The Risks in Dreaming Too Big With Value-Adds
Benjamin Graham once said, "The essence of investment management is the management of risks, not the management of returns."
What does that mean for apartment building investing? Many investors are told that a strong operator is the best insurance against risk. But no operator can see through walls and know when a pipe is going to break. They can't know for sure if the path of progress will keep progressing. And they can't predict a pandemic.
So how do you ACTUALLY mitigate your risk as you're looking at investment opportunities?
Look at the actuals. Today, with very little changes in the property, what's the lowest return you can expect? If something terrible happens and the operator isn't able to execute their grand vision business plan, will you still make a return that you're happy with?
There is a difference between trusting someone's repositioning vision versus making a decision firmly rooted in today's reality.
Will a strong operator execute a heavy-lift value add in today's market? Maybe. But is it worth the risk?
Or is it better to look at a stable, cash-flowing property with very little speculation?
Are lower returns acceptable when you have predictable cash flow and wealth preservation?
Ultimately, that decision is up to the investor.
But I would argue that real estate is a vehicle to preserve capital and generate cash flow. A larger appetite for risk would be better matched with a hedge fund or a more volatile investment vehicle.
Real estate is a long-term wealth growth strategy. Those looking for a high yield in 12 months would perhaps fare better outside of real estate. At Stellar Investment Group, we have a low tolerance for risk and prefer predictable and reliable returns.