Comparing Real Estate Returns: Why Bigger or Higher Isn’t Always Better

Key points:

1. Real estate investors aim to maximize returns and minimize risk over time. Every investor needs to consider the following question: How much risk is being taken to generate each unit of return? A property that is expected to generate 20 percent annual returns with twice the risk of one that generates 15 percent return is a worse investment choice.
2. Who you invest with is the single most important decision in real estate. A top tier manager will put you in a great position to succeed and protect your capital in all cycles. They behave rationally and responsibly. An inexperienced manager without infrastructure, discipline or their own capital will take outsized risks that benefit them at your expense.
3. Real estate is complex and trying to narrow it down to a few variables to make a smart decision is incredibly challenging. When accounting for risk adjusted returns, it’s all about the ability to meet or exceed the assumptions in the underlying financial model. Investors also need to consider things like fees, growth rate assumptions, exit pricing, barriers to entry, aesthetic appeal, capital improvement costs, supply, and asset history, to name a few. These all have a material impact on the risk return profile and the decision to move forward.

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Comparing Real Estate Returns: Why Bigger or Higher Isn’t Always Better