What differentiates a "pro" investor in real estete and an amateur one?

Question: What differentiates a sophisticated investor in real estete and an amateur one? 

Usually, one doesn't need too much education to invest in real estate. Everyone can do it considering most people understand that:

  • Real estate usually increases in value as time passes.

  • If infrastructure is being built around, the value of the building will increase.

So, considering that it's an "easy" investment to understand for 90% of people, what would the sophisticated investor analyze that the amateur one would consider it "irrelevant" or, worst, won't even think about. Broadly speaking, what separates a good one from an amateur one?

 

Amateur investors don’t know what they don’t know and can overlook major risks. Common mistakes include not fully understanding easements, liens, environmental conditions impacting the property. Amateur developers often do not fully understand zoning/entitlements and tend to underestimate the cost and complexity of construction.

 

You're generalizing small scale residential real estate to commercial - in commercial real estate property value doesn't necessarily "usually go up" as its based on the income a property generates and the associated market cap rate which can fluctuate based on market conditions, inflation, lease terms, and quality of management.

What separates good investors is market knowledge, identifying and understanding the major risks, strong baseline understanding of legal documents/writing and ability to interpret leases, and probably most important - the ability to actually manage an asset effectively. Beyond that it's also the ability to identify the best markets and asset classes to invest in at a given time and being able to formulate a strategy that fits the current environment (good luck raising capital if you can't do this).

I'm not saying commercial real estate is rocket science because its not but its not nearly as simple to understand as you're making it out to be.

 

I don't know about amateur versus professional, but good real estate investors/developers understand that whatever is in your underwriting is the most meaningless and least informative part of an investment.  Bad investors don't ever look beyond the excel tab to understand that moving numbers around on paper is useless, that every input you change to solve for whatever return you want is going to be reflected in the real world, and understanding how your windows are made, shipped, delivered to site, and installed(/maintained!) is way more important than knowing what your line item budget for window manufacture/installation is in the underwriting.

It's not a popular opinion on this site, which is very finance focused even in the non-IB forums, but the most sophisticated model in the world is a waste of time and energy without the knowledge of how to execute, and that gets forgotten all the time.  Excel (or ARGUS maybe, which I don't use) is a great tool but I see way too many people tinkering with their models for hours on end to save a couple basis points here or there so that they can show a certain return.  Waste of time that could be spent actually learning something.

 

I personally have 3 relatives who are in real estate and have no university degree nor relevant work experience.

One started as a construction worker, saved money together with his wife and started to flip some houses, then built some small houses and sold them and afterwards got into building residential buildings. Currently has around 20 residential buildings (approx. 10 years in the market) becoming one of the top regional compaines. Another one, invested in around 3 - 4 holiday lodges in a medium-size city in Southern Europe (close to the beach) and has a nice revenue from it and plans to buy more (approx. 5 years doing that). Last one, started a small auto mechanic shop and from profits built  a 1600m2 square building with 3 floors (so 3x1600m2) which is now being rented to diverse businesses which have offices there (approx. 15 years into it). All 3 can live from passive income.

So that's why I say it's easy to understand. They all worked in blue collar jobs and their parents also. No education, no experience. Their investments were done only based on the idea that "real estate is good".

 
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So that's why I say it's easy to understand. They all worked in blue collar jobs and their parents also. No education, no experience. 

Except you said one was a construction worker!  Again, I know it's hard to see past it on WSO, but that is very much a real estate field.  Why do you think he's a good home flipper?  Probably because he has the skills to self perform a lot of the work, or if not, at least the know how to bid out the job.

Also, there are a lot of professions where small scale success is possible without an "education".  Any idiot with a high school diploma can work in banking and succeed.  What did your relative who bought the vacation spots do?  I feel like we're going to hear they were in hospitality.

Just because someone doesn't have an MBA and didn't work behind a desk doesn't mean they don't have experience.

 

You are mistaking prestige/education for intelligence/entrepreneurship. The latter are essential for real estate, the former are not. Instead of thinking real estate is easy because your family succeeded in it without a college degree, recognize that a college degree is mostly just a piece of paper that says nothing about your capacity to succeed in real life.

 

one doesn't need too much education to invest in real estate

Just live it here. Not worth to continue.

 
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Note, if you are going to make a thread that has a stated intention of trying to make everyone one that works in a field seem like an uneducated idiot you might want to not look like an uneducated idiot yourself. 

Cutting things out of context to try and make others seem stupid really just makes you look like the kind of person who masturbates and ties to cum on their own face. 

 

Real estate is "easy" if you think real estate means buying single family homes.  Large real estate deals are often more complicated than PE deals.  Mega development projects are some of the most complicated financial systems in the entire investing landscape. 

 
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This has been alluded to by prior posters, but the idea that "real estate generally goes up" 1) is based primarily on single-family residential or core urban properties and 2) is trended over time horizons that are long enough to bankrupt any real estate investor, professional or amateur. 

As stated by a prior poster, most "investment grade" real estate assets function more like a financial product or a business and absolutely do not simply appreciate. I'll give you a few examples: 

-A company builds a warehouse in rural Mississippi near an interstate exit but not much else, and leases it to Amazon for 10 years. The property, a simple concrete box, sells for a market multiple of whatever rent Amazon is paying (lets say it sells for $40mm). After 10 years, Amazon neglects to renew their lease, and the building is too large and too remote to attract a new tenant. It's now essentially worthless. 

-An airport parking facility (multi-story, big parking garage) near Kansas City Airport is doing tons of business, so a REPE investors buys the asset and operates it. A year later, KC airport begins renovations that include a massive on-site, cheap parking facility. Business tanks and the garage is unable to service it's debt, and the cost to redevelop the site erodes basically all vacant value. It goes to the bank. 

-Hundreds of tertiary malls across the country traded at exponentially higher prices two decades ago than they are worth today. Many of those malls, because of their locations, demographic trends, and the cost needed to redevelop them are basically worthless projects. 

Real estate is easy when you 1) use no leverage 2) have no time requirements and 3) don't rely on income from the property. It sounds like this generally describes your entrepreneurial family members (which is fine, maybe even smart). But even at the amateur level, there are a dozen guys who had the perfect idea for a subdivision next to the marina (or whatever) and underestimated their costs, overestimated the market's willingness to pay, and lost their shirt.    

 

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