January 2026
From aggressive assumptions and fee structures to alignment of interests and downside stress testing, they explain why great-looking numbers don’t always translate into great investments.
Tune in if you’re interested in…
Watch previous episodes:
Ep. 169 Building Durable Income Through Diversified Credit Through Keystone
Ep. 168 Generating Income Through Real Estate Lending
One of the reasons why we're having this session is because some people are interested in how to evaluate real real estate funds, but really it's because of people like me that meet others all over the place and say, I've got this really cool real estate investment.
We pass along to Meghan and check it out. And so I'm and some of you are guilty of doing the same thing, but there's so much more that goes into it. Besides saying, hey, Meghan, here's the deck where you take a look at it.
I mean, I just go by the color scheme. So that's my yes or no.
Happy hour is after this session and will be in the other room, sort of back behind the main stage. So maybe some people are already there.
I just want you all to know, I did try to get past cocktails during this session as an incentive, but I was not successful. But we can like run down the hall when we're done there. I'll be good.
So how effective is it for myself, others to hand you a marketing deck and say, Will you evaluate this? I was hoping it was going to be a topic on golf where I knew more than you did, but unfortunately, it's real estate funds, so.
I knew that I would be moderating. And you would be.
Exactly. So how effective is it to say, hey, Meghan, I came across this person and they're sharing me their newest investment deal. Take a look at it.
Mean it's a good initial way to look and get a quick synopsis of whether or not something could be interesting. I just say you should assume. And this happens a ton, right? A friend shows you something or a country club. Everyone's going into a deal. You just go in assuming it's going to look amazing. You have never seen a marketing deck that did not look amazing, right?
That the numbers weren't really eye popping and exciting. It's just the nature of it. They wouldn't be showing you if they hadn't found a way to make it look really good. When you when you go under the hood a little bit and sometimes you can tell this from the actual deck, sometimes you have to get more information, but there's a lot of assumptions that go into those percentage return numbers, % IRR.
And so a couple of things to ask or look for is one a big one is the time frame that they're looking at. It's really it's a lot easier to make a big return show up on the page if you assume that you're going to sell it really quickly. So let's say you go in, you do a repositioning real quick, you lease it up, and then you're going to sell it in two years or three years that that could generate more easily a higher return versus well, what if it takes a little bit longer?
What if it takes four years, or year? What if you're in a challenging environment to sell? The return drops real quick on the spreadsheet. When you start to extend out the time frame that you're looking at, how aggressive or conservative is that manager being on the potential, on the growth of the income for those properties, on the growth of the expenses?
That's a huge one right now, just insurance costs and things like that. And so delving into a little bit more than just like the number looks good, but like how do they get to that number I think is is a big deal. The other one that's a quick, easy one to look at real fast is the fees.
So with a real estate fund, if anyone listening to Stacy and Kevin session, they were talking about pros and cons, right, of having, owning yourself, the real estate versus having a fund. One of the. I mean, there's a lot of pros, I think, to a fund structure. One of the negatives is there's an extra layer of fees.
How reasonable those fees are matters a lot. So usually there's some type of management fee. And then there's a percentage of the profits. If the manager gets the first thing is when do they get those profits. That's that's important. Right. Because what we want to see usually with like real estate funds we invest in, is it's fine for them to make a management fee to keep the lights on, be able to pay their staff, but really, where most of their profit should be, should be on the back end.
Right? Like if once they're successful in the investors, successful if they get their piece of the profits, then nobody minds that right versus upfront them getting an an acquisition fee and a fee to set up the financing and getting paid all on the way. There's a lot of that in some of these real estate decks. Last thing I'll just say is how much of their own money are they putting into it?
People behave differently when it's their own money versus invest your money. So that's something too, that a good manager who's invested in it will often put that in the deck, be like, hey, I'm putting x percent or the general partner is a big percentage of this fund.
So when you're thinking about alignment of interest to those key points, not only to their own money invested in the fund, but also beyond that, at what point do they participate in the in the return profit?
Exactly. And so you again, I don't mind them sharing once the once we as the investors have gotten paid. But you don't want that to be too early. The other piece is sometimes your friends and family deals. That almost implies you're getting a discount or a special deal. Often those deals have really egregious back end fees, like I've seen the manager taking , , % of the profits.
And it's it's because it's small and it's because it's their friends and family so they can get away with it. So it's it's it's just that's not uncommon. And that's not even crazy. Like that's how some of those are priced institutional managers. It's going to be more like or % of the profits, which, you know, might have sounded high before I said or , but now seem so reasonable now.
So we can agree that a marketing deck is meant to look nice, because you have yet to seen one that did not. So even with those fees and all these things that she's evaluating, the numbers still look really, really good. How do you how do you evaluate the downside in the, you know, better understand the stress tests of these different funds to help you move forward?
Well, every now and then a manager will put a stress test in their marketing deck, which I love. That just tells you about the kind of person they are, but most don't. Most are just going to show you this is this is the rosy scenario because again, they're marketing. They're trying to sell it. I think that's where you probably have to go beyond the deck and you have to either have manager conversations, get their models and their spreadsheets, and you really have to stress test it.
But ideally, again, they do that for you. Ideally, you're dealing with somebody who's thinking about, hey, this is what we think is going to happen, and we're excited for all these reasons. But what if you're wrong? You know what if the market changes? What if things shift faster than we were expecting? What what's going to happen then? And you want to be able to see what what happens to the numbers?
Spreadsheets can be fun and dynamic. We are not going to geek out on Excel today, but if you can change the percentage growth rate, right, what does that do to the end number? What, you know, if all of a sudden they can't refinance in year three like they were planning or interest rates don't drop like everyone's hoping for.
What does that do to the end numbers. And, there's a group we work with. I think they're actually speaking right now in the investment stage. Don't don't leave. Oh. Don't leave. Kirkby management we've been with for over two decades. And one of the reasons why I actually think they've been so successful in their real estate funds is because they start out going in and they, they basically stress it upfront.
So they want to know that if if things go sort of not according to plan, that they're still going to hit their return numbers because of that, they pass on a lot of deals. They they say no to a lot of things, but when they do it, there's just a big cushion built into it. So they've they've had really good results over the years.
And you also talked to me about manager reputation and references as a big key point that you sort of go into as well. I never really thought about that. I just like the numbers on the deck. % returns twice.
That's great. Look, I think there's been a lot of, we haven't actually had a lot of real real estate cycle other than what we're going through now. It's been a while before that, right? was the time before that, and then there was a fair distance before that. But for like real real estate challenges, ideally you're with the manager.
And this manager has lived through challenges. Right. Because if they haven't it's really tough. They're not going to even know what to look for and what to stress test for. So being able to even talk to former investors of theirs. And that doesn't mean, by the way, they did everything perfectly in previous funds or they didn't have issues.
How did they deal with those issues? It's actually really hard to underwrite a manager who's either newer, who never had a problem because you're like, are you lucky or are you good? And and versus the ones who actually had a challenge worked through it, came out the other side, and their investors felt like they were communicating clearly and that they were, you know, doing the right things for investors all throughout the process.
That can be a very powerful reference. Again, even if their track record is not perfect.
I mean, we had a real estate lending group coming to the office last week and talk to us, and he had said that you guys sort of dated for two years before you decided to invest with them. You reached out to a lot of other people in the industry and say, do you know these people are are they trustworthy?
Do they do a good job? What's the reputation? How have they handled, issues that they've had to deal with in the past? You also take that into consideration as well?
Yeah. We have I think we have great networks of other firms that are there like us or different groups who like different kinds of alternative investments. And so finding it's great when someone gives you a reference and, and everyone's known this IRA has noticed this as well as when you get a reference, it's always positive. It's amazing. If you can find your own references, sort of, you know, back channel, finding out how other people who know this group, you get a lot more information and sometimes it's positive and sometimes less so.
How many real estate funds do you get pitched in a given year?
Many. Right now it's crazy, actually. There's a lot right now, and it's it's at least a couple every single week. There's there's just a lot there's a lot of people. The fun thing about them now, too, is this is the pitch. It's like, oh, cap, is there a cap? Right? Is it's like a cap. It's like the percentage of the yield without leverage on a property.
So in theory you want to when you buy it, you want a higher cap rate. Right. Because you want to buy a like it's a good yield. And if the price the price goes up a lot, your cap rate drops your percentage. So so they'll come in, they'll be like, you guys, you can buy this real estate property for for a five cap rate.
Right now it was three and a half, you know two years ago. Like look at that. Isn't that amazing. And it's like but no it's like it's it's still interest rates. You're going to borrow at or . Like it doesn't make sense. So a lot of managers now too are looking at kind of you know, it's very much relative like to where it was.
And they're so excited. And so they're just pushing and pushing content. But I, I like to say this, I'm like, it's great to look and say I hope that rates go down, but hope is not a strategy. And so you have to have it where it works without that happening. And then if it goes down, great, everyone excited.
But there's a lot of those decks to watch out for where they are assuming rates drop. And they're assuming that is that is a very important part of the strategy for making the returns they're targeting.
Now, I know we've been investing for real estate for a long time, and there's a lot of people that know that Morton does that. And so we get pitched all the time. People I might go, oh, hey, can you get this in front of me again? You know, I really think that we've got a good opportunity. So it happens all the time.
And my answer is like, is this really helpful, Chris? Do you really need me to?
It took me to a nice golf course. How how are funds and groups that, that you work with or you evaluate how how do they negotiate other fees or lower costs that end up being beneficial?
Yeah. So, so back to the idea of if again, a fund costs more, there's definitely more fees embedded in it. I will say though, I've seen it firsthand where those managers, when this is all they do every day. It's very different than an individual who's sitting there making the calls, writer who's who finds a deal. A broker brings you a couple of deals for a exchange, and you pick which one you're going to buy.
These guys are in there. They're getting shown a lot of off market transactions. They're buying hopefully at much lower prices. They're just they're getting shown more opportunities. So that's one thing is I just think they have more choices and better buying options. When that's what they do all day, every day. They're able to I've seen them numerous times.
Insurance costs have become a really big issue in the industry. And so when you are, when you have many properties that you're managing, you're sometimes able to negotiate better rates across, you know, a carrier, better property management costs if you're using the same property management company. And so some of those benefits that get passed on to investors, I think, can help offset at least some of those fees.
Does size matter as it relates to real estate funds?
I tend to prefer smaller, more mid-sized managers just because I think sometimes they can get more of those off market or under the radar transactions. It's it's tough when you're just when you have a certain amount of dollars to deploy billions of dollars, you just kind of need to buy the market. Like you can't sit there and be selective and say, yes, no, you really need to put money out fairly broadly.
And so I prefer groups who can be more selective so that one might be a smaller size. It might also just be the way they're structured. Again I at KSB, I use an example before they put big amounts of their own money into every deal. So you know what if if the deal's not right, like they don't want to put their own money in it, they're not going to put client money in it.
So that that sweet spot, that midsize, I think can be a real sweet spot for some managers.
I mean, they've even shared in the past where, you know, the unfortunate life events creates opportunity for them because they play in that middle market. Call it million to $ million transaction size. They had a couple that was getting a divorce. They can call in. I think Chicago told me, too, that although she's going to and they were able to kind of come in, find this opportunity and immediately lower costs and operate it more efficiently, that created a much better opportunity.
When someone goes and runs a process and brings in brokers and right, like you get one price and then if someone again, something's off market, someone needs to sell for a non-economic reason, right? Because the property's doing fine. It's not problem with the property. It's an issue with the seller. That's where there are opportunities created. And so I have not seen currently in this environment, even though we've heard a lot about real estate prices falling, I really haven't seen amazing opportunities where I'm like, oh my gosh, I have to have that.
I'm excited. I want that the one off. So I've been really good. Again, the funds being able to pick off things where you're like, oh, that's a great deal. That's a great property. It's just you have to be selective in in the sizing has to be right. Because again, if they had $ billion to put to work putting $ million equity check into a property, wouldn't, wouldn't move the needle.
That one you're mentioning it was it's small. It was like a small apartment building. And I think that the size of the equity check was about million bucks.
I'm hoping it was in Chicago. So I can say.
We're just going to go with that.
That sounds fine. This is my favorite part of the session, because this is something that Meghan is extremely passionate about. What annoys you the most about real estate funds? That's what we're going with for cocktail Hour.
What pisses me off? So there's a trend and something for everyone to work out, look out for right now, which is driving me a little nuts, because if anyone's listening to me talk about credit, I. I care a lot about the fund structure. So we have the investments, but then, like, what's the framework around it? How does liquidity work.
All those different things. And when you have a loan portfolio, like if you're lending on real estate, having an open structure where you can put money in, take money out at different intervals, it makes a lot of sense. You get that same structure and they're trying to make that structure work. Now the big guys for equity. So they're going to now go and put equity now long term illiquid assets into a vehicle that people can buy in at sometimes daily.
All the time and that people can exit, you know, every quarter. And if anyone thinks that sounds like a mismatch, you are right. But it's really challenging because the biggest thing that bothers me about it is actually the valuation piece. So what price are we buying and selling at when we do it? And by the way, if you're in like big apartments, you can get reasonable data and comps on the levels.
But some of these again literally you can buy it every single day. So if you think that the price that they're making up from day to day, you know, it's like it's amazing how it's super consistent. It just kind of goes like this over time. And so I think the valuations are a real problem on these open ended structures.
The problem is they're more friendly. Right. So if I come to you and I say hey I've got this vehicle, it's just a one year commitment and then you can get out every quarter after that. That sounds pretty good, right? If I say, hey, we're going into real estate equity. So this really needs to be a ten year commitment.
You need to think of this as long term. This isn't quick in and out money. It's going to take you a little bit to be invested. You're going to get AK. That doesn't sound as appealing as the super easy thing that you buy into, but if that long term ten year thing doesn't make sense, if that doesn't make sense for you and some people, it doesn't probably real estate equity doesn't make sense.
It doesn't make sense to try to now cram it into this vehicle that seems more investor friendly, because ultimately there's going to be real challenges with it. By the way, the other piece that's going to be challenging with it is when people, one out there, actually set up the right way so that they're set up so that they're going to limit the amount that wants out in any given quarter.
They're going to be like, nope, too many people want out. We're only letting a little bit out and that's good. They're not going to have to fire sale assets, but I assure you they're going to be a lot of people in those funds who didn't understand that going in. The fact that happen and they're going to be really unhappy.
And it's kind of your classic run on the bank scenarios, right, where everyone wants out. And then it's not so much a problem with the assets as much as you do that the fund is sort of deteriorating. And so I'm watching these these assets and they're just gathering so much money, like so much money coming into them because they're easy.
It's also you click a button, you buy it kind of thing. Yeah. Easy does not necessarily mean good.
And you're not naming any names but I will. So Blackstone is one of them. The B REIT investment that they have. Again they've raised several billion dollars to go buy real estate. If you raised several billion dollars in a short period of time and you're paid to put that money to work, what are you going to do?
You're going to go buy a lot of stuff, stuff you may or may not like. But then the selling point is, oh, you can get out quarterly. And what Meghan's telling you is that in times of heightened, you know, issues, that quarterly is a facade. It is not real because you can't just click a button and create liquidity on a piece of real estate, because if anybody's ever tried to buy a piece of real estate, can you do it in hours or minutes?
No, it takes a lot longer than them.
I have a, a friend who's invested in B REIT. And to give you a fine point on this valuation issue, at the end of I think it was last year, their their marketing rep came to them and they were like, you should put more money in the fund. Real estate is down like %. And he was like, oh really?
Okay. Like interesting. So he asked me, what do you think? Real estate's down . Should I put more money in? I said, what's their fund down? And their fund was up %. I'm like, something is not connected. Right. So they're they're they're speaking out of both sides of their mouths. And it's, it's again, it's a great I love the idea of being able to democratize some of these investments for more people.
Right. We're really passionate about we do a lot of it. It's just if you're going to be in long term illiquid assets, it's got to be structured the right way.
Meghan, I enjoyed this conversation today. I know we only have a couple minutes left, but just to recap it, before anybody might have any questions, when you're looking at a marketing deck it's going to look good. Because if it didn't look good, Meghan actually might want to talk to those people and figure out why figuring out the alignment of interests is really key.
