Daniel Cocca- Managing Director, Principal and General Counsel
A New Perspective: Private Equity Real Estate
NEW BOOK BY ADAM GOWER PH.D.
A BRAND NEW WAY TO FINANCE REAL ESTATE
...No matter how many investors you have or how many deals you've done before.
Daniel Cocca - Managing Director, Principal, and General Counsel
What You're Going to Learn
- A small real estate syndicate focused on results
- Understanding institutional-quality real estate
- Institutional-quality underwriting, analysis and negotiation
- How to deliver a 100% IRR real estate return
- How to be conservative and transparent in real estate investing
- Real estate deals that make sense on a risk-adjusted basis
- How to feel confident with real estate investing in this current cycle
- Real estate asset classes to consider in today's market
- How to find real estate deals that make sense
- How to be a discerning consumer of your real estate investments online
Related article: The Ultimate Guide to Crowdfunding Real Estate Development
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Show Highlights
FOR REAL ESTATE DEVELOPERS
THE WHITE BOARD WORKSHOP
Learn the exact system best of class sponsors use to raise money online.
A Small Real Estate Syndicate Focused on Results
Adam Gower: My first question. Last time I spoke to your team. And said, how can I bring you more investors. You said, we've stopped taking investors. Who in the world says that? You're the only person in the entire country that says, sorry, you're not taking in. So, what's been going on since I last spoke to you. That's an extraordinary position that you're in. Tell me all.
Daniel Cocca: Yeah, I mean, listen. We haven't gone off the rails. It's part of an intentional approach that we've been kind of developing over the years. But I think it really goes back to how Alpha started. It was a group of us who were all pretty busy, working professionals and investors. We wanted to deploy capital into institutional-quality real estate. And, at that point in time, you know, before the JOBS Act, before crowdfunding, before, like all this access. It was a really hard thing to do, especially if you were an individual that wasn't writing 7-figure checks into transactions, right? And we know that to be true because when you look at the data, outside the 1% - top 1% of earners, the percentage of real estate in any given person's portfolio like effectively rounded to zero when you exclude the value of the primary residence, right? And so it was a hard thing to access. And we wanted to create something that felt like an optimized investor experience for us, right? And, we set out and, of course, trials and tribulations and things we learned and things we did wrong. But we set out to build something that, we could access as individuals and get into institutional-quality private real estate deals. And, I think over time, you get to a point where you have to make a decision about, which direction do you want to go, right? And for us, the idea of having tens of thousands of investors, fundamentally changes the core values upon which we kind of built this company, right? Now, we have to acknowledge, of course that, having more investors or investors that are deploying more capital, is a valuable thing, right? But, we also want to be able to develop real relationships with the people in our network, right? Everyone who's part of Alpha has spoken to one of the principles of the firm, has multiple points of contact. And, I don't want to say I'm best friends with everyone in the network, but we know everyone well enough to understand what their real estate goals are, what they do, what they actually care about, and they know enough about us to understand what our strategy is, what they should expect to see from us, how everything works, etc. And so, that's a really important, I think, part of this whole thing. And then, you know, in practice, what you have to also appreciate is that the type of operating partner that we're trying to work with, you know, they, in a vacuum, do not need us to raise capital, right? Like they have billion dollar plus portfolios, they've done it before. If they've performed well, which they have, if we're talking to them, they can raise equity capital. And so, that's not the type of group that's interested in blasting their deal out to tens of thousands of people. And so, part of the way that we kind of improve or keep a high quality partner within Alpha is by keeping this small network. And, we arbitrarily decided that was a 1,000 people. And, you know, we'll see if that ends up being the case. I think we're at about 850 active investors in the network right now. And so we are letting people into Alpha still, it's just on a very selective basis. And the reason why. Yeah, and the reason why that's important because, I do want to clarify. The reason that's an important part of this thing is that - the SEC 99 investor rule, right? That limits the number of people we can bring into, you know, most of our offers.
Adam Gower: Are these 506(b)'s then that you're investing, not (c)'s.
Daniel Cocca: They are. Everyone goes through a pretty comprehensive onboarding process before they join up with Alpha, right? And so, because that's the case, and there is demonstrable value in being the majority equity partner in a deal or at least being a recurring larger equity partner. And that might mean being able to negotiate better investment terms. It might mean, just a right of first refusal on X or priority access to new deals, what have you. There is value to that. And so, the people we're letting into the network today, have the ability to write 6-figure checks, multiple times a year. That benefits the entire network. And what it doesn't do, because we have a ceiling, is create undue competition for equity, right? Because, you know how it goes,. You have a new project. Everyone wants to get in. I don't ever want to have to make the call or send an email saying, Hey, sir, or ma'am, I know you want to come into this deal, but we just don't have room for you, right? We want to make sure the people who are part of Alpha, from the very beginning, the people who really put their trust into us, before we had built the track record we have today. They still get access to our deals and they're not getting pushed out. And so, that's a really long way of saying, you know, it was intentional. I know it sounds crazy. You know, when we talk about it as a team, we oftentimes like joke, like, what are we doing here? Right? And maybe it's a long con on us where we tell everyone we don't want investors and then we get a ton more because that's effectively what's been happening, unfortunately. But it is true. We're trying to keep things at a scale that we think makes sense for the folks in the network today.
Understanding Institutional-Quality Real Estate
Adam Gower: But let me ask you this question. Institutional-quality real estate - and I remember talking to Fark about this, years ago, when we first met. What exactly does that mean to you? Institutional-quality real estate.
Daniel Cocca: It's a good question, and it's a moving scale for all different types of people, right? And you know what, I think when we first started, we thought about it - you know, portfolio and kind of track record size. How many deals have you done? How many have been realized? And we just kind of went through a process of saying somewhat arbitrarily, but with some knowledge - hey, this is the line, and this is a group that has enough experience that we feel comfortable they can navigate a good market, a bad market, whatever kind of comes their way, they can figure it out. And I think that's a really important part of investing into real estate is just minimizing variables, right? And execution risk is a big part of that. And so, whatever you can do to minimize it, makes sense. But I think as we grow as a team internally, especially as we've grown out our own internal asset management team, you know, we feel more comfortable getting involved in the weeds in a lot of the deal processes. And so, there are scenarios where there might be a smaller group or someone from a larger, very established group who's going out on their own and they've only acquired 6 or 7 properties under their own umbrella. But they have a really demonstrated track record of success. And then qualitatively, as we evaluate them over a period of months, we say, hey, we've been searching for reasons why we shouldn't invest with you and you just haven't given us one, right? And because of that - we've never been a group that like, trusts our gut, so to speak. Like we really want you but it's a - like, let's verify over and over and over and over again and eventually evolves into more of a hey, like we've bounced every possible scenario and run every test through this group, and they haven't given us a reason to say no. And so now we feel really comfortable saying yes, right? So a long answer to your question. It's a moving target for everyone. We're just looking for smart groups with good strategies, and when you ask them a question about why they do X, they know why. When you ask them a question about their portfolio, they know why the portfolio is performing in the way that it is. It's not just, hey, we're buying real estate, come on board. And so, not the best answer to your question. There's a lot of factors that go into it, but you know, at the end of the day, that's how we think about it.
Institutional-Quality Underwriting, Analysis, and Negotiation
Adam Gower: Yeah, but there's more to it, isn't there, and you've already touched on this. And that is an aspect, you know, when institutions. We just talked about this before. Institutional-quality real estate, of course, is the real estate itself, the caliber of the sponsor and the scale. Right? You know, like the scale is a large part. But the big differentiator is when an institution invests in a deal. The extent to which two things happen: one, they do due diligence and analyze a deal, that's institutional-quality. And the second is, and you mentioned this and this was actually something I had a deep, long discussion with Fark about, 3-4 years ago. Is, the extent to which you negotiate rights when you go into the deal. Those are really differentiate. Those are clear dividing lines that individual investors simply cannot get or implement. You can't do a property condition report, right, on a building if you're, you know, investing $25,000 even $100,000. It could could cost you that to do a PRC on a deal, for example. Or maybe not that much, but to do all the due diligence. So that's really a differentiator isn't it. That's the value - the added value that you bring is institutional-quality - underwriting, analysis and negotiation.
Daniel Cocca: Yeah, the control rights are key, right? And, it's only over the last few years that, as a network, we've gotten to the point where we're now the majority equity partner and so we can have those control rights, and that's an important part of just how we strategically grow the network, right? But, when you have control rights, what you then also have to make sure you're doing and this is part of the reason why we built out our, kind of, internal asset management team, right, is you have to be on those weekly or biweekly property management update calls. You need to be looking at monthly financials. You need to understand, at the same level the sponsor or operating partner does, what's happening at that deal because at some point down the road, you're going to need to vote yes to a sale or a refinance or some other major decision, right? And you know, there are different levels of the control light spectrum, right? One of the challenges that we hear from a lot of our operating partners is, the largest institutions, the ones that are deploying, you know, billions of dollars into private real estate annually. Their control is very, very laser focused. You know, you want to put up new rims on the basketball court. Somebody is signing-off on that. And that presents challenges, right, when you're trying to manage a property and then also manage an investor. And so, we tend to focus on the major decisions of things that are important. And then we also just know we have influence over the transaction because we're a recurring capital partner and that's just how these relationships are built.
How to Deliver a 100% IRR Real Estate Return
Adam Gower: Results. You just delivered a what? 100% IRR on a deal. Please. Do those really exist? Tell me about that.
Daniel Cocca: You know, it's funny because I just watched this documentary series on HBO about this elusive 100 foot wave in Portugal and that's what I feel like, the 100 IRR deal is like. But throwing my lawyer hat on for a second, which I fortunately don't have to wear that often anymore. You know, what happens in the past is not necessarily indicative of the future, and there's a lot of circumstances and context around, you know what creates one hundred IRR deal. Part of it is the shorter hold time. This is a deal we flipped in and out of in 12 months, and so investors got a 2x on their equity. But, it's very different than having a 100 IRR over a 3-4-5 year hold, right? And then, you know, the deal benefited from - close to perfect timing, right? It was purchased last October. I think it was like, going in like, 5.3 cap, which, you know.
Adam Gower: Multifamily deal?
Daniel Cocca: Yeah. Workforce value-add multifamily in Phoenix. That is not a cap rate that you will see today, by any means. And so, there was a lot of value created. I think we we improved NOI at the property by about 30-35% in that 12 month period. The asset value increased, I think, something like 65-70%. And so, you know, a big chunk of the return, in that case, nearly 55% of it, was market-driven appreciation, right? Cap rate compression. And, that's not something we ever underwrite. We actually underwrite the opposite. We always assume pricing trends are going to go in the reverse. And our threshold is usually about 200 bips of cap rate expansion on a 3-year hold.
Adam Gower: Do you really? That's incredible.
Daniel Cocca: And, we look at things like a matrix, right? And there's 2 parts to that matrix. One is, execution-driven value, meaning, we renovate units, we increase rents, we improve NOI. And the other column is, you know, market-driven appreciation or cap rates compressing. And so, if a deal makes sense, when you underwrite 200 bips of cap rate expansion, during the hold period. And personally, I don't believe that's going to happen. But, in a world where it does, you know, you still get that mid to high teens IRR and every investor should be, not just happy, but ecstatic with those types of returns, especially if they're getting them on an annual basis. The last 5, 7, 10 years have really created a benchmark in an environment that, is a little bit crazy at times, but nevertheless people should be happy with that. But in a world where cap rates stay flat, you know, maybe they increase marginally or, you know, they continue to compress like a lot of people think will happen. That's where you see that outsized return come from, right? And so, what we really care about are - another deal we did with that same sponsor, which we bought in 2018 and sold in 2020, early 2020, I believe. You know, that deal sold - the asset value, I think was about 50% higher at sale, it was held for maybe 18 or 19 months. But out of that 50%, 40% of it, was an increase in NOI, right? And so, in that case, 80% of that return was execution-driven improvement to net operating income. And that's a really important thing to understand, because 100 IRR and in that case, I think that deal is a low 40s net IRR to our investors. Like, those deals, in terms of execution were actually somewhat similar, right? I think they they beat their pro forma rents by anywhere from $50 to $70. The deals performed well by any means or in any market. But it's the cap rate compression on that deal that led to that monster. I think it was like, 104 net IRR. Please don't ever expect that to happen again.
Be Conservative and Transparent in Real Estate Investing
Adam Gower: Investors, especially those that have been in the market for long enough are - they anticipate returns that may not necessarily be realistic in a market like we have today, that's full of liquidity, essentially overheated. How do you deal with that? How do you explain to investors? How do you articulate that, what you saw yesterday, and you already, kind of, used this as a proviso right? Past returns, nothing about the future, blah blah. But I mean, realistically, that's the case, right? Investors are used to higher returns. How do you sell deals, in 3 cap market, for example.
Daniel Cocca: So, it's a really good question. I think there are a couple of parts to it. One, and this is part of the practical business point behind why we have a smaller network, is that, it's much easier for us to communicate things like this to a group of 800 to 1,000 people than it would 20,000 or 30,000 people, right? We can spend the time getting on the phone, having real conversations with anyone who wants to, in the network, about how we view the current environment, what their return expectations should be, et cetera, et cetera, right? Now, fortunately, a lot of these people have been investing through multiple cycles, and so they know there are good times and bad times, and they come and go and what have you. But you're right. It's a behavioral economics question, right? You throw massive numbers in front of people. You set a massively high benchmark. All of a sudden, they're disappointed with what would otherwise be a really strong return. And so, there's no way to stop people from feeling the way that they feel about the return expectations, right? We just try to make sure we educate people. We write a lot of, kind of, quarterly - what we call "Alpha Insights". We do a lot of white papers, where we talk about our strategy. Just trying to get everyone on the same page that we are, right? At the end of the day, it's an exercise in investor education. I know this is something that you do a lot of as well. And so, we're just trying to, kind of, share our version of what we see in the marketplace and, you know, hope that people understand. And then of course, you know, we put a ton of qualifications on things, right? Like, I'm, as you can tell, the type of person who, I'm going to lead with: this is why what I'm about to tell you, you know, needs to be qualified by whatever proviso you want to add in there, right? And you know, as an individual, I am not a huge fan of investor protections, but, based on my training as a lawyer, I realize they're really important, right? And, it's because there's these types of opportunities for investors to behave in a way that's irrational, like the benchmark effect, as we call it, in behavioral economics. That you sometimes need some amount of regulation, right? To make sure that there aren't groups out there that are taking something that happens and presenting it in a way that is misrepresentative. And I'll tell you, and I'm sure you're on the same emails that I am, see a ton of deals coming from a ton of different people that I've never met before in my inbox. And, a lot of them, more recently have been - "This is a home run deal. Invest now. Limited spots". They play on all of those behavioral economics, marketing things, that get people to say: I would need to invest right now. If I don't say yes in the next 3 hours, someone's going to get my spot and I'm going to miss out. And, that's always problematic to me, and it's not a direct answer to your question, but the point I'm trying to make is that, you got to choose your lane, so to speak and we've chosen a lane where, we're going to err on the side of being very conservative and overly transparent.
Real Estate Deals That Make Sense on a Risk-Adjusted Basis
Adam Gower: Let me ask you this way. So how do you compete with that? I mean, there's 2 types of people that are doing that, right? There are those that are exceptionally good at triggering psychological responses in prospects, but who don't necessarily really understand what's going on in real estate. And so, it's a major hazard. Then you have, legitimate sponsors who have worked harder, still working hard and they understand the business but they also understand that if they don't fly the high return flag, they're going to lose a lot of opportunity with investors who are gravitating to, you know, that which glitters must be gold, type of returns. So how do you deal with that? Had your conversations that I've had with other folks who are like you, who are conservative. How do you deal with that? How do you explain to an investor who maybe isn't sophisticated that highest IRR doesn't necessarily always win.
Adam Cocca: Yeah, I think that's an important point. An important thing to note is that, we don't view ourselves as competing with that type of group, right? And, if you're part of Alpha and you pay attention to what we're doing and what we're writing, you should hopefully be able to recognize those things pretty easy, right? And, that's just kind of a big part of it. We are not trying to play that game and that's why we have a smaller network because it's easier to to ultimately communicate those things, right? And, you know, in a vacuum, you know, we even know internally, right? Throw risk to the side. If we put a deal up that has a higher IRR, everything else being equal, there will be more interest from our investor network in the higher IRR camp? People, as individuals, do not do a great job of making investment decisions on a risk-adjusted basis, right? And, that's part of the role that we play in this process, right? Because, we're going through the exercise of - flying out, touring the property, touring all the comps, making sure that the business plan is actually feasible, that, there's a substantial amount of downside protection. And so, when we share a deal with our network, we already believe internally that the deal makes sense on a risk-adjusted basis and investors get to choose which deals they do or do not want to participate in.
Feeling Confident With Real Estate Investing in This Current Cycle
Adam Gower: Daniel. So, where are we in the cycle? I know that's like asking you to gaze into a crystal ball. But what does the market look like, to you at the moment?
Daniel Cocca: Yeah. So, my crystal ball has regularly been wrong, particularly as it relates to real estate investing. The good thing is, my crystal ball and our crystal ball tends to err on the conservative side. So, being wrong is not necessarily a bad thing, right?
Daniel Cocca: But, if we were sitting here in 2015, I would have been telling you about how important long-term, fixed-rate debt is, right? And then we had, 7 out of 8 quarters with interest rate rises before that. And, all of a sudden, we're living in a completely different world and we feel very differently about things. And, the deals that have long-term fixed-rate debt, we're frustrated by it because they've got prepayments and we want to get out of them. And, you know, that's how it goes, right? And so, since 2015, we've been talking about, you know, downside protection, need-based residential assets, removing or minimizing variables, right? That's why we historically have not done much that has a commercial component where consumer behavior has really any impact on what we're doing. And that's not because we predicted COVID. It certainly isn't. Part of the strategy is, let's minimize the variables that we can and then try to make bets, so to speak, on the areas that we feel confident in, right? And so, that's kind of ultimately, how we got to that point.
Real Estate Asset Classes to Consider in Today's Market
Adam Gower: So what's hot today? Makes it sound a bit sensational, which I know you're not. But, tell me about it.
Daniel Cocca: I get it. So, okay. I think our investments fall into 3 buckets right now. One will be your value-add workforce multifamily and that falls into, kind of, two sub-buckets. One will be the "demand market" like a Phoenix, where you're buying at very low cap rates - sub, 3 1/2, in many cases. But, there is a business plan where, you're going to get, rent increases and the ability to create value exists such that buying a 3 or 3 1/2 cap deal can make sense. Again, insomuch as you believe there is downside protection, your coverage ratio makes sense and the business plan is achievable. We want to look at the comps and say, we know how we're going to renovate this property. We know what it's going to look like upon completion. And, if at the end of the day, it's going to look better than other properties who are already getting our pro forma rents, that makes us believe that the business plan is achievable. And, you know, in a vacuum, and I feel like I've been using that phrase a ton recently, but in a vacuum, right? There's just been a ton of capital. And, this isn't something, the listeners don't know - that's pumped into the economy. And, even if it gets into the hands of the people who need it the most, it eventually trickles into the hands of the wealthy. And, that's what's led to all this asset- level inflation, right? And so, even though we've been very concerned about the downside as we've made investments over the last 5 years or so, we do have to acknowledge that, assets should continue to appreciate. If that's another 2, 3, 5 years, it's hard for me to say. Depending on who you speak to you, you can hear a wide range of thoughts there. But generally speaking, if a deal has strong downside protection, the business plan is achievable, we likely want to own that asset. We want to be asset owners in the current market, right? And so, we look at some of that workforce value-add and demand markets, that has a ton of the value creation story. And then we also like the smaller, secondary, stable, tertiary market. Maybe we're going to buy a 150-unit multifamily, class B, and you're buying it at north of a 5 cap, right? So, your margin for error is a little bit higher. You don't need to get $250 rent bumps in order for the deal to make sense. It cash flows better in the early years. We like those types of deals as well, in the multi-space. Again, Class B is interesting because, regardless of the economy type, someone's in Class B, right? C moved to B, in a good economy. A moved to B in a bad economy. There's always somebody there. Again, minimizing variables. That's an area we like. We've historically and we'll continue to do a lot of senior housing. It's mostly been assisted living and memory care. And, you know, for obvious reasons, we haven't acquired any properties over the last 14 to 16 months, something like that, right? But if you asked me 6 months ago, I would have told you, and this is before the delta variant became a real issue in that space. I would have said, we're looking at an acquisition-rich environment, over the next 12 to 18 months. It's a very fragmented asset class. Tons of mom and pop owners who have their entire retirements tied up in 1 or 2 assets. And, even if they didn't have COVID cases or deaths, they had to deal with the rising labor costs, right? And, that put a lot of pressure on the mom and pop that, an institutional manager, like the one that we acquire assets with - didn't experience to the same degree, right? Of course, the portfolio took an occupancy hit during COVID, but it's bounced back pretty quickly, and we're kind of comfortable with where things are, and there's still some room to get back to pre-COVID levels. But, we're well ahead, by, I think about 5 percentage points, in occupancy, over the rest of the market, right? And so, we're expecting to see opportunities there. It's an asset class that most operators are on the ground-up side, in an effort to deal with the supply-demand imbalances as baby boomers head into those facilities. The group we work with, focuses exclusively on acquisitions. There's a limited universe of buyers in that space. And so, we tend to find really interesting high 7, 8, 9 cap rate acquisitions that will cash flow in the high single, low double-digits right out of the gate and then also have some upside as part of this larger portfolio we're building. And then, the last area that we're deploying capital in right now is the single family rental space. And, it's relatively new for us. We just started this year. It's an asset class that we've been talking about for years. The challenge is, as an individual group, it's a really hard thing to do, right? Anyone who's ever owned a rental property knows, you go out and you buy it. It's a ton of work. What have you? It's really important to build scale in whatever given market. And so, we found an operating partner that, kind of, fits perfectly into that strategy. And, we just love the big picture stats about single family rentals. And I'll throw some of them at you because they were new to me when I first learned them. I guess, anything's new to you when you first learn it, but, it wasn't that long ago that I run these stats, right? But, I think it's like 53% of the rental stock in the United States is single family housing, with the remaining 47% being apartment buildings. And that's never what I thought.
Adam Gower: That's extraordinary.
Daniel Cocca: I would have assumed that there were way more apartment buildings, right? But, despite that, and you know, pre-COVID, only about 2% of single family homes were owned by institutional private equity, right? Whereas if you go back to multifamily, it's about 50% institutionally owned. And then, if you think back, and you know, this is before my time as a professional, but the early 90's, multifamily was not seen as an institutional quote unquote asset class, right? And, it got there over time. And our expectation is, the same thing is going to happen in the single family rental space, right? And so, our strategy is really to buy up very similar types as we do on the multi side. So, you know, workforce, value-add. We come in - we typically spend $15,000 - $20,000 renovating any given home. And, you know, the rents, post renovation are typically not exceeding $1,400 - $1,500 a month, right? They're very affordable, to the demographic that lives in that local market. And then, what we'll do. We're in 2 cities now, about to get into our third city, is build up a portfolio of maybe one to two thousand assets, stabilize it across four or five markets, and then we'll look to sell it to an institution and get that portfolio premium as well. Because, what we expect to happen, particularly over the next 3, 5, 7 years, is that, what was one percent institutional capital pre-COVID, which is about 2 1/2 to 3%, the last time I looked at it. 5, 10, 15, 20%, in the next 5 - 7 years, and, the challenge is to go in. You can't buy - if you're going to deploy two hundred million dollars in the space, you can't go out and just buy $200,000 homes one after another, which is not an efficient way to deploy capital. And so, having a portfolio of a 1,000 stabilized assets is a very attractive exit to an institution. And so, it's newer in our portfolio of asset classes we invest in, but one that we are very, very bullish on.
How to Find Real Estate Deals That Make Sense
Adam Gower: What are the biggest challenges that you have today, and then we'll move to 3 sign-off questions. My last question.
Daniel Cocca: Sure. Challenges as it relates to our business?
Adam Gower: Yeah, on a day-to-day basis. Like, what are you trying to deal with today?
Daniel Cocca: Yeah. I think it's internally building out more expertise, particularly at the asset manager level, right? When we first started Alpha, we were in our late twenties at the time, right? So, very naive, needless to say. We thought, hey, you aggregate people or you give them the opportunity to invest with a billion dollar sponsor or a sponsor with a billion dollar portfolio. That's all that matters, right? Because, you're giving them access to something they didn't have before and bigger is always better, what have you. And, what we learned over the years, of course, is that's not always the case. There are groups that check those boxes and haven't performed. And so, having a really skilled underwriting and asset management team is important. We hired my partner Anne from AllianceBernstein, maybe like 3 1/2 years ago. Kind of built out our group internally to look very institutional just in the way that we evaluate new acquisitions, but then also look at the performance of these existing acquisitions and then try to apply that data to the next deal we see from that same group, right? And so, that's a big part of what we're doing now is building that out. We obviously are looking for opportunities to deploy capital and again, a way or a deal type that has downside protection, but also achievable upside, right? And as cap rates continue to compres,s at some point, in certain asset classes or deal types, it just becomes less and less likely, right? I don't see a world where we're buying 2 cap deals, right? And it's not all that crazy, though, because when you talk to people and investors in other countries, like, who want to invest in the U.S., they often say, I live in - even a city like Toronto, and everything is a 2 cap here, right? And so, you know, the world may go there, but your margin for error is just so low. And what happens on like a value-add deal, for example, I think it starts to take the profile of a development deal. You're not going to have any cash flow for 1, 2, maybe 3 years and you're making a bet on the residual value of the asset, right? And you know, we hope that that's not where the market's going. To be honest, if you ask me, even as an owner of a lot of real estate, for our purposes, I think I prefer cap rates to maybe, across the board, go up 50 bips. I think that would create a nice sweet spot where investors are still generating really strong, high teen, maybe low 20 IRRs when deals outperform. But, you still have downside protection on your new your new acquisitions, right? And so, I think those are the two things that, we think about the most is, how to continue to find deals that work and make sense, regardless of the environment that we're in today or maybe in the future.
How to Be a Discerning Consumer of Your Real Estate Investments Online
Daniel Cocca: It's important to make sure you're working with groups that are trustworthy because deals are marketed based on forward-looking projections. I can make a deal, on paper, look however I want to make it look. And so, you ought to be a discerning consumer of your investments.
Adam Gower: Yeah. And that actually is my, actually almost answered my last one. For somebody, a high net worth investor who is listening in today, knows that only under very special circumstances can they invest with you. What is - but they've not invested in real estate before. What advice would you give them, as they start their journey today, particularly on deciding whether or not to invest in real estate, online, specifically.
Daniel Cocca: Yeah. That's an excellent question and I think the first thing is - it's a long term game, right? You're not trying to find a single deal and invest in that deal and get the best return you possibly can. You're trying to create a sustainable system, right? And I think Warren Buffett said this, but, I might be wrong. Investing is a game where patient people take money from impatient people, right? And I think that's true in a lot of aspects of life. But it is in real estate investing. And so, spend the time learning about the group or the operating partner you're working with, right? And sometimes it's challenging as an individual investor, like you said before, because, you know, even if I'm writing a $500,000 check, five times a year, these billion dollar portfolio sponsors have zero interest in my money, right? And they're especially not going to give me the time that I would want to actually genuinely evaluate that group. And that's where a group like us, does come into play, right? Because, in the aggregate, we're writing $5 to $15 million checks, into any given deal. And, with that comes a certain level of influence and involvement in the transaction. And so, it's a long way of saying, be patient, invest in what you know. It's something I hear a lot. You know, don't get caught up in the crazy new thing, even though I'll talk about cryptocurrency for hours with anyone who wants to talk about it. But, it's not - I view that as my gambling money as opposed to building a healthy financial foundation, right? And so, I think that's the best advice I'd give people. And then, you know, look at the data, right? Look at their performance, compare it to what was underwritten. And, you know, over a period of years, you'll start to understand, if you actually put the time in, to read and look at everything. And unfortunately, most people don't do that. But if you do, you'll learn it really quickly, right? If you're an accredited investor, you likely are sophisticated enough in whatever it is that you do, to figure this out as well.
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