If I Had to Start Over: The 8 Pitfalls to Avoid in Commercial Real Estate

Markets have changed. Embarking on a career as a commercial real estate fund manager or syndicator can be a thrilling journey, as many have recently witnessed, filled with the promise of substantial rewards and the allure of cementing a legacy. However, the path to success is fraught with pitfalls that can derail even the most ambitious endeavors. If I had to start over in this complex and competitive field, understanding the common reasons behind many failures would be paramount.

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This blog post delves into the eight critical mistakes that often stand between aspiring professionals and their success in commercial real estate. From the intricacies of transactional know-how to the nuances of building a robust network, we'll explore the essential lessons that can help you navigate the industry more effectively and avoid the pitfalls that have hindered others. Whether you're just starting out or looking to recalibrate your approach, these insights aim to provide a foundation for a more resilient and prosperous career in commercial real estate.

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1.?????? Believe They Need to Buy and Operate a Commercial Building First.

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Many emerging syndicators and real estate fund managers mistakenly believe that mastering every aspect is necessary before they can become syndicators or equity investors. However, the reality is quite different. Building a successful career in this industry requires a unique skill set that many newcomers do not possess.

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This doesn't necessarily mean relying on financial leverage; today, it involves leveraging the expertise of other sponsors to your advantage to build a meaningful track record for yourself. It also means acquiring the skills to persuade and influence people to invest in deals managed by those with a distinguished track record.

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Furthermore, in the current landscape, why would an LP or investor take all that risk?

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Who is going to finance a first-time operator in a deeply distressed market?

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Answer: Not many.

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2.?????? Insufficient Networks To Raise Capital Consistently.

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I can't emphasize enough how many individuals approach me to raise capital without even having a website. The absence of a platform to showcase your professional reputation significantly hampers progress. In today's era, marked by the prevalence of LinkedIn, people expect to be able to look you up instantly, sometimes even while they're speaking with you, based on my experience.

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The second rule of real estate is to always be in the process of raising capital and to have an automated system in place that allows you to build a brand and summon that capital on demand.

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Nowadays, this is achieved through email, offering investors a window into your journey as you skillfully navigate the markets. If you're using email services like MailChimp or HubSpot to communicate with your limited partners (LPs), you're missing out on consistently and meaningfully capturing their attention with updates, regardless of whether the news is good or bad.

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Because investor engagement and interactivity are the new currency.

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For those new to this field who possess a network but lack experience and a proven track record, starting out as an aspiring fund manager can be daunting, making it difficult to secure loans and establish a credible reputation. Instead, developing robust networks and making an effort to establish yourself as a professional syndicator or investor are critical steps in overcoming this hurdle.

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If you're not actively networking with only the most experienced commercial real estate sponsors and general partners (GPs), you're at a complete disadvantage when it comes to sourcing the best possible deals. Your investors need to trust you from the start, and you must deliver on that trust.

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Sal's Rule: In real estate, it's far easier to raise money than it is to deploy it in a way that is meaningful and thoughtful.???????

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3.?????? Overpaying For Assets.

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This has been easier said than practiced over the past 5 years. Based on my 20+ years of experience, people have overpaid. Without a thorough understanding of how to value commercial properties, you might find yourself overpaying and facing financial consequences. It's vital to navigate the market intelligently to protect your personal relationships and safeguard your hard-earned reputation.

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If you don't know how to value these assets, how can you expect to understand what you're paying for? What you'll end up doing is what everyone else who overpaid for multifamily properties did: putting their family's reputation, marriage, and assets at risk.

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4.?????? Failing To Comprehend How to Effectively Engage with Investors.

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There’s networking, then there’s pitching. Proposing marriage on the first date is deemed creepy, akin to expecting to dive into business within the first 45 seconds of meeting someone while armed with an iPad. This industry thrives on relationships, yet novices often treat it as a transactional hustle, the kind that might even make Gary Vee blush.

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Investors are more than just capital sources; they are individuals with emotions, egos, and expectations. Cultivating strong relationships with investors is similar to a courtship or marriage. It's important to value their time and cater to their needs, understanding that no one will commit their capital without establishing a strong rapport. Your role involves making connections and serving others to build trust.

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Commitment to building long-term relationships is essential, and as we often said at Goldman Sachs, one should be "long-term greedy."

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5.?????? Not Knowing Your Investor.

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The middle and upper-middle classes seek wealth creation. They don’t tell you this but they are looking to get rich quick. They are drawn to Class C to B apartment value-added deals due to their lower entry barriers. However, they may not fully grasp the concept of credit risk and might view high returns as once-in-a-lifetime opportunities, not realizing that they are taking on tenants who are poorer than they are.

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Conversely, the top .001% of wealthy families, exemplified by Spanish billionaire and Zara founder Amancio Ortega, adopt a different strategy. Through his family office, Pontegadea, Ortega invests cash in statement assets worldwide. In 2022, his investments in Class A buildings from New York City to Dublin exceeded $2 billion, each purchase reflecting his belief in the long-term appreciation of statement-class real estate.

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Based on my experience, a .001% family will not want to be in the same asset classes as the middle class.

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Sal’s Rule: Different capital sources have different drivers and desires.

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6.?????? Underestimating Expenses and Undervaluing Time

Time is a finite resource, and your ability to allocate it effectively can be crucial to your success. Whether investing time or money, underestimating expenses can impede your progress. To build a functional syndication business, one must master the art of influence, persuading potential investors to support your fund or the entity's general partnership (GP).

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It costs money not only to set up but also to expedite the process by collaborating with someone who can troubleshoot alongside you. Working with an experienced individual who has navigated various scenarios ensures you avoid mistakes. After all, you only get one chance with someone else's money. How much, then, is your reputation worth?

Sal's Rule: Any syndicator or fund manager should dedicate at least 50% of their time to engaging with existing investors and attracting new ones.

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7.?????? Deficiency in Deal Execution Expertise

The devil is truly in the details, especially in real estate transactions.

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Questions abound: What comes first, the deal or the money? What happens next? And what follows after that?

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A deep understanding of terms, including the capital structure, is essential.

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Who receives payment, when, and for what reason? What happens if the deal encounters distress? What steps should be taken next? Whom will you contact?

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Sal's Rule: Understanding how a system works by examining how it fails is crucial, as we are currently seeing.

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8.?????? Inability to Effectively Communicate Your Deals

In a world saturated with complex jargon, simplicity and clarity are paramount. Avoid falling into the trap of over-explaining with technical terms. It's important to learn how to present your investment opportunities in a way that is understandable to anyone, including your spouse. Capturing and maintaining your investors' attention and effectively conveying the potential of your ventures will be crucial to your success.

You must be able to communicate clearly and simply. For instance, explain where an investor's money goes, how it returns to them, and when. In today's environment, attention is more valuable than oil; this is evident in the realm of social media. Without attention, you cannot raise capital. Without capital, your venture is stalled. Remember, never to violate the second rule of real estate or risk extinction.

Putting it all together, the ability to raise and manage equity (or private debt) is essential. This requires understanding how to assemble the pieces. If you're relatively new to this industry, I strongly encourage you to invest time in acquiring this invaluable skill set. Ignorance of the most expensive debt that you can have. If you increase your skill set, you increase your value, which increases your income.

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Without a distinctive and highly sought-after skill set (such as buy-side real estate private equity), achieving success in this business becomes challenging, especially when banks are hesitant to lend.

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Are you eager to learn these skills in real-time by looking over our shoulders as we start getting into the distressed market again? Click here to schedule a session: https://bit.ly/3LnGAU3.

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