towards a party where that’s their role since they have a lot of net worth.
Take for example, Greystar. This company basically started as a property management company of a portfolio of apartment buildings in Texas. I’m going to assume these were “shitty” buildings that were given to a start up management company, probably due to relationships.
Over time, with growth, this “evergreen” management cash flow then helped build an organization at scale and then investments where Greystar became the sponsor. Being in the game, building relationships, having operational success, collecting the hard to get data, created a flywheel.
I say, a management company is hard to kill because you can have a management company of one building or one person (you!). There’s usually very little CapEx or debt. It’s a consulting service company essentially.
Anyways, #1, 2, 3 I’ve done personally and think they derisk going on your own early in your entrepreneurial journey… from a success at business standpoint. There are downsides like partnership risk, but the upsides generally outweigh in my opinion, because having business success helps with future opportunities and credibility, even if the money didn’t reach expectations.
Getting great work experience matters. Education attainment, certifications, they all matter.
Management is really, really difficult though. Everyone hates you, you make no money, and it is a constant grind in every possible way. Hiring and retaining staff. Keeping margins down. Responding to residents.
I agree it is a hard business to kill, but I also think that it's one of the ways grifters tend to suck money out of projects. Huge management fees without actually doing anything. Or in-house construction management that is making 20-30% margins for slapping some paint and plaster on a load bearing wall and calling it a day.
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