Real Estate Investors Can and Should Invest in Startups

by francine Hardaway on March 8, 2010

Real estate investors should invest in startup tech companies.Typically, early stage angels and real estate investors never mix, because the real estate guys feel like they can’t measure the risk in startup investing.  But there’s not that much difference; I invest in both, and I know. What’s really cool is that real estate and tech often run counter-cyclically, and investing in tech is a good way to keep money at work when there’s nothing to do in real estate. Many real estate investors I know have cash on the sidelines right now, because there are is a surplus of empty space. And yet they won’t participate in companies that could grow and fill their space.  How short-sighted!

I just finished participating in a real estate deal in which I was a small investor. I’m never a big investor; I did that once and lost my pants. I leave the big investments to the big guys and diversify my portfolio in real estate as in everything else by making smaller investments.

In this particular deal, I was part of a consortium that raised money to buy some “finished lots.” Finished lots, in case you don’t know this jargon, are pieces of land that have been bought by somebody previously as raw land. That first buyer, who probably bought the land from a farmer, takes the land through an entitlement process (zoning) to find out how many homes can be built on the piece of land. The land is then subdivided into that number of lots, and the improvements are put in. (Water, electricity, telephone, sidewalks — whatever must be in a subdivision in that jurisdiction.)

Land is bought for $x per acre. Let’s call that the seed money.  As finished lots, the same land is worth 3-4x per acre.  Let’s all that Series A. Homebuilders then buy the finished lots. Let’s all that Series B.  They build houses on the lots. And the houses sell for  3-4x the price of the lots. So there you have it. A finished  lot that costs $20,000 sustains a house that costs $120,000.  The sale of the home is the exit for the homebuilder.

These are rough numbers because I’m not a spreadsheet jockey, but you can see where the land gets valued higher and higher as time goes on. Why is that different from the valuation of a startup company?

In this case, the homebuilder that owned the finished lots couldn’t build on them immediately, because there’s no market. He had a one time opportunity for a tax recapture in 2009, so he fire-sold them to us. We will hold them.  The land just participated in a down round!

How is this different from a tech company?  Not very. Real estate has a burn rate, even land.  You have to pay the taxes, keep it clear, stop kids from vandalizing it, or people from dumping on it, or whatever. In commercial real estate, the burn is higher; you have to keep utilities running, landscaping maintained, and so on.

I’ve been in land partnerships that are twenty years old, where we have exited partially but still own part of the land. How is this different from a tech company in a VC portfolio that doesn’t make it big? That limps along? I’ve also been in land partnerships where we’ve exited with 10x returns, like startup investors have.

So what is there for a real estate investor to be wary of?

{ 3 comments… read them below or add one }

real estate vietnam April 21, 2010 at 11:34 pm

Really? This is pretty interesting. Usually, start-ups are undergoing many challenges and they are on the “trial and error” stage where if something goes wrong, it can be a make-or-break in the company. So, investing with them, will be a big risk and challenge.

hardaway April 22, 2010 at 6:53 am

People just don't realize the risks in real estate. Trust me, each real estate project is a startup, roo. And one for which the market is no more certain.

Francine Hardaway, Ph D

real estate in hanoi June 6, 2011 at 8:25 am

interesting… thanks for sharing…

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