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The Top 5 Things to Know Before Making a Real Estate Investment

By: Max Sharkansky, Managing Partner

The Top 5 Things

Although it is a concept and industry that virtually everyone in the world is familiar with to some degree, real estate investments still demand a thorough and sophisticated understanding of markets, deal economics, and risk.

With that in mind, we’ve compiled our top 5 things people – whether seasoned investors in other sectors and markets or not – need to know before making their first real estate investments:

You can time the market

Contrary to Warren Buffet’s famous adage that you can’t time the market, it is important for real estate investors to consider where the market is in its natural peak-to-trough cycle.

You need not be a real estate guru to understand that prices in 2009 were extremely cheap following the Great Financial Crisis, and may not be so cheap in the nearly 10-year market appreciation that followed.

While it is hard to forecast what the next 10 years will look like, it is not hard to employ caution and prudence when considering your next investment.

What makes the deal so special?

Real estate investors must be able to articulate their investment thesis clearly. In other words, you should identify an individual investment or fund manager based on a strategic understanding as to why the investment plan will be profitable.

Is the asset being purchased at a competitive price? Do you or the investment manager have market information that others do not? What is the strategy for adding value to this asset?

Without first answering these questions with through investment analysis, it is hard to even consider the viability of a real estate deal.

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Number crunching is necessary

Financial analysis is the hammer in the tool box of real estate investing. Familiarize yourself with how to calculate cash-on-cash returns, cap rates, and leveraged IRRs in order to make defensible real estate decisions.

If partnering with an investment manager, it is critical that they provide open lines of communication and clear reporting of the numbers, as well as various best, worst, and stabilized case scenarios.

Without basic knowledge of how to calculate net operating income, debt service, and equity multiples it is difficult to even understand the potential of your investment.

Know what you’re getting in to

In some cases, a real estate investment is more akin to running a small business than it is to simply receiving mailbox money. It can involve late-night phone calls from tenants complaining of broken water heaters, uncollected rent checks, and unforeseen expenses.

This is why investors who aren’t looking for a potentially full-time job should consider a syndicate or fund with managers who ensure that the investment or investments will be looked after by experienced property professionals.

For example, at Trion Properties, we operate a vertically-integrated property management platform to ensure an efficient process and shared values among property-level staff and investors.

Consider opportunity costs

The best way to analyze a potential real estate investment is to consider the opportunity costs of investing the money elsewhere. Stocks and bonds offer less risky investment propositions, professional managers, and liquidity.

An investor should consider the trade-off between real estate and other investable assets before going down the path of real estate investing.

That said, there is naturally no strong reward without some risk, and with the right real estate investment strategy and execution – such as identifying underperforming assets in supply-constrained markets and performing cost-effective value-add renovations – that risk can be very well mitigated.

Related: Understanding the Illiquidity Premium in Real Estate

Posted By Max Sharkansky, Managing Partner

Max is co-founder of Trion Properties and oversees all aspects of acquisition, disposition, and property analysis for the company. Since founding Trion he has led the acquisition, renovation and disposition of over $300,000,000 in mismanaged and distressed assets, primarily in multi family, yielding an average IRR in excess of 30%.

Max's driving objectives in investing are to deliver outsized returns without taking outsized risks and the words he lives by are that "real estate doesn't kill people, debt does."