Seeing past the pitch

Happy Thursday!

I posted this today and it went (slightly) viral within the real estate community on Twitter - there’s an entire thread which you’re welcome to look at by clicking on the image.

I think every deck comes along with a pitch and one of the hardest things as an LP is seeing “past” the pitch, so to speak.

I tell LPs that when you see any metric or “directional statement” and it doesn’t immediately come with support you have two options:

• If it’s important and a potential catalyst - look into the support to see if you agree

• If it’s not important - don’t let the statement sell you and move to next point

A “directional statement” essentially means that when you read something that a GP wrote you should immediately say “the GP wants me to think in this direction, but do I have enough support to believe that this is actually the case?

Let’s dive into five examples of this:

1) Price Per Square Foot (PSF)

• Why it sounds good: “We’re thrilled to be buying this asset for $120/psf.”

• Why it’s not helpful on its own: PSF only means something relative to comparable trades, building quality, and renovation status. Without that context, the number is (literally) meaningless.

• Counterexample: $120/psf could be:

• Cheap if nearby trades are $150/psf

• Expensive if renovated assets are trading at $110/psf

In short: the metric doesn’t help unless the LP understands what the right PSF should be.

2) Net IRR

• Why it sounds good: “Targeting a 19% net IRR to LPs.”

• Why it’s not helpful: Nearly every real estate deal is projected to produce a 15-25% IRR. The number itself rarely differentiates the opportunity. Let’s also not forget how easy it is to get a different outcome on IRR based on a single assumption change.

• Counterexample: Two deals can both project a 19% IRR, but:

• Deal A assumes aggressive rent growth and a cap rate compression exit

• Deal B assumes modest rent growth with conservative exit assumptions

The IRR is identical, but the risk profile is completely different. This is precisely I, with some very rare exceptions, strongly discourage filtering deals based on their IRRs.

3) “Under Replacement Cost”

• Why it sounds good: “We’re buying this property under replacement cost.” For the uninitiated, this (in simple English) means that if you were to build the property today it would cost more than your Purchase Price.

• Why it’s not helpful: This argument is extremely common and often overstated. In many markets today, almost everything trades below replacement cost.

• Counterexample: Even if replacement cost is $300k/unit and the property is purchased for $220k/unit, that doesn’t automatically make it a great investment.

This quite literally just means it’s more expensive to build something like this nearby.

4) Equity Multiple

• Why it sounds good: “Targeting a 2.0x equity multiple.”

• Why it’s not helpful: Equity multiples ignore time.

• Counterexample:

• A 2.0x over 5 years is very different from

• A 2.0x over 10 years

Both sound identical in a pitch, but a 2x in 10 years is a 7% IRR … at which point the question becomes whether you’re interested in tying up your capital in an alternative investment that’s not liquid for what the S&P typically makes over a long term average.

5) Market Growth Statistics

• Why it sounds good: “The market grew population by 15% over the past decade.”

• Why it’s not helpful: First, market statistics are usually broad and backward-looking. They don’t necessarily explain why this specific property will perform well.

• Counterexample: A pitch might say (I’ve seen it btw) “Texas is booming” - ok, but while that’s true it could also simultaneously be true that the county that you’re about to invest is in shrinking

To close, be on the lookout for unsupported metrics. Your job as an LP is to have (and refine through practice) a healthy dose of skepticism.

When you’re ready, I could help you in 2 ways - my email is aleksey@gplpmatch.com:

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