When Smaller is Better

Don’t need to deploy billions into any given real estate theme? You're in luck. In some sectors, there are far better opportunities in smaller deals.

Thesis Driven dives deep into emerging themes and real estate operating models by featuring a handful of operators executing on each theme. This week’s letter digs into sectors of real estate in which smaller investors have a distinct advantage.

At times, tiny is good. Photo by Arwin Basdew.

Warren Buffett famously said he could generate returns of “50% per year” if he were only investing $1 million. While most real estate investors are not of Buffett’s caliber, his underlying logic still holds: when investing at a small scale, there are more mis-priced investment opportunities and less competition against sophisticated investors with cheap capital.

While writing Thesis Driven and speaking with a wide range of GPs, we have come across a number of real estate categories and themes that are simply better-suited to investors writing smaller checks. Our focus today will be on opportunities for equity investments smaller than $10 million, as those tend to be safely below the scale targeted by institutional investors.  

Note that not every sub-scale category is sub-scale for the same reason, and not every opportunity to write a small check is a good one. For example, the historic tax credit development sector is limited in scale because there are relatively few HTC redevelopment opportunities, and the ones that exist tend to be fairly small and bespoke. That’s unlikely to change outside of a radical reworking of US historic preservation law. But other categories too small for institutional investors today—such as small-site multifamily and ADUs—have the potential to gain institutional appeal over the coming years.

Smaller real estate investors would be wise to separate true sub-scale opportunities from faux ones. Many real estate “crowdfunding” models are broken because they throw away the one fundamental advantage small investors have: the ability to write smaller checks and not compete against the behemoths. While promising “access to the same deals Blackstone is doing” may sound compelling to a retail investor, it simply means that those small investors are now competing with Blackstone but without the resources and market intelligence. 

So where should investors look for these small-scale opportunities? Today we’ll tackle six sectors where smaller investors are at a distinct advantage:

1. ADUs and Lot Splits

2. Preferred Equity

3. Boutique Hospitality

4. Historic Tax Credits

5. Tertiary Markets (and Below)

6. Small Site Multifamily