1. Going it alone
HNW investors shouldn’t believe that they can handle the gamut of functions connected with commercial real estate alone, according to Matt Topley, chief investment officer at Valley Forge, Pa.-based wealth management firm Fortis Wealth LLC.
“In most cases, HNW people earn money due to their expertise in a particular professional field. The trouble occurs when then try to park that money in real estate,” Topley says. “Most of the time, they fail due to lack of industry knowledge and inability to execute as a landlord. It’s not because they aren’t intelligent.”
HNW investors should resist the urge to shoulder the entire burden of buying, selling, owning and operating a property, agrees Jeff Sica, president, CEO and chief investment officer at Circle Squared Alternative Investments LLC.
“While we absolutely respect our HNW clients and their business experience, we make it very clear that it is a mistake for them to conclude that they can do everything required for a deal on their own,” says Sica, whose Morristown, N.J.-based firm specializes in private equity real estate deals for HNW investors. “Solid deals require a solid team with multiple areas of functional expertise.”
HNW investors should build a strong team of professionals to guide their real estate investment decisions, including experts in real estate law, taxes, insurance, leasing and property management, according to Adam Finkel, principal of Tower Capital LLC, a real estate finance firm in Phoenix.
2. Not doing adequate due diligence
HNW investors frequently fall for the sales pitch about a potential investment, but then give little to no thought to what underlies the deal, says Les Kiser, principal and managing broker at Chicago-based multifamily brokerage firm Kiser Group Realty Inc.
“It’s easy to get swept up in the excitement, but just like with any investment, you have to do your due diligence,” Kiser notes. “Make sure everything checks out. I know of too many examples of people losing money because they bought the pitch without doing the research.”
Components of due diligence should include:
Seeking references from other HNW investors who’ve done deals with the firm that’s making the pitch, as well as requesting case studies for previous projects to help determine how the firm executes deals, how it delivers results and what its investment philosophy is. It should be an “immediate red flag” if the firm refuses to offer this information, says Charles “Chick” Atkins, principal at Atkins Cos., a real estate developer and manager in West Orange, N.J.
Carefully examining the positives and negatives of an asset. For instance, what are the market comps, how desirable is the location of the property and how has it performed in the past?
Understanding the risks. This is particularly true when placing money with—and trusting in—a friend or relative in conjunction with a “can’t miss” opportunity, says Randy Hubschmidt, managing partner at Fortis Wealth. “More often than not, high-net-worth people tend to learn the hard way that they would have been better off to have had their money professional managed, and with much better liquidity and flexibility,” he notes.
The bottom line: Know who you’re doing business with.
“A good partner can make a bad deal work, while a bad partner can kill a good deal,” says Cliff Booth, president and CEO of Westmount Realty Capital LLC, a real estate investment firm in Dallas.
John Egan, Feb 22, 2019