And the incredibly simple way to avoid it
Investing in real estate can be an excellent way to build wealth, but it does come with risks.
The biggest risk isn’t just about the market or the property, but who you decide to invest with. As an investor, one of the BIGGEST mistakes you can make is not properly evaluating the operator you plan to invest with.
I learned this lesson the hard way early in my investing career. I invested $300,000 with a developer I knew from my local real estate group who was raising money for new construction townhomes. He seemed like a nice guy, but I didn’t ask enough questions or verify his track record. Ultimately the project failed and I lost my entire investment.
This experience taught me that there is more to investment success than just finding a good deal or timing the market. It’s even more important to choose an experienced operator with a proven ability to navigate challenging market conditions.
Why Choosing the Right Operator Matters
Real estate markets inevitably go through ups and downs. When things get difficult, inexperienced operators can really struggle. As an investor, this exposes you to significant financial risk. That’s why choosing the right operator is important – it can save your business.
The key is finding a general partner who is a “true” operator, meaning they have:
- Extensive experience running apartment communities, not just raising capital.
- A long track record working with the same team. Lack of continuity is a red flag.
- Strong operating performance even in today's environment. (For example, our properties are over 90% occupied.)
- Clear and transparent communications so you understand what’s happening.
Operators with these qualities are focused on protecting cash flow and enhancing asset value, not just chasing deals. They understand that an excellent investment is the result of both strong operations and a properly structured deal.
How to Identify Good Real Estate Operators
When evaluating potential partners, ask lots of questions to assess their experience and performance. Here are some key things to look for:
Proven Track Record
- How many multifamily properties have they acquired and operated successfully?
- Can they share examples, including business plans and performance reports?
- Have they successfully sold or refinanced properties in the past?
Experience Through Downturns
- How did they perform during the last economic recession or period of high vacancy?
- What operational changes did they make? This shows resiliency.
Alignment of Interests
- Is the operator investing a significant amount of their own capital?
- Are they getting paid based on property performance?
- Do they have the ability to operate freely without checking in every step of the way?
- Do they share your views on quality?
Professionalism and Responsiveness
- How quickly and clearly do they respond to questions?
- Do they share updates without you having to ask?
A truly seasoned operator will gladly provide transparency into their track record and approach. If someone seems hesitant, evasive, or overly salesy, consider that a red flag.
Don't Be Afraid to Invest, But Choose Your Operator Carefully
While the mistakes of the past taught me tough lessons, there’s no doubt that apartments are a great asset class for long-term wealth creation. Demand continues to stay strong, especially as millennials age into prime renting years.
Meanwhile, higher interest rates have lowered the valuation of existing apartment units. This means investors can buy at discounts to replacement costs and be positioned for excellent returns as the market strengthens.
The key is finding the right partner. With a quality operator at the helm, real estate syndications can provide outstanding risk-adjusted returns no matter what the stock market may be doing.
If you have questions about evaluating apartment building operators or want to learn about our offerings, don’t hesitate to schedule a call. I’m always happy to speak with investors about how we can put our decades of experience to work for them.
