Real estate has many barriers to entry including lack of knowledge of the industry, how to underwrite deals, finding deals, and raising capital. While gaining knowledge and learning to underwrite is overcome by reading and learning from the enormous amount of books, blogs, and websites, finding deals and having the capital to acquire properties seems to be the two areas most real estate investors have trouble with.
There is a quiet debate in the real estate investing industry as to which area should be focused on first: finding the deal or raising capital.
I’m going to take the side of each and discuss why each can make a strong case.
FINDING THE DEAL BEFORE CAPITAL
In 2020 and 2021, the real estate market has not only been hot but has been on fire. There was a news article about a home in Berkeley, California that sold for $1 million over asking. An acquaintance listed their apartment complex for sale and sold it at a 13.5% premium.
With all this selling taking place, there is also a lot of extra capital sitting on the sidelines. When speaking with other investors, many are currently waiting either for a “real estate crash” or are actively looking for the next deal. Those looking for the next deal often cite not being able to find the right deal to invest in or being outbid on their offers.
In the current investing climate, if you can find a decent deal with good returns, then you will probably find capital for it. The reason for this is because the price of real estate is high right now and the excellent returns you probably could have found a couple years ago are a lot harder to come by.
In many cases, investors will not commit capital without first seeing an actual deal anyway, making it even more difficult to get any type of capital commitments.
What constitutes a good and great deal will depend on the individual. In my opinion, anything that at least can beat the average stock market returns by a few percentage points is considered a good deal.
Below is a chart showing stock market return averages for the last 10, 30, and 50 years:
(Motley Fool)
The number that should be focused on is the Annualized Real Return (Adjusted for Inflation). This gives a more accurate return on your investment since it is making appropriate adjustments by taking inflation into account. The longer time periods provide better insight into historical returns as there is more data used. Keep in mind, however, the common saying that "past performance is not indicative of future results". However, this will give you a benchmark to reach for when looking for deals.
There is money on the sidelines waiting to be deployed. By finding the right deals with returns exceeding the historical returns on the stock market, you should find yourself with enough capital to fund your next investments.
In the next blog post, we will cover the case for finding the capital first before finding the deal.
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