• Ian Ippolito

Beware of Sponsor Promises of a "Demographic Tailwind"

A dry real-estate study contains a hidden bombshell: One of the most popular ways investors pick "the best" investment is usually completely wrong.

(Disclaimer: I'm not a financial advisor or attorney. Consult your own financial and/or legal advisors before making any investment or legal decisions.)

Paul Kaseburg, the author of "Investing in Real Estate Private Equity" has sat on both sides of the table on over $1.7 billion of real estate deals. He says one of the biggest mistakes investors make is falling in love with the "story" of an investment, instead of doing proper due diligence.

A study released by Green Street Advisors confirms exactly how dangerous it can be to rely on some of these stories.

"Pitch Perfect"

One of the main ways that sponsors pitch the supposed superiority of their offering over others, is demographic demand. And on the surface these pitches sound really convincing. For example:

"Austin, Texas has been ranked in the top 5 places for millennials to live work and play. So while it was a bit expensive to purchase this property, all these young people moving to Austin in the next couple of years will make this a fantastic investment."

"The population is aging dramatically. So we purchased this so-so assisted living home at a great discount. Then once the demographic tailwinds over the next several years kick in, we'll see profitability soar."

"Homeownership is decreasing and renters are increasing. So although the purchase price of this single-family home portfolio was higher than we wanted, it was well worth it because as the demographic tailwinds continue to kick in, we'll all be very happy in the end." (This is a very close paraphrase of an investment that I just recently passed on.)

Unfortunately, all of the above pitches are most likely wrong.

"Tailwind" or "hot air"?

Green Street analyzed the top 50 markets across the country, and also all property sectors. They found that demographic trends that are "easy to see coming," rarely grow net operating income and thus rarely help the bottom line. And sometimes they even work against an investment, and reduce profitability.