I have a friend who has been passively investing in multifamily assets for many years. He has invested with many professional groups and in many geographic markets. Recently he referred to the professional group or sponsor team as the jockey and the geographic market/physical asset as the horse. I recognize that he didn’t come up with this analogy on his own, but really liked it and wanted to share it here. In order to perform well in “the race”, our investment requires a strong horse and a reliable jockey. Let’s dig a little deeper…
With real estate investing, people tend to focus only on the physical asset – the apartment building, the mixed-use facility, or the office building. When evaluating a potential investment, they think of the costs involved to own the asset (insurance, taxes, property management, etc.), the rent provided by the tenants, and the price of the building(s). With this mentality, people are focusing on the horse. That is okay and actually required, but this is only half the story.
It is cliché but still very true. Real estate is a people business. See the Green Bison blog post from March 2019 about this. What is on the other side of this race analogy? The sponsor is. They are the jockey in this race. The sponsor is the team that puts together the deal for investors to participate in, and then they perform the asset management. The success or failure of the investment depends on the people (jockey) operating the asset (the horse). In fact, you could argue that the jockey is more important than the horse. Why would I write that?
Well – you are hiring a sponsor to take possession of your money and grow it when you make an investment. This investment could be through a crowdfunding site or a private real estate syndication deal as a passive investor. You obviously want to associate with people who will be good stewards of your money. Therefore, the sponsor’s ethics, network, skill, and experience are critically important.
Most crowdfunding platforms that I have seen focus on the building with the nice landscaping, the nice swimming pools, the gyms, the dog park, etc. The financial forecasts (proforma) almost always lists promising year to year increases of net operating income with attractive return numbers. I suspect many investors merely look at the numbers before pulling the trigger…chasing that high internal rate of return (IRR) or return on investment (ROI) value. Not enough consideration is given to the sponsor.
The real estate investor should focus on the horse and the jockey when considering a potential investment. The physical property is just one half of the equation. The other half is the sponsor, and I think it is the more important half. In private equity real estate, the investor is entrusting the sponsor with their money and relying on their judgement, experience and expertise to grow their investment. The investor should consider the sponsor team as much as evaluating the physical asset, geographic market/economics and forecasted risks and returns.