How would you invest $100M into real estate?
Great interview question that is commonly asked in PERE. Thoughts?
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Here's my answer: "Construction lending. There's always a need for debt, and right now is a good time BC demand is outweighing supply. Banks are loosening up, but not that quickly. Starting to see development in multi-family/housing start to pick up. I think secondary and tertiary markets are next to absorb, then appreciate. Low returns on safe bets on markets like NY, SF, and D.C. are drawing commercial RE investors to value-add opps in secondary and tertiary markets like Austin, Charlotte and Kansas City."
$100m would be good for a starter fund dedicated to asset backed lending to small and mid-sized real estate development projects, targeting those who cannot get traditional bank financings and using the RE assets as collateral.
I disagree, I don't believe investing in small to mid-sized developments (even if you limit yourself to the debt piece) is wise at this time.
I believe that:
No doubt, there is a scarcity of debt in that particular "slice" of the RE market, but there are safer and more profitable opportunities at this point in time.
Anyway, just my opinion.
I would not invest in suburban and other "middle of nowhere" type of locations either. I was more thinking along line of mom and pop type developers in major cities characterized by heavy zoning regulations and localisms, and SF in particular, which is dominated by local small and mid-sized multifamily owners, usually family businesses. The big guys simply can't get into that market unless they partner with one of the local guys.
The asset backed lending approach works even better in many emerging markets with systematic capital market distortions where the local developers simply do not have much access to standard bank loans. Often the private/shadow banking lenders are the only sources of financings available to them. $100M can go pretty far in many of those places.
MBS all the way! Who cares what it means. $100M all in.
Multi-family conversion in a smaller, growing market with a rising downtown
This is what I am doing...
anything else? can you guys provide more justification as to why you would invest in such areas of RE?
Hah, it's way too complicated to just say "Here's $100,000,000 - you have to invest it into real estate - what would you do?"
There are SO many options and SO many ways to do it, and all of those are dependent on SO many factors that it gets impossible to point at one thing and go "there!"
I think it's pretty obvious how many options/factors come into play here. I was asking for the sake of getting solid answers to a common interview question.
EU is not my expertise, but is you need high/opportunistic returns I'd consider looking at deal flow in Europe - Italy and Spain.
affordable housing in Brazil
Parking garages in tier one Chinese cities.
I'd line the walls of my banana stand with cash to cover my ass when the Feds come a-knockin'.
There always money in the banana stand
I would use 50 million to invest in beachfront lots. Then leverage the other 50 million to build beachfront condominiums and town homes. By my home 6-10 acre beachfront lots are going anywhere from $700k-1.5m. Some lots I would have a buy and hold strategy, others I would strategically start development. The average luxury town home in my area not beach front are sold from 250-500k. Luxury condominiums not beachfront 500k+. The beachfront element could easily add to the value of these properties.
This is what you do. Buy all the waterfront property in a prime area and then create a scarcity issue.
That sounds like a great plan. With 100mil you could easily drive demand up by owning the great majority of beachfront properties in a prime area. You probably could pull it off with no development, just purchase the land and homes already built.
Many areas have restrictions on beachfront private properties because these are considered public spaces. $100m won't go very far at all if you look at truly prime areas like Malibu or Santa Monica also I doubt the REPE you are interviewing would be impressed with your plan to dump money into single family homes.
This is such nonsense.
We see a lot of successful self storage deals and I really like the asset class. Business model would be to buy smaller mom & pop deals in rising markets at high cap rates, then max out the truck rental/merchandise sales/insurance platform to increase NOI. Self storage is much lower risk and less speculative than office or retail, and Americans have major hoarding problems.
Lots of big companies are packaging SFH lately so it's not too crazy. However, I do not think investing in a single area and asset class is exactly a good idea.
Would this REPE fund have a specific style? Risk-averse or balls to wall? What kind of returns are expected? I wouldn't just say "Buy X" because then you really aren't thinking about what your potential investors are looking for.
High Risk? Boom town area property investing near oil basins. Strategic acquisitions of land around a boomtown along main paths of access (highways/rivers/trains) and lease it out to refinery/storage/transport companies looking to get into the area without paying boom prices.
Manufacturing related assets (betting on the return of American factories as china's labor prices jump)
Moderate risk: Well located Farmland, single family homes in/around random gateway cities. Pick whichever you like more. MBS in cities that have shown strong recovery since the recession.
Low Risk: Manhattan Luxury apartments, conversion sites, hotel MBS, LLP's/Land in highrise developments in the midtown east and hudson yards area. Pretty much anything under $700/foot for residential conversions in the decent manhattan locations. Luxury anything in gateway cities. The more unique and rare, the better.
When you have that much to invest you have to do more tax planning than just straight up return planning. There are deals abound. However your return can be highly juiced if you pick one asset class over another. Add this caveat at the end of your pitch because you do not know what type of investments the fund or person has as a majority of their portfolio.
Discussing this is just a waste of time anyways, the amount of work that goes into housing developments is insane. You can't just say "oh I'd leverage 50m for a development" Klutch is a goddam troll and im sick of his shit
Assuming this was not my money and I took my fiduciary obligation to my investors seriously, I would invest in a combination of the following:
Assuming this was my money, I would develop or acquire a hotel in Miami and make it look like the Cosmo in Vegas, then spend the rest of my days partying like a fucking dipshit. Ideally, I would die before age 50 from a heart attack induced by a cocaine binge fueled sex orgy.
All of these for only $100m? You probably want to narrow down to just one or two asset classes, such as a NPL only strategy.
The Cosmopolitan is rather nice. I am there later this week. DB has done a surprisingly good job operating that property. I remember them trying to sell it (after having foreclosed it from Bruce Eichner) but couldn't find buyers in the depth of the crisis so they decided to get a gaming license and run it themselves. Maybe if they get comfortable enough with it they might further expand their casino resort empire.
I actually meant small balance CMBS, but good point, $100 M would most likely not be enough to invest in all those spaces. Good catch.
DB should drop it like it's hot, and I would expect that they are exploring exit strategies as we speak. The hotel business (especially the Las Vegas hotel business) is too volatile, that's why I would rather develop or buy in Miami instead (also because $100 M wouldn't get you far in the Vegas hotel business). I could go on and on about Vegas and what I think about the real estate market out there, but that would be like another post.
You'll have a lot of fun at the Cosmo. Bring an ice pack, you'll need it for your sore neck, your head will be on a swivel doing double takes at all the fyne ass you'll no doubt be staring at.
BTW, my last comments are purposely vague. It would be best if you figured out that question on your own.
I wouldn't recommend using my answer. If you did, you would be peppered with follow up questions and you would be toast if you didn't know what you were talking about.
No more comments? I am disappointed.
Please feel free to pick apart my assumptions, I was hoping to get involved in some interesting discussion.
No one mentioned Texas...also I'd just pick an MSA and and be a sharpshooter that jvs with bigger people on value add deals. Maybe even some environmental issues. Typical deal could be class B office buying from an owner who's got no ability to reposition and retanant due to lack of funds. Stabilize and sell.
Texas (when I say Texas, I mean Dallas and Houston) has been the RE investing darling for quite some time. Cap rates in Houston are at historic lows, Dallas cap rates are trending towards historic lows, etc. Texas is great for core investing, not so great if you're return expectations are mid to high teens.
The "stabilize and sell" strategy is, in my opinion, a great direct real estate investment strategy for a non-institutional, entrepreneurial type of person/group, but only if you are operating in primary markets and intend to reposition B assets in A submarkets into A+ assets.
Logistics development in Tier II Chinese cities.
I'd say, with 100 million, I'd invest across 2 logistics development funds (REPE, opportunistic, blind pool)... The ones operated by big players would work out fine, so long as you didn't get crushed by the fees. You could probably expect a low risk 15% IRR and potentially 20%. Thing is the segment is tough to access on your own because you need the tenant network. The supply/demand imbalance is just so large that so long as your operator can execute there's very minimal market risk.
Currently preparing for interviews myself and trying to figure out a good way to answer this question.
My thinking is that you would want to rephrase the question by beginning with, well that all depends on the level of risk you're willing to take on and the returns that you're looking to accomplish.
If you have a low tolerance for risk I would invest relatively high up in CMBS capital stack.
For higher risk you could talk about a foreclosure to rental residential plan, or maybe properties in currently undervalued areas like Las Vegas.
JV it up, you can't lose. Triple digit IRR.
Also, just generally on logistics in china, Carlyle just announced an investment with a local Chinese player to build/buy 17 logistics assets in china (saw it in south china morning post this morning). Even non logistics specialists Are getting into the market... and then you've got all the logi specialists with big exposure. Is a hot market, for good reason too.
http://online.wsj.com/article/SB100014241278873240093045790425040727953…
Indeed. Historically it has been more challenging to get land for that use due to the government's concern over the modest tax revenue it brings in versus some other uses, but that's all beginning to change. And yes, shift to consumption, shift to online shopping, all of those trends play a role.
^^ Not bad!
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