Skill vs. Luck
And why realized IRR doesn't tell the entire story
“Don’t confuse brains with a bull market”. -Humphrey B. Neill
From our previous posts, you’ll remember the two key inputs to calculate property value: cap rate and NOI.
Of those two, only NOI is even somewhat within the sponsor’s control.
Virtually all CRE value-add deals rely on NOI increase as the means to force appreciation. Today, we will take a look at the relationship between luck (cap rates) and skill (being able to increase NOI), and how each of them impacts your returns.
After reading this article, you’ll:
Understand why stratospheric IRRs on realized deals may not have any correlation with sponsor’s operational expertise.
Know which questions to ask, and what data points will allow you to accurately assess sponsors’ past performance.
You will see an example of a detailed track record with relevant information is included. Share that with your favorite GP and ask that they update their track record to reflect NOI performance on their realized deals!