With the rise of real estate technology and new business models, startup real estate investment companies have become an intriguing option for investors. However, identifying the best startups in this crowded field can be challenging. This article will provide tips on how to evaluate startup real estate investment firms based on team experience, investment strategy, use of technology, fee structure, and track record. We’ll also overview the potential upsides and downsides of investing with a startup real estate company versus established players. With the right due diligence, startup real estate investment firms can provide diversification and exposure to cutting-edge strategies for your portfolio.
Assess the background and experience of the startup real estate investment team
A solid leadership team with real estate, finance, and technology expertise is essential for any startup real estate investment firm. Look for teams that combine experience from top real estate private equity firms, investment banks, real estate developers, and tech companies. Strong pedigrees from top universities and companies lend credibility. The team should have experience across real estate sectors and the full investment lifecycle from sourcing to underwriting to asset management. Diversity of backgrounds and skill sets on the team is positive as real estate investing requires a range of capabilities.
Evaluate the startup’s real estate investment strategy and use of technology
Understand the competitive advantage of the startup real estate investment firm’s strategy and how they use technology to execute it. Many real estate investment tech startups aim to leverage data and analytics to source deals and underwrite assets more quickly and accurately. Others pursue niche property types or markets overlooked by conventional firms. Seek firms with a differentiated strategy well-suited to the current market. Also assess how they use technology pre and post-investment to add value. AI, machine learning, predictive analytics, process automation, and mobile apps are just some of the technologies top startups incorporate.
Scrutinize the startup real estate investment firm’s fee structure
Startup real estate investment firms should offer lower, more flexible fees than traditional players to compensate for their lack of track record. Make sure to understand all the fees including management fees, performance fees, transaction fees, carried interest, hurdles, and fee schedules. Startups need to justify their fees based on the value provided through use of technology, network, or innovative strategies. Also assess how investor-friendly the fees are relative to established real estate private equity firms.
Review any initial investments and deals of the startup real estate investment firm
While the track record will be limited given their startup status, you can still glean insights from assessing early investments. Gauge the startup’s ability to source off-market or differentiated deals. Analyze the merits of initial deals across factors like price paid, projected returns, market dynamics, asset quality, and execution risks. This will provide a sense for their underwriting rigor and investment selection process. Also evaluate early fund performance if available.
Evaluating startup real estate investment firms requires scrutinizing their team, strategy, use of technology, fee structure, and initial investments. While riskier than established firms, top startups can outperform through innovation and higher alignment with investors.