Challenges for the Small Investor

By Steve Jaffe, Executive VP & General Counsel of BH Properties: The challenge for a small investor in today's market is finding that niche.

In the current market, the challenge for the small investor, between $1-15 million, is trying to find a niche. Even though the real estate market seems to have stabilized, there is still less property and deal flow. But the key to success is to really understanding what is happening in the desired market. More than ever now, small investors need to build relationships with local brokers and have a basic understanding of the needs of a particular seller. And with that knowledge under their belt, they really have to just block and tackle their way into the market. There will not be a tsunami of real estate opportunities opening up as there was in the past, so investors really have to spend a lot of time knowing what it is that they do best, what is their competitive advantage.

So for example, at BH Properties, when we were trying to figure out what our competitive advantage was, we had to step back and we really looked at what we had historically done. We knew that that model – were spread over 17 states – probably wouldn’t work for us any longer due to the current investment horizon. So for the last couple of years we had to drill down deep into very specific markets. We spent a lot of time in Arizona, Nevada and California specifically, really focusing on a couple of markets and a couple of product types and we developed a deep understanding o the local community. We knew these markets even as well as the brokers did, and that has led to a lot of success for us.

We have also spent a lot of time looking at buying notes. And we have been very successful doing that. Again, here we had to enhance our relationships with the national brokers handling notes. Developing relationships with them allowed us to understand what it was that a particular seller needed to hit as far as returns, timing, or whatever their particular hot points were, which we then could target and provide.

And yet another challenge for the small investor in this market is understanding that they actually have to be a good operator too. Making a simple investment decision is not enough anymore. Investors are not going to bailed out by 10 years of appreciation any longer. It is really necessary to understand your business and your business is delivering a product to your tenant. If you can target a specific niche, and pull together this localized knowledge and really understand your business on top of understanding your capital needs and what your financing requirements are, you’ll probably hit doubles, and triples, and the occasional home run.

But the important part is to stay focused on your core competency and remember that really in the end you are a service business and you are providing a product to your tenants. Nothing is more important than that. It takes time and patience, and capital.