The Golden Question of Real Estate Investing

Before investing in a real estate fund, ask one question:

👉👉👉 “What has to go wrong before I lose $1 of principal?”

If the answer begins with the projected return, ask again.

The answer should explain your position in the capital stack.

Consider a simplified property worth $10 million:

– $5 million senior loan
– $5 million owner equity

If you own the equity, a 10% decline in the property’s value reduces your $5 million position by $1 million.

You have lost 20% of your equity.

If you hold the $5 million senior loan, that same decline is absorbed by the owner’s equity first.

The property would have to lose half its value before the decline reached your original principal.

That does not make the loan risk-free.

The valuation could be wrong. Foreclosure can be slow and expensive. Interest, taxes, legal costs, or property deterioration can erode the apparent cushion. A fund may also use leverage, make subordinate loans, or hold assets that are harder to liquidate than its marketing suggests.

That is why “secured by real estate” tells you very little by itself.

You need to know:

• What lien position does the fund hold?
• What is the loan-to-value at origination?
• How was the property valued?
• Is the fund itself using leverage?
• Who absorbs the first loss?
• What happens when a borrower stops paying?

Two investors can be exposed to the same building, the same tenants, and the same market.

One can lose everything while the other is repaid in full.

The difference is not necessarily the real estate.

It is where each investor sits in the structure.

Before evaluating what an investment might earn, determine what must happen for it to lose money.