In this discussion, the speakers compare publicly traded REITs to direct private real‑estate investments. They argue that REITs behave like any other stock—correlated with public markets and essentially “real‑estate sausages” that offer no unique exposure. The conversation then shifts to private markets, emphasizing the need to separate asset risk from operator risk. To manage risk, they recommend a diversified allocation across several “buckets” (public equities, bonds, private real estate, private credit, natural resources) and a strict limit of no more than 5% of capital in any single private deal. The core of outperformance, they claim, lies in rigorous operator due‑diligence: while public REIT operators differ only marginally (about 1.5 % in returns), top private operators can double public‑market returns, whereas poor operators can lose money. Consequently, careful operator selection in private real‑estate can consistently beat public markets.
Chapters
That is interesting that even REITs that are based upon real estate correlate with the public markets.
Right.
Yeah, I've never seen them as anything but a stock, no matter what they call them.
I call them real estate sausages. It's like if you want a steak, buy a steak. You want a piece of real estate, buy a piece of real estate. You want a sausage, buy a sausage. And that's what they are, they're real estate sausages.
Yeah, it's a good way to put it there. So when evaluating opportunities, which I think is— in public markets, I don't think people spend any time other than people like Warren Buffett really evaluating what they're investing in.
So true.
So how do you distinguish between asset risk and operator risk, which I think in private markets, that's very— that's a very important question, and you really need to understand that.
Yeah, well, the, the first way to mitigate risk is, is to make sure you have different buckets. So I recommend, right, have a public market bucket, have a bond bucket, right? But then have a private real estate bucket, have a private credit bucket, have a natural resources bucket, That you're putting in private investments across the spectrum. That's number one. And number two is doing operator due diligence, right? Those are the two ways that you manage and mitigate your risk in privates is, is first of all, manage your allocation strategy. Never put more than 5% in any one deal. I don't care how much you love it. It's— you put any more than that, you're taking what I call the bet, right? You're making the bet. Don't make the bet. The big boys don't make the bet. Right. They're playing, they're playing statistics. They're playing the numbers game. They're not trying to have a crystal ball. None of them are trying to have a crystal ball of what's going up and what's going down. They're just trying to say, I'm spreading my risk around. I'm going to make good, solid investments knowing that some are going to go up and some are going to go down. And then, and so managing your buckets is first and foremost. And second is picking great operators, right? The difference between operators and the public side is not pronounced. And there's one of my favorite charts in the book is from JPMorgan and shows the best REIT operators and the worst REIT operators, there's only like 1.5 percentage points of return difference between the two of them, right? They're pretty much— they're all vanilla, they're all the same. The great ones are doing mediocre, and the, the not great ones are doing mediocre. On the, on the private side, the best operators are doubling the returns of the public guys. Double. The worst guys are losing money, right? So they're making 0% returns or negative returns. And so So the way you differentiate yourself, you know, it's almost impossible. People try to beat the public markets all the time and no one can do it really. But, but in the private markets, you absolutely can beat the market. And the way you beat the market is by doing better due diligence and better underwriting of these, of these private operators. And you can absolutely beat the market. Anyone who does great operator selection consistently in the private market is going to kill it.
