As active Real Estate investors, we spend a tremendous amount of time searching for, and ultimately analyzing deals. We look at gross income, and the dozens of different expense line items. We analyze the amount of capital a building will need over the next ten or so years to account for new roofs, HVAC systems, and parking lots. We also try to calculate how much we will need to spend to pay for leasing commissions and tenant improvements for new tenants in a building’s vacancies.
The one thing that no financial model or back of the napkin analysis can take into account is the “human element” of the real estate business.
For some reason, people tend to look more at the actual asset in the real estate business, and less at the team running it. I chalk this up to real estate being viewed by many as a universal investment asset class like stocks or fixed income or commodities, not an actual business. But you wouldn’t expect an incompetent management team to get the job done in a technology or manufacturing business. The same holds true for efficiently running commercial buildings.
The “human element” is so important, yet it is often overlooked when analyzing a deal. The essence of this concept is basically that a huge component to an investor’s ultimate success comes down to the decision makers and key day to day people in a properties operations.
Is the guy who is bidding out the curbing job at your retail center competent enough to choose the right contractor for the job? Is he smart enough to not get price gouged? Is he smart enough to know that the cheapest proposal many times is a “fly by night” who couldn’t profitably do the job for such a low number?
Is the leasing team at your office experienced and competent enough to understand that putting a sign outside of your building with their contact information is about 1% of the job, not 100%? Does your listing really get the team excited to work the asset? Or is it just another listing to collect and hope someone calls and makes their life easy?
Is the person collecting your rents competent enough to be polite and courteous with all tenants, but still stern enough ensure that payments are made on time?
Does your accountant thoroughly understand the nuance of every single triple-net tenant’s lease so that he/she can bill back accordingly? Does she know that of your ten tenants, nine do not get billed an administrative fee, but your tenth anchor tenant does? These types of situations can have a huge impact on the bottom line.
While having a superior product, great location, amenities, etc., are incredibly important, having the right people in place is just, if not more, as important. You can have the best portfolio in the world, but if the team running the asset is incompetent, you probably will mess up “good” real estate. It’s definitely a debate, but the team ultimately may be more valuable than the product (real estate).
As a passive investor, you need to ensure the management team or sponsor is experienced and competent. And as a sponsor, management team, or direct investor, you need to make sure you have the right players in each seat. The stakes are too high to have one incompetent player on your team.