Same Return but Different Location: Are investors biased?

12 Replies

Hello BP Community. I am reviewing multiple offerings from the crowd funded platforms and want to get your opinions. Given both offerings targets the same return: IRR, equity multiples, and vesting term with similar sponsor background, and same type of deal (buy in place, minimum value add, hold, exit), how much premium will you price based on the location? Is there a preference over location (Los Angeles VS Houston) given all else equal. Thanks.

Originally posted by @Victor Ong :

Hello BP Community. I am reviewing multiple offerings from the crowd funded platforms and want to get your opinions. Given both offerings targets the same return: IRR, equity multiples, and vesting term with similar sponsor background, and same type of deal (buy in place, minimum value add, hold, exit), how much premium will you price based on the location? Is there a preference over location (Los Angeles VS Houston) given all else equal. Thanks.

LA is anti landlord and Houston is pro landlord. Huge difference.

 

@Victor Ong

This is an interesting question. The returns are actually forecasted to be the same so why chose one over the other? As an investor how do you pick? I think in choosing I would tend to look at the track records of sponsors, are they presenting rosy or conservative. Do they have a history of over delivering on returns. For the sake of your point, let's assume those are the same. All the sponsors tend to over deliver by the same amount. It seems like at that point your saying which one of these markets will have a higher IRR due to some unforeseen force? In this case I'd probably look at market fundamentals that lead to high returns. It's really a question of why pick a certain market over another if returns are the same. I think at this point people are reduced to - I feel like Huston will have higher job growth with less supply or I think the movie industry is moving to Atlanta. Or whatever the random emotional preference is.

Originally posted by @Victor Ong :

@John Farady

I know that already, we already have a portfolio in LA. Tell me something that I don’t know.

The surefire way to discourage feedback on your question is to get belligerent with members who reply.

Location is critical in the ability to achieve the advertised returns.  Yes, most prudent investors have criteria on market fundamentals such as population and job growth (a bias based on sound research).  And some investors have biases based on no research but that's not worth discussing.

Originally posted by @Mike Dymski :
Originally posted by @Victor Ong:

@John Farady

I know that already, we already have a portfolio in LA. Tell me something that I don’t know.

The surefire way to discourage feedback on your question is to get belligerent with members who reply.

Location is critical in the ability to achieve the advertised returns.  Yes, most prudent investors have criteria on market fundamentals such as population and job growth (a bias based on sound research).  And some investors have biases based on no research but that's not worth discussing.

Thanks for the comment. Once he loses his money or property to legislation, or bad land lording laws, he'll understand. Until then, he's smarter than the both of us. ;-)

 

Originally posted by @Lee Ripma :

@Victor Ong

This is an interesting question. The returns are actually forecasted to be the same so why chose one over the other? As an investor how do you pick? I think in choosing I would tend to look at the track records of sponsors, are they presenting rosy or conservative. Do they have a history of over delivering on returns. For the sake of your point, let's assume those are the same. All the sponsors tend to over deliver by the same amount. It seems like at that point your saying which one of these markets will have a higher IRR due to some unforeseen force? In this case I'd probably look at market fundamentals that lead to high returns. It's really a question of why pick a certain market over another if returns are the same. I think at this point people are reduced to - I feel like Huston will have higher job growth with less supply or I think the movie industry is moving to Atlanta. Or whatever the random emotional preference is.

Hi Lee, thanks for your meaningful feedback. I tend to see real estate investors' sentiment to price a premium on metropolitan area where the motto of location location location is embed in their doctrine. From the financial return perspective, we care mainly about the following topics but not limited to ... 1) Is the sponsor ethical and deliver what they said 2) Does the reward compensate for the risk we have to take? 3) How does the sponsor underwrite their deal?

The location sentiment seems to be less critical when you layout all the key performance metrics. But then again, when you were presented with a 15% IRR with 1.8 Equity Multiples within 5 years term on both LA and Houston deal, my bias would lead me to LA. I think we all have a "location bias" embedded within us.

Originally posted by @John Farady :
Originally posted by @Mike Dymski:
Originally posted by @Victor Ong:

@John Farady

I know that already, we already have a portfolio in LA. Tell me something that I don’t know.

The surefire way to discourage feedback on your question is to get belligerent with members who reply.

Location is critical in the ability to achieve the advertised returns.  Yes, most prudent investors have criteria on market fundamentals such as population and job growth (a bias based on sound research).  And some investors have biases based on no research but that's not worth discussing.

Thanks for the comment. Once he loses his money or property to legislation, or bad land lording laws, he'll understand. Until then, he's smarter than the both of us. ;-)

 

If you understand economics, you would understand the anti-landlord sentiment along with city and state legal system create a high barrier of entry to the market. The legal system purges the less competitive landlords, and prevents new player to come in. The system works great for the well capitalized investors and existing landlords.

We are very excited about the current environment. With all the rent and eviction moratorium, non-GSE landlords in LA are most likely to experience a wave of default after their forbearances expired.. Portfolios are going to get slammed by lack of rental income and mortgage payment due. It is once in a life time opportunity to acquire. We believe the next 24months will be worst off compared to 2008 recession.

Originally posted by @Mike Dymski :
Originally posted by @Victor Ong:

@John Farady

I know that already, we already have a portfolio in LA. Tell me something that I don’t know.

The surefire way to discourage feedback on your question is to get belligerent with members who reply.

Location is critical in the ability to achieve the advertised returns.  Yes, most prudent investors have criteria on market fundamentals such as population and job growth (a bias based on sound research).  And some investors have biases based on no research but that's not worth discussing.

Thanks, I like to discourage garbage feedbacks as they lack any meaning and doesn't add value to the community.

 I see, I am trying to figure out if there will be a tie breaker if all else are equal other than locations.

Originally posted by @Victor Ong :
Originally posted by @John Farady:
Originally posted by @Mike Dymski:
Originally posted by @Victor Ong:

@John Farady

I know that already, we already have a portfolio in LA. Tell me something that I don’t know.

The surefire way to discourage feedback on your question is to get belligerent with members who reply.

Location is critical in the ability to achieve the advertised returns.  Yes, most prudent investors have criteria on market fundamentals such as population and job growth (a bias based on sound research).  And some investors have biases based on no research but that's not worth discussing.

Thanks for the comment. Once he loses his money or property to legislation, or bad land lording laws, he'll understand. Until then, he's smarter than the both of us. ;-)

 

If you understand economics, you would understand the anti-landlord sentiment along with city and state legal system create a high barrier of entry to the market. The legal system purges the less competitive landlords, and prevents new player to come in. The system works great for the well capitalized investors and existing landlords.

We are very excited about the current environment. With all the rent and eviction moratorium, non-GSE landlords in LA are most likely to experience a wave of default after their forbearances expired.. Portfolios are going to get slammed by lack of rental income and mortgage payment due. It is once in a life time opportunity to acquire. We believe the next 24months will be worst off compared to 2008 recession. 

 All that I know is that I wouldn't invest with you, you're reckless. If all you compute is numbers, you are missing the big trends and downsides of investing.

@Victor Ong - I agree. We have a location bias. However if we dig into it the bias is really about our feeling that one place will perform better than another due to something we can't quite place. Huston vs LA I go LA all day because there is a lack of supply and huge demand. I think this gives the investment more potential return even if underwriting is the same. I have a bias for growth markets with high demand. So I would go for Austin since it has the highest forecasted population growth of any city in the US and there are barriers to entry and restriction on supply and companies want to move to Austin because it's cheap compared to CA and business-friendly. Huston seems like it could easily be overbuilt but LA almost can't have that problem. So our feelings in location bias are founded in something. I think for me it's an unconscious bias toward something that is in high demand and short supply. I love LA RE. I also love Kansas City real estate. However, I like them for different reasons and I think they are a great combo.

Originally posted by @Victor Ong :

@John Farady

I know that already, we already have a portfolio in LA. Tell me something that I don’t know.

@victor ong I just feel I have o comment on your disrespectful response to @john farady. He would have no way of knowing what you know and what you don't know. There is no need to be snarky to another BP member that was trying to be helpful. That's not what this forum is about.