Fix Your Real Estate Thesis

Boom, people. Welcome on. Let's talk about building a real estate investment thesis. Now, you might be sitting there, well, Bridger, I've already got a good thesis. I find deals. I just do deals and make money. Like, it's great. But when you're building a fund, what you're trying to do is look at— and this is what you're doing even with syndications, but you're looking into the future, right? Whether it's a year, 3 years, 5 years, 8 years away and saying, this is what we believe the market or real estate or this property will look like in this timetable. And this is why we've reduced risks and how we've done this and why we believe of all the real estate you could do, because this, by the way, is a lot of people doing real estate out there. This is why of all the real estate deals you're looking at, you should come look at ours and you should invest into ours in this location, in this market, because it's more compelling, has a stronger thesis and edge than other markets. A thesis, a definition of a thesis. Think about like back to science class. This is your, your, when you're writing 101 class back in college, whatever. This is your main argument or idea, okay? This is what you are driving for. And think about writing a paper or doing a science experience— experiment. You have all this data, all these studies you do to back up your thesis, okay? The same thing is true in a fund. This is the core of your fund. So when you're going out and building your fund, you have your main idea or thesis of, We should be buying, and I'm gonna share in this, actually I'm gonna share about a bunch of different examples of theses. So real estate, hedge funds, venture, private, I'm gonna share a bunch of different examples to show how theses are different across asset classes, but then we'll bring it back home for this asset class. But for example, this is why you and me should be buying real estate in Dallas, Texas, or this is why we should be buying consumer electronic businesses out of China, or this is why we should be buying social media accounts and pooling them together. This is why we should be lending money in private credit. And here is all of the reasons why. And essentially that's what your pitch deck is consolidating down. And here's the team to capitalise on it. And we'll talk about edge and risk control in a second. Your thesis is a main argument or idea showing that you have asymmetrical risk. Now again, we've talked about some previous videos, but what this means is relatively low risk for relatively high reward. Okay. So what I'm trying to show somebody is, hey, in this investment, we have reduced the risks in this way. The risk category has been smaller and our return category has stayed the same or increased. Okay. I'm going to share— actually, I'll share a quick story. I was with Ray Dalio at the Greenwich Economic Forum and he mentioned this. He said, our portfolios, what we found is if we found 12 to 15 uncorrelated assets, if we diversified correctly, we could reduce 80% of our risk without losing any reward. And that's how we found asymmetrical risk at our Bridgewater funds. Okay? That was how they did it. They talked through diversification in a hedge fund. Other ways, I'm gonna share one more example of, I've shared others about bringing on team members. If we brought on Elon Musk, for example, I think our risk level would go down and maybe our reward would go up. And just by bringing on a business partner, sometimes we can have asymmetrical risk. House flippers, for example. If Bridger went and flipped a house, there's a lot of risk involved. I'm not a great handyman. I'm not this— my family always makes fun of me. I'm not just— I'm just not a great handyman. That's just what it is. I pay other people to be my handyman. I go do other stuff. So if I went and flipped a house, a lot of risk, you know, but if someone else went If he comes and flips a house, I mean, the risk level is way smaller than Bridger's risk level. And he knows the reward, the outcome, the miscellaneous expenses, how to work with the city and permitting, all the stuff that I don't know. Just ignorance makes me have higher risk than him. Okay? So certain asset classes that we have have lower risk. So back to this, we are trying to find a main argument idea that we can find asymmetrical risk that we can back up. Okay. So if you're looking at a Now house, the next piece of it, and by the way, this is like the core. This is like your entire fund. Everyone keep, they'll ask you, what is your thesis? Walk me through your thesis. Oh yeah, yeah, we got a pitch deck, all that stuff, but great, walk me, what is your compelling reason for being alive as a firm? All right? So we've got an interesting, a good model here of figuring that out, okay? And this is called risk control return. All right, this is how you can drive asymmetrical risk. All right, so in risk control return, you may have seen this before, but we'll go through it again because I think it's that useful. This is something, by the way, you will continue to revisit as you build your fund. This is not something you just do once and then you take off. Every quarter you should be meeting with your team and talking through risk control return in your fund. What we're trying to do again for asymmetrical risk is have relatively low risks for high return. And then there's some things that we control. So for example, there are risks that we can control. There are risks that we cannot control. Both are important. Both are risks, okay? We can see how sensitive we are to those things and then how they drive a worst case, a base case, and a best case scenario, okay? And we can run a model that shows these things, all variables being equal, how much does this risk, you know, how sensitive are we to this risk of a worst, base, and best case scenario? So let me give you a few examples of different asset classes. Again, this will give you a better idea. So let's talk multifamily real estate. Okay. So what are some risks we can and can't control? I'll go fast through this, but we can control our rent rates. We can control our purchase price. We control our debt percentage, you know, location, rehab costs. We cannot control, you know, Fed funds rate, immigration laws, macroeconomy, supply chains. We can't control those things. Are they important though? Yes, the Fed funds rate is very important. Even though we can't control it, we should definitely be— see how sensitive we are. So what we'll do is we'll see how sensitive we are to those things and how they drive a worst base and best case scenario. So let me give you— let's furthermore, let's go through an example here. Fed funds rate. Okay. So for our fund, all things being equal, the Fed funds rate, if it goes up or down a full basis point or percentage point, how does that affect our fund? And let's say we run it through our pro forma model. All things being equal, if the Fed funds rate goes up 1%, stays the same, or goes down 1%, it drives different outcomes. Okay, so a change against us would be we'd drive down to a 2% IRR. No change would be an 11% IRR, and a positive change for us would be a 23% IRR. So rates went down. Okay, so how sensitive are we to rates? Very sensitive, right? I mean, a change of 1% drastically changes our IRRs, right? By roughly, you know, 9 to 12 percentage points. Pretty interesting. Okay, let's do another one on multifamily. So for example, rehab costs. Okay, so if rehab costs go up 5% or down 5%, how does that drive an outcome for us? And we'd run through our model and we show a worst case, best case, and base case scenario. So let's say, for example, if Rehab Gob's costs go up, you know, no change would be 11%. If they go up 5%, we'd be down to 10% IRR. And if they decrease, we save money on rehab costs. We're at a 12% IRR. Also, you might go through this process, by the way, risk control, return edge, and you might figure out your idea isn't that great. Sorry, I said it. It's tough love. But you might go through this and go, crap, I don't have asymmetrical risk. I actually have high risk and low return. Don't just fall in love with the deal. Many of us, we get so— we just love our deals. We love our idea. We can't do any wrong and everyone else is idiots. There are plenty of opportunities out there. There's plenty more deals and other stuff coming around like the corner. Like there's tons of stuff to do. Start from first principles. Have a strong conversation with yourself to really see if you have risk control return. If you do, let's go ahead. If you don't, That's okay. Let's go back to the drawing board. Let's tweak it. Let's figure out something else that we can do to make something really, really high quality. Because once you get something incredibly high quality with relatively low risk to high return, you're off to the races. And that's where you can do incredible things running a fund. So when we look at this, well, we, we were somewhat sensitive, but really not crazy sensitive to rehab costs. It's good to know. Okay. So are there, and then we go back and are there risks? That's one we can control. Can we control this or mitigate this Does that make sense? So number one, understanding it, and then how can we reduce our risks with keeping our return the same? This will give you this as you go through this exercise. It'll give you and paint you a good picture. Let's go to a different example: hedge funds. Okay, I want to give you different examples because I think this will this will you know I guess make it more more sense. So hedge funds, for example, here's a bunch of different things they can and can't control: entry price, exit price, margin, debt, durations, options, diversification, insurance. And then they can't control Fed rates, wars, economies, earnings, government spending, okay? All very important. So let's do an example of diversification. This is back to Ray Dalio. So if you're a hedge fund, a long-short hedge fund, and you have one position, okay, what's your worst base and best case scenario? Well, worst case is negative infinity. If you're shorting that stock, you can actually can be, you know, you can lose your money plus more if you have margin, right? No change, the average, you know, S&P 500, let's call it 8% IRR return. And then one position though has the positive of 200% IRR, okay? Now to Ray Dalio's point, he's like, when we diversify, if we do it correctly, we can reduce risk without, you know, clipping our upside. So for example, let's say we did 20 positions, okay? No change would be 8%, but it mitigates our downside risk, our worst case, you know, negative 20% IRR. It's not negative infinity anymore, it's negative 20%. And then our positive is 25% IRR. OK, so it clipped both sides. It clipped the top and the bottom when we did that. OK, for 20 positions. Now I'm just using examples here, but let's say we go to 80 positions. OK, if we have 80 positions in our portfolio, well, look at this. Our no change would still be 8% IRR, kind of base case. Look at our downside, 3% IRR. The likelihood of these all going down is the worst. You know, not— it may— Relatively worst-case scenario is only a 3% negative error, but we still maintained a 25% error on our upside. Now, if I go back again, see this, it was -20 and 25, and then it was -3 and 25. And so we go, oh, okay. So by adding 80 positions in this scenario, and again, I'm not saying this is true, this is just an example, we mitigated our downside risk without muting our upside potential. We've created, by adding just more positions, we've created more asymmetrical risk in our portfolio. Is this making sense? Let me share one more. Private equity, okay? Private equity, they have a purchase price, debt, industry, team, earnout, CapEx expense, all that kind of stuff, and then things they can't control. Fed rates, laws, wars, supply chain, things like that. So, let's take one more example. Let's just do expenses, okay? In private equity, if you have a 10% change in expenses up or down, It's going to drive different IRRs. We have maybe a 2% variable based on a 10% change of IRRs. So hopefully that gives you a little bit of sense of potentially how to think through risk control return. And again, this is something you should keep revisiting. So every quarter, every 6 months, okay, what if this person gets elected into an office or government? How does that change? Does that affect us? Or this policy or bill gets passed or There's a war heating up over on some part of the planet. Does that affect us or not? Fed, you know, Fed is FOMC is meeting next month, and if they change rates in a certain way, how does that affect us? As you even go out and present your fund, I'll share a real story with we. I run a crypto hedge fund right now, Ugly Unicorn. When we started first started pitching in 2021 and 2022, our pitch looked vastly different than when we pitched in twenty. Not vastly different, but a lot different in 2023. In 2021, crypto was up and to the right. Everyone loved. crypto. Couldn't lose money in crypto. 2022, Bitcoin fell 76% that year. And our fund actually did very well. We mitigated very well. So our language turned around from, hey, here's the returns, how it goes so great, to this is how we risk mitigate, how we presented the information. And then as we went to 2023, it changed even more because there was new dynamics coming into the space. And so, and risks were always updating and things that were You know, in 2022, there was a lot of talk around a central bank digital currency. By 2024, that conversation had really died in a lot of ways and it had moved to a strategic Bitcoin reserve. Moving to 2025, it had moved again to a different spot. So the risks were still there, but ones that we emphasized or talked about or put into our model more tweaked as time went on. You should be doing this in your fund. We've got a main argument to our thesis. We're trying to find asymmetrical risk. Risk control return will help you through that. One last thing I wanna share. This will come through in talking about the Faunce Formula, will come all the way down to building your edge, okay? I wanna briefly talk about this for a second. This will help you, and this is more on phase 3, but I want to have you have this in mind as we go through the program here about building out your edge. So your thesis is your main argument or idea and goes hand in hand with what I call your edge. People will also ask, they're kind of asking the same question. Hey, give me your thesis or give me your edge. What's compelling about you than all of your competitors? So, it's interesting to think through, okay, yeah, you know, we should invest in X. Yeah, but so is everybody else. So, your thesis is not unique at all. Right? So, there's a piece of this that has to be an edge. What makes you different than other people? And I'll walk you through this briefly here. There are 4 distinct categories that make up and build your edge. Those are your asset class, your strategy, your team, and your structure. Now briefly talking through these, your asset class, okay, by itself that can be an edge. Hey, we're investing in the future of robotics. There's not very many firms doing that. For whatever reason, we have an edge, or quantum computing, or whatever new cool technology is coming out. That might be By itself, just a compelling asset class. Primarily though, once you figure out that asset class, there also will be sometimes competitors. You then move to your strategy. Okay? This will go hand in hand with risk control return. Okay? And this will probably end up being the biggest piece of your edge. We'll talk about that in a second. After your strategy, it's like, okay, well, show me the team that's working on that strategy. And that can or cannot be an edge. Now, many people in this group are Maybe this is your first-time fund. This might be a little smaller, but still can be important. And the reason I put it on here, you can strengthen your edge by building out a great team. For example, if you told me, hey, Ken Griffin, Elon Musk, and Jeff Bezos are all doing a fund together, do you wanna be involved? It's like, yes. I don't care what the strategy is or asset class, like Ken Griffin's doing it, and like, yeah, I'm in, just 'cause the team is so compelling, okay? And then finally, structure. This is how you pay back investors. Can sometimes be favorable or not favorable on your edge, and I'll share a few. Let me share some examples here. So if I zoom in, this is what you are competing against in just general. Okay, and this I put multifamily real estate here, but it could be you know whatever whatever asset class you're in for asset classes. Okay, here's your asset class strategy. They've got you know they're doing value add, twenty years of experience, three funds prior, and they're doing a two percent management fee, eight percent pref, and eighty twenty split. That's standard. So if you're doing this exact same thing, but it's your first fund, why would I invest with you versus all these other guys that are doing venture capital or private equity or hedge funds in this? Okay? So let me show you how Ugly Unicorns and Founders Partners looks. This is how we kinda look. So Ugly Unicorn and Founders Partners both have compelling asset classes. Ugly Unicorn is a blockchain investment fund, which is unique. And Founders Partners is GP stakes at a small level, very unique. Asset classes by themselves very unique and give us an edge. We we believe we have pretty compelling strategies, and that's risk control return. This is how yours might look. Our team is good. I wouldn't say it's out of the park ballpark crazy. It's fine. Okay, and our structure is pretty standard. Just two two and twenty. Pretty standard structure. So nothing compelling about there, but nothing bad either. Okay, that's how it looks for us. I'll scroll down one more, and I'm guessing yours might look. kind of like that as well. My dad's first bridge loan fund, okay, they were doing hard money lending. Asset class wasn't very compelling, okay, it was just kind of normal. However, he had a very good strategy and their team was okay, but they had a very compelling structure. Their structure was, I'll put my pen here, they paid investors a 16% pref, meaning investors got the first 16% of returns. They paid a 0% management fee, no management fee, And then above 16%, I think they split like, I don't know, 80/20. And then they, after like 25%, they then split 50/50. But it was very compelling to investors. Like, hey, we know we're a first-time fund, we're in a boring asset class, we have a pretty good strategy, but we don't make any money unless you make 16% first. You want in? They're like, yeah, that sounds awesome. That's what they used as their compelling edge, okay? So when you use these in tandem, again, you're building your edge and and specifically your strategy under that edge of your risk control return, it can help you out quite a bit. Now for real estate opportunities specifically, let's dive down to the iPad here. Let's look. So real estate, a few different things you might wanna track or look at. Pretty simple, IRR, so internal rate of return, or even just simple as rate of return. I actually like using those in my fund. Just what is the rate of return? Pretty simple. IRR brings in sometimes risk-free rates, other things like that. You can also use APY if you're more doing yielding producing strategy, you can use that as well. Another one would be cash on cash. So cash on cash would be how much cash has been distributed over the total amount of money that was like in that we made for the year. So we, you know, how much, what was the cash on cash return? You could also use, and these are a few metrics that are kind of defining your investment thesis when you're building that out, your equity multiple, okay? So what is, how many distributions have you made with the total equity that you have? And so you'd say, hey, you know, this fund we target, it's a 7-year fund to have a 3.7x equity multiple, or down below here, multiple on invested capital, MOIC. We plan to have, this is unrealized plus realized gains over the next 7 years, you're gonna be paid back, you know, 3.7x. So for example, if I put in $100,000, I would expect in 7 years to get back $370,000. Okay, that's what those kind of 2 things are driving towards. It's a little bit different, but driving towards a similar thing. Okay. A couple other metrics that are good to drive down when you're doing risk control return to look at. Again, these are— I'm just giving you a few. Obviously, cap rate, net operating income, or the property value. These will be how you evaluate and sell and buy properties. You can drive that. What if cap rates move up or down in a certain asset class? You'll be looking at your occupancy rate and then obviously your debt service coverage ratio. So how much debt do you have? And sorry, I skipped over occupancy rate. How many people are living or using or leasing out your buildings? And then how much debt do you have? What's your debt service? So how much operating income do you have coming in and how much debt do you need to pay? Okay, pretty, pretty standard metrics here. So now let's talk about definitions, I guess, and driving down to your edge. The asset class you're in is pretty standard real estate. Like everybody typically likes real estate. You don't have to sell people on real estate. Now, furthermore, though, you could get a little bit deeper on that asset class. And say this is why we're targeting industrial in Wisconsin. This is why we're targeting core plus in Los Angeles. Okay, for a certain reason, that might be a little bit more asset class driven and then driving into the strategy. This could also go with your market. So back up here. So hey, we're we're targeting a primary market in Los Angeles, California, or we're driving a secondary market in and there's about So it depends on definitions-wise, but most, you know, Google searches would tell you there's 6 to maybe 8 primary markets in the United States. Boston, New York, Los Angeles, okay, Chicago, that's a primary market. Secondary markets, Nashville, Tennessee, Salt Lake City, you know, kind of some secondary city size. Then you have tertiary markets which are outside of those. So we're in Lehi, Utah right now. That's a tertiary market, okay? And there might be reasons why you should buy real estate in a in this small market that's whatever an outskirts of Austin, Texas. Okay, but market definition I think is is crucial when talking about where you're at and then getting into okay definitions here for your strategy. So our strategy revolves around I'll use different color here core or core plus or value add or opportunistic. Okay, core would be this is. Core is great locations. These are stable, high quality. This is downtown Los Angeles, like multifamily. That's core. Core plus would be this is close but probably needs a little bit more value add. Okay, so yeah, we're in downtown LA, great spot of the city, it's awesome, but we need a little bit of value add to make this thing. That'd be more core plus type of. Then you have value add. That'd be just— it can be any market, um, but you're just adding value. This is run down and we're You know, and back to the classes here, we have Class A, Class B, Class C, and you can even call some Class D. Class A, or sometimes they'll call A+ or A-, B+, B-, stuff like that. This would be your core. Hey, core is like A, A+. Like these are like top tier, beautiful buildings in Las Vegas, whatever it is. B, you know, that's kind of getting the value add space. Most of the time value add's gonna play kind of in this space. B and C class properties. We're going to try to buy a B minus and turn it into an A minus, or we're buying a C plus and turning it into a B plus. Okay, that's kind of the idea of a value add. Core plus would be value add, but hey, we're taking an A minus and turning it into an A plus. Okay, that'd be the idea there. There's little definitions. Opportunistic would be, hey, we just find good opportunities. Okay, that's what we do. And we in a certain, and I would still define the market in whatever market we know in Arizona. In Phoenix, Arizona, we love opportunistic things there. Okay, then I would also define what type you're in. You guys know this as well, but single-family, multifamily, commercial is somewhat of a broad term depending on who you're talking to. Commercial does technically define anything that's not single-family would technically be commercial. But generally speaking, commercial is more like when people do like office. But underneath there you have industrial, storage, other types of— and so I'd pick which one. Hey, we target So to define things, hey, we're in the Nashville market. We do value-add industrial. And I guess you could add down here like new build construction. We do— we're in Dallas, Texas. We do new build in commercial office space and we do class— we build Class B office space. Or Class A office space, right? And that's how you kind of define and bucket down your asset class. People in real estate are smart. They already, most people you're pitching already have real estate. They like real estate. They know what it is, okay? So that's how you kind of bucket down your asset class. And then furthermore, you're gonna say, okay, so now that we're doing commercial, we're doing Nashville value-add, B-class office space or not. Sorry, we're going to do new build B-class office space. Great. Now let me walk you through how we're better than everybody else. And that's the strategy. And let's dive into some strategy things here. So I guess maybe I put it here, but strategy, say number one, we're going to build because there's in this market, there's just a huge demand for this type of product. Number 1. Number 2, we have an experience, and then that's getting more into team, okay? Our team can capitalise on a strategy. We get materials for way cheaper. We're doing 3D-printed buildings. We're doing stand-up, the little things that stand up, and, you know, like the concrete slabs that stand up, and it takes our costs way lower. And we believe we can enter a product like commercial office space into this market, and we can get up to a 95% occupancy rate In six months and for a certain cap rate, and that will produce a cash-on-cash return to investors or a rate of return or a MOIC of X or a 3.7x over five years. Now the risks associated with this, and we'll walk through some of the risks. That's kind of how you, I think, would present your investment thesis on a real estate fund. We had a group in Fondant Partners, very opportunistic. They just said, "Hey." We've done deals last 15 years. We are very good at picking them. We find opportunistic things that are bad. It's death, divorce, it's partnership breakups, it's whatever, foreclosures. And we're opportunistic. We go buy them. Our average rate of return is, I don't know, 35% rate of return to investors. We crush it. So, and we target a certain market in a tertiary market that we find, you know, and we're doing, you know, primarily single-family. Cool. Okay, that helps bucket investors and to figure out where does your investment thesis fit. Again, you're going to keep tweaking this. Real estate market's always constantly changing. You're going to keep tweaking and updating this model on especially Fed rates, supply chains, if you're doing new builds, supply and demand of certain markets, housing shortages, things like that, to paint a compelling picture of why they should invest with you and what is your unique edge in this market. Hopefully that's helpful. See you next one. Bye-bye.