When we sit down and talk to accredited investors about investing in our hard money loans, we often discuss the value of having a fund manager who provides full service management, handling issues such as deal flow, underwriting, and servicing.
But on a larger level, this raises the question of what a fund manager does, exactly. You may have an investment fund manager who takes care of your mutual funds or other investments. But what are the responsibilities of a fund manager when it comes to real estate?
Finding a blend of the right properties that maximizes upside while hedging against exposure.
Let’s say that you want to invest in Sacramento residential properties. Should you place all your capital strictly in single-family homes in a single neighborhood, or just in multi-family units? Almost certainly not. You want to prevent against undue market exposure—being overinvested in a single investment type.
For instance, suppose you invest heavily into multi-family units in Downtown and Midtown Sacramento, as rents have been climbing consistently due to the restricted supply of rentals in that area. Thus, MFHs look like a great investment. But then in 2019, construction on a number of condos and new high-rise apartments in the area is completed, and those units are dumped on the market, and/or commercial growth in Sacramento dumps due to slowdown in the economy. As a result, the value of the units you’ve invested in drops precipitously, and your portfolio as a whole gets hammered.
This is why real estate fund managers will diversify property investments, in terms of both location—perhaps spreading investments across downtown, suburban, and rural areas of a region, or across multiple regions—as well as property types—single homes, MFHs, office buildings, warehouses, retail, raw property, and so on.
They do the groundwork of identifying property types and individual properties that are most likely to increase in value, while hedging those bets by placing investments elsewhere.
While property values across the board may fall to some degree during market downturns, you are protected from seeing your portfolio suffer serious devaluation.
Identifying an appropriate level of debt-to-equity or loan-to-value to protect investment principal.
Whenever investing in a property, whether by directly owning a property or investing in a loan on a property, it’s important to consider how much money you have tied up, versus how much is owed.
For instance, if you are buying up properties aggressively, and you’re leveraged to the hilt, with your average debt-to-equity being around 4- or 5-to-1—meaning that you’ve paid off around 1/5 to 1/4 of what you owe—that’s a problem. If the market takes a downturn, you have a significantly increased risk of not being able to pay off your mortgages, having your properties repossessed, and losing your capital.
In the same way, investing in property loans can be dicey if the loan-to-value—the amount of the loan divided by the value of the property—is too high. If the borrower defaults on a high LTV loan—say, 80%—you may have a difficult time recouping the full loan amount when repossessing and selling the property.
A real estate manager develops an investment plan in which they identify a ‘safe’ debt-to-equity or loan-to-value ratio, given present and anticipated market conditions. This helps to protect your principal capital, rather than overleveraging yourself chasing after profits.
Providing value and guidance by aligning their interests with investors’ interests.
You know you have a solid real estate fund manager’s interests are aligned with yours. In short, that means that they have skin in the game, investing their personal funds using the same strategies that they apply to your investments.
If you’re investing on your own, or with a fund manager who doesn’t follow their own advice with their own money, then you don’t have any guidance as to the right way to invest. Finding a real estate fund manager who gives you reason to trust them as a bellwether is invaluable for ensuring the security of your investment.
In this respect and many others, the fund manager is a sober-handed captain, using their in-depth knowledge to plot a course that is as beneficial as possible for everyone involved, while avoiding undue risk (again, for everyone involved!).
If you would like to learn more about the value of having a real estate fund manager on your side, and the best route for investing in real estate, Socotra Capital can help. Contact us today by calling 855-889-7626, or by sending us a message through our contact form.