What does disciplined real estate investing look like?

When I was in-house at a global real estate private equity firm, it meant formal written memoranda laying out the underwriting assumptions, combined with public debate of the pros and cons of each investment at weekly investment committee meetings. This allowed risks to be understood and evaluated systematically.

This is not the only way to underwrite a deal, but without any process at all, risk is often not adequately priced in. Mispriced risk can occur for many reasons.

Sometimes participating in a marketed process creates a bidding war that leads people to overpay and take on speculative risk, essentially sharing some of the anticipated value increase over the long term with the seller now. That temptation may be especially strong in certain areas where valuations and rents have risen significantly in recent history and everyone seems to want to get in while the going is good.

Speculative risk-taking can also happen when the going-in basis is well below market and the projected returns are so high that investors overlook material diligence issues. The assumption is that the returns will make up for the risks. Sometimes this trade is justified.

There’s a reason opportunistic investments target higher returns than core or core-plus investments: investors expect to be compensated for taking more risk. The problem arises when people take risks they don’t even know they’re taking.

Over my career, I’ve observed that real estate investors are not always precise about identifying and measuring risk. People rely heavily on hunches and gut instincts, even when institutional processes, such as an investment committee, are in place. If you’ve been in the business a long time and learned some painful lessons, you’re understandably cautious about repeating them. But how do you know that your lived experience covers all risks that could be out there? Or that you’re worried about the right things?

As a lawyer, I’m one piece of a much bigger puzzle, but my aim is to help clients be rigorous in their underwriting. Risk can be worth taking when you understand it, have a plan to mitigate it, and are adequately compensated for it. Surprises, on the other hand, are a real estate investor’s worst nightmare.

To me, disciplined real estate investing involves standardized checklists and procedures to make sure the right questions are being asked. It means playing devil’s advocate and being willing to be overruled. It also means putting myself in my client’s shoes and not being overly conservative when the risk doesn’t warrant it.

Being able to quantify a risk based on expected value is incredibly important - i.e., if X happens, it would likely cost Y and there's approximately a Z chance of it occurring - so we can factor in an expected value for the risk of Y*Z.

Identifying truly good opportunities in real estate is difficult - I know from personal experience many years ago cold-calling people to find off market opportunities. Sometimes people are careless with underwriting, overpay, and still get lucky. But consistency over the long run requires discipline and a process. If it were easy to consistently hit home runs, everyone would do it. We're here to help you make the most informed decisions possible and feel confident about what you're buying.