I have my MSRED and 1 year experience as lead development project manager (working directly with principals) for a small up and coming development firm in a major northeast city. I have the opportunity to invest $1 million from a family friend (to start a side hustle) but am not quite sure which asset class to target or whether to finance- though my instinct is to buy with minimal or no leverage right now.
Can you please share your thoughts on a first time investment in the current economic/political/pandemic climate, which asset class/strategy to focus on, and financing? Purchase 1 property or multiple? Is it important to build an investment thesis prior to investing, or keeping an open mind is the better approach?
Thank you!
Interested to see the responses here. My experience is only in life-science development, which is very specialized, so I'm not one to give advice on which asset class.
I would imagine you want to start small, focus on your core competence, and definitely have a thesis. $1M isn't a ton of money for a non-residential commercial development, especially without leverage. Perhaps you could co-invest with another developer or provide debt. Otherwise, you may be looking at small residential plays.
Definitely not looking at development plays or to invest in someone else's. Looking to get started with something on the side myself that I can scale over time.
Question... Is this $1 million just like a one-off allocation/investment of this family friend? Like they are worth somewhere north of $20/$30 million (i.e. this is below the 5% threshold for risky allocations). Or is this a more significant portion of total wealth?
Answer to that totally dictates what is prudent, but overall, $1 million isn't going to take you very far unless you club in as co-GP with bigger player. Still, maybe better off with indirect funds and REITs if just looking for a real estate allocation.
To give more clarification, it's a friend's father who wants his son to start getting involved in RE on the side and is offering $1 million to get started (as he has done with some of his other kids). It's not a significant investment for him and his goal is for his son to get his foot into RE to learn by doing. I'd be partnering with this friend and it's essentially me leading the way. Still have to figure out how it would all be structured (taking advice on that too).
I'm not looking to invest in a fund. I really would like to be a bit more hands on in acquiring a property (and having it professionally managed). My ultimate goal is to build a big enough portfolio on the side to go off on my own and eventually venture into development. (I currently work in development and recognize it takes experience/expertise, time, and of course plenty of money to develop).
What I'm struggling with is determining what to get started with (investment thesis) that I could scale on the side. Multifamily is of course an obvious place to start- but it certainly has some elevated risk right now given all that is going on- though I don't believe the increased risk to be long-lived, so I'm not sure if I should:
A) wait a bit of time before investing
B) determine an investment thesis and look for opportunities that exist because of the risk
C) invest in a different asset class
Okay, I am going to go ahead and assume your friend's father will also provide PG and other financial support as needed for loans, as well as cover incidental pursuit/deal costs.....
So with leverage, you are looking at assets/total investment in the 3 to maybe 4 million range, at full use....
That's enough to do a "deal", assuming you do in fact have financial backstop beyond as needed. Frankly, this puts you in that small/private client space. Competitive, but doable.
If you can find something opportunistic given the times, maybe your best bet. Honestly, I think for property type or market, you should go with what you and your friend know best. Multifamily is probably the 'easiest' but you really need to figure that out from a long term perspective. If you are really going into business, current market whims isn't the best way to decide a long term path.
What is your friend's job?
What is your friend’s dad’s job?***
With financing, let's assume you have ~7MM to work with. If it were me, I'd want to do a 10 bed, or so, townhouse development since you could keep the prop management fees pretty low at that size.
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