How To Pick Your Asset Class For Real Estate Funds

So in real estate, when starting your real estate fund, it is very important to pick your asset class. Now some of you already probably have an asset class picked out, but for other people, it's actually crucial to walk through your red oceans and blue oceans currently in the market. So on the whiteboard here, you can see we've laid out some big red oceans here. We have residential, we've got commercial, we've got land development, but now we want to go into the, the smaller blue niche oceans that are surrounding these 3 bigger red oceans to help you look through different investment opportunities inside When you're pitching an investor on a real estate fund, like if someone says, what type of fund you're running?

And you say real estate, they're going to say, what kind of real estate? And you better have an answer, right? Otherwise, you just lost that investment for sure.

Typically, investors want to see expertise in a certain area. I was actually on a coaching call today. One guy was telling me, he's like, Bridger, we're going to run a fund that does— we're going to do trading and we're going to buy and sell small business. We're going to do fix and flips. And I was like, whoa, hold on. Do you really think an investor is going to believe That you have expertise in fix and flips, but also you're an incredible trader, and also at the same time, you're also a very good purchaser of small businesses. And typically you see funds, even funds, multi-billion dollar funds, that stick to one specific asset class. They say, we do Class B multifamily apartments above 200 units, and it's a multi-billion dollar fund. And if they want to go into a different sector, they launch a different fund for that sector. Typically you see that. Especially with small-time funds. So Lincoln, let's dive into the different types of real estate oceans we have here.

Let's do it. So I mean, you've got 3 main kind of pools, right? You've got residential, you know, real estate that people live in, commercial, any sort of business-related, and then land and development, which is kind of its own in itself. Okay, so first up we have single-family, right? This is very common if you're syndicating deals, maybe a fix and flip, but can you do that at scale, right? Is there enough market? Is there another real estate fund that focuses on that area? Typically Low cost, easy access, right? High liquidity.

So we went through and actually filled out this whole whiteboard. So we started out with single-family homes under residential, right? Here you have mobile home parks, actually a very lucrative industry as of recently. Here we put townhomes and condos. They— it depends on how many you do, but they start to bleed into commercial real estate as well once you get over 4 units. That's how lenders will at least look at it. Under commercial, we have a lot of stuff here, okay? You have storage units, you have retail, which is like a mall, strip mall, outdoor stuff, office buildings, multifamily real estate. Industrial warehouses, senior assisted living, hotels, motels are all under this realm. There's actually a lot of stuff going on in here. So back to the beginning, we mentioned you want to be pretty specific on what type of real estate you are going to show an investor and say, hey, we are absolute experts in industrial space between 20,000 and 30,000 square feet. We just know the industry inside and out, or my partner knows the industry inside and out, and that's what we want to do. Typically, investment funds in real estate, they focus on 1, maybe 2 asset classes inside of their investment thesis.

You know, a big thing to consider when you're assessing these different markets is, you know, what's the liquidity? Is there a high demand for that type of real estate class? And if you need to get in or out of that investment, like, are there buyers there? Another thing to consider is the upfront cost to purchase a townhome or a condo or single-family is a lot less than buying a large multifamily or a large, like a hotel or a hospital or whatever it is, right? Biggest things I would say to consider are liquidity and upfront costs, and then, you know, assessing competitors and seeing what that landscape looks like.

And also looking at how market conditions affect each one of these industries. Different markets will affect different parts of real estate. It's not like all real estate goes down together and up together just perfectly. Different sectors of real estate are affected different. Like you saw in COVID-19, certain sectors were way more affected than others. Now, one last note I want to make in here, for instance, multifamily will have its own class of itself. It'll say we have core, we have A, we have B, we have C, we have D. I'm getting all the way down the corner here, okay?

Usually A through D is common.

And these are the levels of how good the property is. Core would be, you know, downtown, high, nice penthouses. A is still good property, just not downtown. B-class property is usually a little bit rundown, kind of the working man's apartments. Cs are very rundown. D's are almost unlivable, right? They're to the point of where they're so destroyed. They really— it's almost like a, you know, fix and flipper, like on the TV show. We're going to go buy this apartment. That's where you get into D's. So, some funds, like my dad's funds, for instance, you've seen him a lot in this course. Their fund, their primary focus is, hey, we buy B-class apartments. And over 5 years, we're going to take them from B and we're going to turn them into A. And we're going to sell. That's their entire investment thesis, multi-billion-dollar fund wrapped around, we're going to go from B to A. That's it, in this one little sector of real estate.

I know a fund manager that was talking to a friend who worked at Amazon, and they were saying, yeah, we are trying to identify, you know, these different warehouses that we can store our computing software. And he says, well, I know a guy and I think I could put this together. He said, let me like bid you on it. And he did. And now he's like the go-to man in this market for Amazon. So there may not be initially a ton of opportunity in each of these asset classes, but when you dig a little deeper, you'll find out that there is.

Now, over to our last section. This is kind of obvious, but land and development. So, this is taking raw land and you're going to develop maybe single-family homes. You're going to go and develop storage units, and you're— sometimes there's certain funds that all they will do is get land development. They will prep lots and then sell those lots to a builder for single-family, right? That's an entire process. Entire fund might do that one step. Now, other funds down here, if you're taking a, you know, a Class D apartment and upgrading it, that might be coming into this development realm, might be mixing the 2 as well. So these are the few classes you can look at. Now, there are a lot of subcategories that we have not covered. We want to give you a little outlook of what's going on in the real estate space right now.