“Past performance is no guarantee of future results.”
Every investment product will include this statement in its offering documents. Yet, investors still rely on “track record” to analyze an investment.
In real estate, of course investing with a competent, experienced asset manager should be a requirement for any investment but analyzing track record is more than just reviewing historical returns.
We speak to a lot of asset managers about partnering on new Cityfunds. Recently we met with a firm based in Texas. Their strategy is value-add multifamily. The principal of the firm was thumping his chest that the firm has delivered 17% returns to their investors since 2010.
Most investors would think that is great and would want to invest with them. Who doesn’t want to earn 17% annual returns?
When you adjust for leverage; and
When you adjust for strategy; and
When you adjust for market;
This asset manager has underperformed -- big time!
Other than large institutions, most investors do not refer to any benchmarks when looking at track record or even return targets. One of the benefits of Compound Cityfunds is the creation of an index-like real estate product that can be used as a benchmark for specific asset classes and markets. We hope that with this additional transparency, investors will have the tools to better analyze potential real estate investments. And asset managers are going to have to start proving their value.
4 Being extremely generous here. In a market that delivers ~10% un-levered returns, the difference between 20% and 75% leverage would be closer to 12% per annum. We used a lower adjustment number to take into account that the increase in risk associated with leverage on multifamily properties is not linear. However, in a downturn, the difference between 20% leverage and 75% leverage could be the difference of losing 100% of equity invested or being able to hold through to the next cycle.