By Jimmy King, Founder, Contrarian RE Fund 1, LLC
The recent announcement by Blackstone the final close of its latest global real estate fund, Blackstone Real Estate Partners X (“BREP X”) with $30.4 billion of total capital commitments (the largest real estate or private equity drawdown fund ever raised), reflects confidence for investing in real estate during periods characterized by market volatility. In a news release announcing the fund, a Blackstone executive stated that the company has made some of their best investments in periods characterized by market volatility and dislocation.
The market is certainly volatile at this time, and plentiful opportunities exist to invest in distressed real estate.
Being successful at these types of investments requires the ability to identify and acquire real estate properties that are being sold at steep discounts. Many of these opportunities exist in multifamily and manufactured home communities that are suddenly being made available for well under the original asking price as owners struggle with increased debt and/or escalating fees. Some are even selling for as little as 60 percent of their original value (2019 highs vs today) . And while opportunities exist, being a successful investor requires a great deal of insight, information and investigation before a purchase is made.
The Contrarian RE Fund 1, LLC, actively researches and identifies distressed real estate assets and reviewing if they are viable options for the fund’s “Value-Add” business model. If they are, the team of experts make purchase decisions regarding the properties by investigating the level of enhancements and improvements that need to be made for each property.
The “Value-Add” business model has realized significant profits since it was first implemented in 2009. By purchasing properties with low rental rates and making substantial physical and operational enhancements that improve both the property and resident experience, the model has been proven to be able to consistently achieve higher rental rates and refinance initial capital investment.
Some of the key factors to consider when making the decision to join a fund that invests in distressed real estate includes:
Size of the Fund
Are you interested in investing in a massive fund, like the $30.4 billion fund structured by Blackstone, or a fund that is less than $50 million? The key differences between massive and smaller investment funds are (JIMMY, WHY WOULD A PERSON CHOOSE A SMALLER FUND? FOR EXAMPLE, DOES A SMALLER FUND PROVIDE A FASTER RETURN ON AN INVESTMENT? ARE THERE FEWER PENALTIES/RISKS? ETC)
A smaller fund will provide you with the opportunity to interact on a personal level with the management team, whereas a larger fund won’t go beyond the standard paperwork to update you on your investment. You’ll also have the opportunity to meet members of the team (the craftspeople and contractors who are working on a real estate renovation that you’ve invested in, for example). It’s highly unlikely that the management team at Blackstone is sharing their cell phone numbers with investors in that fund.
Decision Making Process
As an outcome of the personal interaction with the management team of a small fund, you’ll have the opportunity to contribute to the decision making process. While the team for a smaller fund brings strong real estate market knowledge on a local level, they will also likely be willing to accept input and ideas from knowledgeable investors. Opportunities will present themselves that the management team may not be aware of, but that investors can bring to the table, for the good of everyone.
While the opportunity to invest in distressed real estate is intended to show a profitable return, there are some intangible outcomes as well. For example, renovating properties will help to improve neighborhoods and communities by eliminating blighted real estate. This type of contribution goes far beyond the initial investment, especially when investors are personally familiar with the property and can visit it and feel pride in what they’ve accomplished.
As more and more opportunities to invest in distressed properties present themselves, the time to act is now. If this seems like an appealing investment option to you, be sure to take the time to research what’s available and which type of fund is the best fit for you.
James King is the Founder of the Contrarian RE Fund 1, LLC, and along with his team of professionals has successfully owned and operated more than 2,000 units across the United States. He can be reached at KingCommunities.com ([email protected]) or 562-208-7649.