Real estate investing has and will always be a game of identifying the right opportunities and capitalizing on them to create financial success. In order to seize as many real estate opportunities as possible, investors must have a diversified set of knowledge and skills. This is the path that real estate investor Lin He took, as he built his business over the course of almost 20 years.
Originally from China, He came to the US in 1992 to pursue his PhD in civil engineering, graduating in 1998. According to He, he noticed that the California residential real estate market was appreciating rapidly since the mid 1990s, and that this was not sustainable in the long term. He forsaw the bubble in the real estate market was coming and took his first real estate foreclosure class in 2004 in anticipation of the upcoming market crash, instead of speculating the real estate marekt.
He says that he is not interested in speculation, and that he focuses on investment in real estate, clarifying that it is important to understand the difference between investment and speculation. Investment is looking for returns in the form of cash flow in the future, while speculation is putting down equity in hope of appreciation in the future.
In November 2007, He left his job to become a full-time investor. According to He, he has purchased hundreds of houses since 2009, flipping about three out of every four properties and keeping the remainder as rentals. He says there is a synergy between flipping and investing in properties, with flipping as a means to generate capital, which will be used to fuel investments, because real estate is a cash-intensive asset class.
In 2014, as he believed the market was closer to the top than the bottom of the cycle then, He switched gears and started focusing on residential construction which allowed him stay engaged in the market with lower risk. In addition, He says he wanted to gain experience as a business owner, which provides valuable skills to make him a better investor, because being an investor and business owner are the two sides of the same coin..
“Construction has lower risks compared to flipping, which is a tough business. Handling construction won’t make you a fortune, but not having control over construction can cause you to lose money and opportunities,” He says.
In essence, His real estate business model includes three types of roles: equity (real estate) investors, debt (mortgage) investors, and service providers (agents, contractors, etc). To survive and thrive in the real estate business, it is critical to be able to play different roles in different market conditions. For example, when the market was down like in 2008, it is a good time to buy on the cheap and hold on to real estate. When the market is going up like 2012 to 2015, flipping can be a good business to be in with the tailwind of appreciating market. When the market is close to the top, it would be wise to lower the risk by originating bridge loans which has lower risk compared to buying real estate, as well as being a service provider.
Since beginning his real estate journey almost 20 years ago, He says he spent the first decade learning how to be a “complete investor” in the residential real estate sector. He strove to handle every aspect of the business, including equity, debt, and service.
For the second decade of his journey, He focused on transitioning from an investor to a real estate business operator focused on scale. By investing significantly in human capital, He built a team that can handle bigger and more deals, which will help in growing the business further. As He enters his third decade of being a real estate investor, he aims to become more of a capitalist in the space.
“I want to become an investment fund manager with real world experience, and not just be a spreadsheet wizard. This way, I can invest in other real estate operator’s investment projects. .”
Today, While He continue to work on luxury residential development projects in Newport Beach, which is an affluent neighborhood in Southern California with a median price 10 times higher than the national average, his main investment thesis is centered around Maturity Default of development projects Due to the rapid increase in interest rate and anticipation of recession, both debt and equity have become scarce. Things come to a head when the existing mortgages on some of the ongoing development projects mature. If the developer can not pay off the existing mortgage through refinance, it constitutes a maturity default. There are several ways to deal with the maturity default. One is to provide new bridge loans to developers to pay off the existing mortgage. Another is to buy the existing mortage that is in default at discount and do a workout with the developer. Finally those mid-construction projects can be bought and brought to the finish line. All of these solutions can be capital intensive and require a wide array of skillsets, and this is when He step up to the plate and be a true solution provider.
“By identifying distressed situations and applying our knowledge and capital, we are able to solve more problems and add value to our counterparty. Finding this niche allows us to encounter less competition and gain better returns for our investments.”
He highlights the importance of bridge loans in the current environment. These bridge loans are high-yield, short-duration mortgages. He says that the market condition is right for bridge loans due to the high level of uncertainty in the market. These loans have higher yield at around 10% to 12%, compared to the stock market which has a historical 9% return. In the rising interest rate environment, there is no principal impairment risk, and it is also more secure, as it is backed by real estate and not more volatile assets such as art and businesses.
“Since the start, I have always had the attitude of being a problem solver. I aim to provide value using my knowledge and skills to solve problems in the real estate sector that other people are not willing or able to solve,” He says.
Media contact: Lin He
Email: [email protected]
There is no offer to sell, no solicitation of an offer to buy, and no recommendation of any security or any other product or service in this article. Moreover, nothing contained in this should be construed as a recommendation to buy, sell, or hold any investment or security, or to engage in any investment strategy or transaction. It is your responsibility to determine whether any investment, investment strategy, security, or related transaction is appropriate for you based on your investment objectives, financial circumstances, and risk tolerance. Consult your business advisor, attorney, or tax advisor regarding your specific business, legal, or tax situation.
