Active Rain October 24, 2010

Real Estate Investors Are Not Venture Capitalists

The kids at Croton Point ParkI recall about 10 years ago that Warren Buffet was asked why he did not own more than a token amount of stock in Microsoft. His answer: I don’t know that business well enough to invest in it. Buffet knew insurance, soda, candy, razors, and other blue chips, but didn’t pretend to know software. My understanding is that he owns more stock in Microsoft now, but the lesson is that good investors put their money in a vehicle they know and understand. 

I work with some real estate investors who might be considered to have deep pockets; it is all a matter of perspective, however, because real estate is not a penny stock. Real estate is expensive, and is considered high risk/high reward. An investor’s fund for procuring and rehabbing properties might be enough for some to retire on to be sure, but it depends on your point of view. 

Sometimes, I am approached by people who figure out that if I know people who can write a six figure check for property that they would be great sources of capital for a great idea they have. I have been approached about water springs, sports complexes, stocks, and probably dozens of ideas for businesses that the person pitching thought my investors would be great partners for. 

They aren’t. Real estate investors often take a long time to build their funds, and they can lose it quickly if they go off the reservation into an expensive project they don’t understand. They know this, and they seldom stray off their path. We’ve even lost money on projects we were certain would have a healthy margin, and take it from me, real estate mistakes are expensive-really expensive. 

I have seen investors lose huge money firsthand in some properties that sounded good, but did not pan out. There is a joke my brother told me a while back that goes something like “Anyone can have a million bucks running their own restaurant. Just start out with two million.” And so it goes. 

So to those whom I have had to politely decline, I just want you to understand. It isn’t that I would prohibit anyone from running an idea past me or the investors I represent, but I do want you to know why we can’t say yes at this time. We have to be stewards of resources that we cannot gamble with. Risk- yes, gamble- no.