REPE Interview Question "If you had $100M, where would you invest it?"
Had this question in a REPE interview. There have been some threads on here that discuss it but not recently. In the current RE market, would love to hear some answers to this
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I would Invest in Real Estate.
Username checks out.
If i had $100M of my own money to invest (and obviously for the purposes of this discussion as it relates to real estate investing), I would be putting it into core plus investments in stable markets. Investments that are at (or near) a stabilized occupancy containing tenants with good credit. Investments that might have a little meat left on the bone (minor lease-up, revenue enhancing opportunities to explore at the right time, etc.).
There's an over saturation of value add investors chasing a story. In my market, I'm seeing vacant buildings trade at a higher price PSF than that of more stabilized investments containing strong yields, literally a block down the street with the same deal profile, with the exception of occupancy and a re positioning story. Especially when you take a step back and understand where we are at in this cycle, it really makes you question how these groups are making these deals pencil.
When you couple this with the historically low debt capital markets environment... This is why I would be placing my $100M into core plus deals in core markets.
Completely agree
This is an interesting argument, which type of investment will perform better in a downturn, core or value-add.
Argument for Value Add: You can eat more of a cap rate increase because ideally you have a decent spread between your yield on cost and exit cap. A cap rate increase will crush core assets as there is limited ability to increase NOI and you'll never be able to get out for what you paid. If your compelled to sell before the market recovers (fund life, liquidity crisis, etc) you're going to take a bath.
Argument for Core: Trophy assets will be the first to rebound in a recovery, and are inherently more valuable due to barriers to entry. The thesis of value add investments are unlikely to be realized in a recession. If you can hold through the downturn they will bounce back.
It's beyond that. You need to be asking yourself what kind of risk are you willing to take knowing the current state of the RE market (aka late innings of the RE investment cycle). Not just a basic question like: is value add or core real estate better to pursue (which is a bias question that doesn't factor in the current state of the RE market).
In my market and understanding where we are at within the current RE cycle, for value add, I would say that the biggest risk is lease-up risk, and second (depending on how large of a renovation) being construction risk. Risk of construction cost increases, esp. when factoring in the unknown factors that you just don't know until you are already within the renovation (change orders).
If you have a fund that only allows for one area within the risk spectrum (opportunistic fund, or core fund), you don't really have much optionally with where you place your money. You just need to make sure you are disciplined and have a team that is fully on board for the potential that downside scenarios may turn into the true pursued business plan.
These deals “pencil” because everyone has capital they need to deploy before their fund investment period is up. No one is leaving 10% of their fund uninvested and handing it back to investors, that would be moronic from an operator stand point. Leads to aggressive and borderline reckless underwriting.
Side note: I don’t work for a value-add shop anymore but I can’t imagine with how tight these deals are getting underwritten that there is any promote at the end, and doing value-add deals for an asset management fee seems dumb. I wonder if there is going to be a huge capital inflow for core deals next time around.
While I think the above is a great answer, I believe in an interview context, this question is poised as a proxy to your knowledge of the basics of managing risk in a portfolio. My answer is always: "Keep ~$10M in cash for liquidity purposes, investment $15M in government securities for guaranteed coupon, invest the rest in equity in asset type xyz in market abc. Just my personal take from the feedback I have received when asked this question.
Unsexy high cash yield asset classes with recession resistant leasing and low capex needs. Examples include non-climate controlled storage, extended stay hotels, and RV/manufactured home parks.
Class B multifamily. You can buy ~10 $30 million apartment complexes with hundreds of units each at about 65-70% leverage each.
When people in $3-4 PSF apartments lose their job they'll move into my $1-2 PSF apartments.
Works both ways. If the apartment market has a downturn, the Class A people will add two months free as a leasing incentive and steal all of your tenants. Class A will always lease up (whether or not it's at a price point the owners want is another matter). You can't say the same about old product.
I appreciate you saying this, every conference I attend or article I read totes the advantages of Class B, work force housing in a downturn and although it certainly is more protected than the Class A urban infill product that is getting overbuilt in nearly every city everyone conveniently skips over the cascading effect of luxury apartments upping concessions to fill their brand new units and save their projects.
id give it to my cousin
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