Check out our Commercial Investing Terminology Cheat Sheet

Feb. 27, 2023

Investing in the Right Sponsor and Markets

Investing in the Right Sponsor and Markets

In this podcast episode with Caleb Johnson, the focus is on how to find the right sponsor for your real estate investments. He shares his thoughts on what to look out for when vetting a sponsor, including red flags. Caleb advises investors to be patient in searching for the right operator, offering, and market. He also highlights the importance of doing due diligence on the operator, market, and offering, especially on the numbers and financials that the operator is projecting. Caleb advises that underwriting vacancies should be conservative, and rent projections should be realistic.

The conversation also touches on two key aspects of real estate deals, namely, refinance and rent growth. Caleb and Jake discuss how to assess the feasibility of projected refinances and rent growth, respectively. They agree that there's a need to look out for red flags and do some independent analysis on deals. This podcast is a must-listen for anyone looking to invest in real estate, especially passive investors who want to find the right sponsor.

Finding the Right Sponsor!

Finding the right sponsor is critical in commercial real estate investments. A track record of success is one of the key factors to consider, and a genuine operator who is not just a salesperson can make a significant difference. It is important for a passive investor to conduct due diligence and ask critical questions about the financials, market, and projections. One should also look for conservative underwriting, realistic rent projections, and a well-thought-out refinance plan. While rent growth is vital, projecting unrealistic growth rates over time is unsustainable and risky. Ultimately, finding the right sponsor is vital for successful commercial real estate investments.

Due Diligence Piece: The Market

The due diligence process for investing in real estate requires a thorough understanding of the market. It is important to consider not just the major competitive markets like Dallas, Phoenix, and Florida, but also other markets with population growth and job opportunities. Red flags to watch out for include stagnant population growth, lack of jobs, and projections of low exit cap rates compared to purchase rates. A quick Google search can reveal population growth trends and areas of market development. Additionally, keeping an eye out for major developments such as new retail chains, Amazon distribution centers, or large-scale infrastructure projects can provide valuable insights into potential investment opportunities. By staying informed about the market and its trends, investors can make more informed decisions and potentially uncover hidden gems in overlooked markets.

Opportunities in the Market Downturns

Aspiring limited partners should consider real estate as an excellent investment opportunity. The benefits of investing in this hard asset are numerous, from appreciation and depreciation to scarcity that cannot be replicated. When compared to stock market investments, real estate offers more control and a chance to seize discount opportunities when prices dip. It is also beneficial to do research on the topic, such as reading books like Sam Zell's "Am I Being Too Subtle" for valuable advice. With an understanding of the market and wise decision making, those considering limited partnership can capitalize on all the advantages offered by investing in real estate.

Who is Caleb Johnson?

Caleb Johnson has been an entrepreneur since the age of 18. He founded Red Sea Capital in 2022 and prior to that, he worked at NK Development Group as a marketing specialist and investor relations manager. During his time there, he successfully grew the company to over 450 units within two years through capital investments and acquisitions. Caleb is committed to providing excellent service to investors and cultivating meaningful relationships.