What Kind of Real Estate Investor Are You? What Game Are You Playing?
What Kind of Real Estate Investor Are You? What Game Are You Playing?
Harrison Cohen, Senior Vice President & Principal, Triton Realty Group
I've been reading The Psychology of Money by Morgan Housel. Chapter 16 is called “You & Me,” and the whole point of it is this: be careful taking financial cues from people who are playing a different game than you are.
Housel's observation is that we call everyone who puts money to work an “investor,” as if we were all basketball players on the same court, playing by the same rules. We aren't. And once you see that, the takeaway is simple. As he puts it, it's vital to:
"....Simply identify who you are playing for"
He also lays out what he calls a rule of finance: money chases returns to the greatest extent it can.
Housel is writing about stocks. But if you've sat across the table from as many multifamily buyers and sellers as I have, you know it applies just as much to apartment buildings on the North Side of Chicago as it does to a tech stock. Two people can look at the exact same 12-unit in Rogers Park on the same day and reach completely opposite conclusions about price. Neither one is wrong. They're just playing different games.
And that's the most important thing to understand as a buyer entering today's competitive multifamily investment market.
The Seven Games People Are Actually Playing
THE LONG-TERM HOLDER
Optimizing for: Durable cash flow, debt paydown, and appreciation over 15, 20, 30 years. Often generational.
How they behave: They'll pay up for location and construction quality. They care less about going-in cap rate than they do about where the rents will be in a decade. They use conservative leverage. They rarely sell, and when they do it's because of a life event, not a market call.
What winning looks like: Owning the building free and clear with the mortgage burned and rents at three times what they were at purchase.
Where they get in trouble: Overpaying for a “trophy” asset in a location that doesn't actually have the rent growth to bail them out, and then being stuck with it. Time forgives a lot in this game, but it doesn't forgive everything.
THE VALUE-ADD OPERATOR
Optimizing for: IRR and equity multiple over a 3-to-5 year window.
How they behave: They're buying the problem, not the building. Deferred maintenance, below-market rents, bad management, a broken unit mix. They underwrite to a renovated rent and an exit cap, and they need both to be right.
What winning looks like: Buy at a number, spend a number, refinance or sell at a materially higher number, recycle the equity into the next one.
Where they get in trouble: Renovation budgets that assumed 2021 pricing and construction timelines that assumed 2021 labor. And exit cap assumptions that are more optimistic than the going-in cap. If your exit cap is tighter than your entry cap, you're not underwriting, you're hoping.
THE YIELD BUYER
Optimizing for: Cash-on-cash return from day one.
How they behave: They want in-place income, a clean rent roll, and a debt service coverage ratio that sleeps well at night. This buyer is usually in workforce housing, usually further out from the core, and usually far less interested in the story than in the T-12.
What winning looks like: A check every month that grows a little bit each year.
Where they get in trouble: Chasing the headline cap rate into a submarket or an asset class where the collections, the turnover, and the capital needs eat the whole spread. A 9 cap on paper can turn into a 5 cap in real life once the building takes its share back.
THE 1031 EXCHANGE BUYER
Optimizing for: Not paying the tax.
How they behave: This is the most misunderstood buyer in our business, and the one whose behavior confuses everyone else the most. They have 45 days to identify and 180 days to close. That clock is worth real money to them, and it shows up in what they'll pay. They will absolutely outbid a value-add operator on the same building, and the value-add guy will walk away saying the market is irrational.
It isn't irrational. The exchange buyer is solving for a different problem. Their alternative isn't a lower price. Their alternative is a tax bill.
What winning looks like: Closing on time, deferring the gain, and being reasonably happy with the replacement asset.
Where they get in trouble: Letting the calendar buy the building. I've watched good investors take a mediocre asset at a full price because day 40 was coming. The tax tail should not wag the real estate dog.
THE SYNDICATOR OR FUND
Optimizing for: Deploying committed capital inside a defined fund life, and hitting a promised return to their LPs.
How they behave: Their fund runs on a clock. Committed capital has to be put to work inside an investment period, and the fund itself has a defined life. That clock creates real urgency to buy, and a hard stop on when they have to sell, regardless of where the market is that year.
What winning looks like: Hitting the preferred return, clearing the promote, and raising the next fund.
Where they get in trouble: Buying because the fund needs to buy, and selling because the fund needs to sell. If you're a private buyer competing against them, understand that their clock is not your clock. You don't have to match their urgency.
THE DEVELOPER AND ADAPTIVE RE-USE BUYER
Optimizing for: Residual land value and a completed-project basis below replacement cost.
How they behave: They aren't valuing the existing building at all. They're valuing what they can put on the site, or what they can convert the shell into. That's why a developer's number on a tired mixed-use property can look absurd to an income buyer, in either direction.
What winning looks like: Entitlement risk, construction cost, and interest carry on a project that takes eighteen months longer than the pro forma said it would.
THE ACCIDENTAL OWNER
Optimizing for: Getting it right, and getting it off their plate. Often before they've decided what “right” means.
How they behave: They never set out to play this game. They inherited the building from a parent, or they've owned it so long that the original plan is a distant memory. Sometimes it's a surviving spouse, sometimes it's three siblings in three different states who now own a six-flat together. The building usually has below-market rents, some deferred capital needs, and books kept by a relative or a longtime manager.
Decisions get made by committee, and slowly. And because every family member is playing a slightly different game of their own, one wants the cash, one wants to keep it, one wants to exchange, agreeing on anything can be the hardest part.
What winning looks like: A clean decision the whole family can live with. That might be a sale at a price they can defend to each other, or a clear plan to keep the building and run it properly. Either way, without leaving money on the table.
Where they get in trouble: Selling to the first person who knocks on the door, or holding by default while the building drifts and the family argues. Understand this: the accidental owner is the owner every other player on this list is hunting. The mailers, the cold calls, the “we buy buildings” letters are aimed at you. The tax picture on inherited property can also look very different than people assume, which is a conversation to have with your accountant before you set a price, not after.
"The accidental owner is the owner every other player on the list is hunting"
Practice Pointers
Write down your game before you look at your next deal. Hold period, target return, leverage tolerance, and how much operational lift you're actually willing to take on. Put it on one page. If a deal doesn't fit that page, it isn't your deal, no matter how good it looks.
When you get outbid, find out who bought it and why. Nine times out of ten, the winning bidder wasn't playing your game. A 1031 buyer on a clock, a developer pricing the dirt, or a fund with capital to place. That's information. “The market is crazy” is not.
Be careful whose advice you're taking. The friend telling you the market is overpriced may be a yield buyer who hasn't bought since 2019. The one telling you to be aggressive may be a syndicator with money to deploy. Both are giving you honest advice from inside their own game. Neither is necessarily giving you advice for yours.
Match your debt to your hold. More damage gets done here than anywhere else. Short-term or floating debt on a long-term hold, or a 10-year fixed loan with a big prepayment penalty on a building you intend to flip in three years. The capital stack should reflect the game, not the other way around.
Don't let a tax deadline set your price. If you're going into an exchange, start identifying replacement property before you close the sale, not after. The best exchange outcomes I've been part of were sourced off-market and lined up months in advance.
Underwrite the exit buyer, not just the asset. When you sell, who is the natural buyer, and what game will they be playing? That determines your exit cap far more than any national report will. Sellers play games too, and matching your building to the buyer whose game it fits is a story I'll dig into in an upcoming edition.
If you're an accidental owner, get everyone on the same page before you get a price. Agree as a family on what you're actually solving for: cash, income, simplicity, or legacy. A valuation is far more useful once everyone agrees on the question it's answering.
What I'm Seeing Boots on the Ground
The buyer pool has separated by game, not by price point. On our recent offerings we've had value-add operators, exchange buyers, and long-term family holders all bidding on the same asset, and the spread between the high and low bid has been wide. That spread isn't a pricing problem. It's a game problem.
Exchange money is still the most aggressive dollar in the 5-to-50 unit space. When we source a 1031 buyer directly, that buyer consistently underwrites tighter than the general market. In May we sold 3922-24 N. Milwaukee / 4714-16 W. Byron in Portage Park for $2,175,000 to a local investor with a renovation track record, buying through a 1031 exchange. The asset fit that buyer’s game exactly: in-place income on day one, with value-add runway still ahead.
The best executions are still coming from properly renovated product. Last November we closed the off-market sale of 2244 N. Kenmore for $5.8 million, setting a new pricing benchmark for boutique multifamily in Lincoln Park. That was a function of the quality of the renovation and matching the asset to the right buyer: a family-run investment group, buying from a longtime owner making its first-ever sale.
Sellers are still anchored to 2021 and 2022 pricing. The gap between seller expectations and where financing actually clears remains the single biggest reason deals don’t come to market.
Off-market is where the mismatches get solved. When you can control the process, you can put the building in front of the buyer whose game it actually fits, instead of letting it get repriced by a buyer pool playing five different games at once.
The Bottom Line
No one has a crystal ball on rates, and you should be skeptical of anyone who tells you they do. Like Miss Cleo, it's probably a fraud.
What I'd say is this: investors who buy at a great basis, a basis that supports leverage, in locations that are irreplaceable, will be rewarded with appreciation over time. And the investors who can articulate what game they're playing, and why, have a business plan they can actually stick to. One that grows NOI and, ideally, delivers a profit. You don't need a sophisticated model. You need a clear mandate.
Housel's rule is that money chases returns to the greatest extent it can. That's true in our business too. But returns aren't a single number. A 6% return with no headaches is a win for one owner and a failure for another. Both of them are right, because they're not playing the same game.
Figure out yours. Then stop taking cues from people playing somebody else's.
Harrison Cohen is Senior Vice President and Principal at Triton Realty Group, specializing in the sale of apartment and mixed-use properties from 6 to 125 units throughout Chicago and the surrounding suburbs. To discuss your portfolio or receive a complimentary Broker Opinion of Value, contact him directly.
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