Hi {{first_name | there}},
I've been having many conversations with investors lately as we continue to market the NH Multifamily Fund III, many of whom are unfamiliar with our business and strategy.
Typically, we set up introductory calls to share more about our history, our business, and the fund's thesis.
Now, these conversations typically start at a high level; we talk about why New Hampshire is a great market, why we like multifamily, our track record, etc. But here's the thing: these aren't the questions that actually cut to the root of why it makes sense to work with us (or any sponsor, for that matter).
If you're speaking with a GP or sponsor, whether it's us or someone else, the fundamental question you need to be asking is this: What are you actually better at than other folks in the marketplace?
What's your edge? What's your special sauce? What do you do better than everybody else you're competing against?
If you're a GP, you need to have a crystal-clear answer to this question. If you're an LP, you need to ask it directly.
Here's why this matters so much:
A significant portion of returns generated from real estate investing is not driven simply by "real estate going up over time” (although that is a fundamental reason to invest in the asset class).
The true “above-market returns” are created in the short term through the relentless pursuit of inefficiency and identifying components of the market where you can create outsized value for yourself and your investors.
Let me give you some examples of what this can look like:
For some sponsors, it might be a renovation strategy. Maybe they're buying buildings with very large two-bedroom units, gutting them, and adding an extra bedroom to turn them into three-bedrooms (and they have a consistent way of finding deals that work for this approach).
For others, it could be a market focus where they have information others don't, such as knowledge of new developments coming to a submarket, or another reason the market is priced inefficiently.
It could be an operational strategy, such as operating properties with furnished mid-term leases rather than long-term leases, given the property's proximity to a hospital or major employment center.
Or it could be at the company level; perhaps they have in-house construction and can do the work more cost-effectively than competitors. Or perhaps they have an in-house management advantage that third-party management doesn't provide.
For example, in our business, we invest significant time, energy, and resources in sourcing direct-to-seller deals. We buy at a competitive basis because we compete with fewer buyers when we're pursuing deals.
The point is: this should be clearly defined if you're a sponsor. And if you're an LP, you need to be investing with sponsors who have defined this.
Now here's the catch, and this is where it gets really important for LPs to pay attention:
Many of these strategies that capitalize on inefficiency don't scale over time. At some point, a GP will address this inefficiency, and there will be none left to capitalize on in the marketplace. That's when a business gets much larger, and they start doing deals that offer slightly lower projected returns. And that's fine! It's just a different business model once you hit scale.
So here's my biggest tip for LPs:
You should be thinking about identifying and investing alongside sponsors who are riding the wave of this strategy and where they can still capitalize on this inefficiency, therefore producing outsized returns as they're growing their business and approaching scale.
Think of it like surfing. You want to ride that wave until it crests and the outsized returns dissipate - the point where they start doing deals that aren't as unique or specialized compared to their competition. As an LP, you want to ride that wave to the top, and then find the next sponsor and continue riding that wave with them.
That's how you truly generate above-market returns in real estate.
So the next time you're on a call with a sponsor, skip the surface-level questions and get straight to what matters:
What is your competitive advantage? What inefficiency are you capitalizing on? And are you still in the phase where you can capitalize on it?
Talk soon,
Axel
P.S. We built our business on direct-to-seller deals because that's where our edge is, and we're transparent about it. If you know another investor who values clarity over marketing speak, forward this email to them.
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