The French writer Antoine de Saint-Exupery once said: “As for the future, your task is not to foresee it, but to enable it. Success is not a matter of chance but the result of a well-crafted strategy and unwavering commitment to core principles.”
At Heritage Capital, we have distilled our decades and generations of experience and industry expertise into a set of seven fundamental rules that guide our investment decisions and ensure the long-term growth and stability of our portfolio.
These rules, which range from prioritizing capital preservation to fostering strong relationships with stakeholders, form the bedrock of our investment philosophy. They are not merely theoretical concepts but practical guidelines that have been tested and refined through countless deals and market cycles.
Our next investment is under contract. Please join the waitlist for priority access when the deal goes live.
Rule 1: Do Not Lose Money
In the world of investing, our primary objective is always to protect and preserve the capital entrusted to us by investors.
One of the most effective strategies for safeguarding investor capital is to maintain a conservative approach to leverage. By keeping loan-to-value ratios at or below 65%, we create a vital buffer that allows us to navigate market fluctuations and economic uncertainties with greater resilience. This threshold provides a cushion that is essential for maintaining a safe and stable investment profile, ensuring that we can comfortably meet our debt obligations without overextending ourselves.
In addition to managing leverage responsibly, it is crucial to conduct thorough due diligence on every investment opportunity. This involves rigorously analyzing market trends, assessing the competitive landscape, and evaluating the long-term viability of each potential investment. By carefully scrutinizing the fundamentals of each opportunity and only proceeding with those that meet our stringent criteria, we further minimize the risk of capital loss.
Ultimately, the key to successful investing lies in prioritizing the preservation of capital above the pursuit of short-term gains. By maintaining a disciplined, risk-aware approach and adhering to conservative leverage ratios, we can protect the hard-earned capital of our investors and position ourselves for long-term, sustainable growth. In a world where permanent capital loss is an ever-present threat, the importance of this fundamental rule cannot be overstated.
Rule 2: Manage Interest Rate Exposure
Managing interest rate exposure is a crucial aspect of our real estate investment strategy. We understand that fluctuations in interest rates can significantly impact the profitability and stability of our investments. To mitigate this risk, we employ various techniques to ensure predictable and manageable interest rates on our loans.
One approach we take is securing long-term, fixed-rate loans whenever possible. By locking in a fixed interest rate, we eliminate the uncertainty associated with variable rates and can accurately project our cash flows and returns. However, when fixed-rate loans are not available or feasible, we turn to financial tools such as interest rate caps or swaps. These instruments help us establish a capped rate, providing stability and protecting our investments from potential interest rate spikes.
In addition to managing interest rates, we also pay close attention to the timing of our debt maturities. We strive to align our loan maturities with the optimal points in the property market cycle to execute our business plans effectively. This strategic alignment allows us to capitalize on favorable market conditions and minimize the impact of any unforeseen events that may coincide with critical milestones, such as loan maturities or lease renewals.
Rule 3: Space Out Loan Maturities (Adept Portfolio Management)
To avoid having all our debts come due in the same year, we stagger loan maturities so there is only one maturity each year. This strategic spacing ensures resilience and provides additional security for our investors' capital. We further prioritize financial stability by keeping assets separate and not cross-collateralized.
By implementing this approach, we minimize the risk of facing a significant financial burden in any given year. This allows us to manage our cash flow more effectively and reduces the likelihood of defaulting on our obligations. Moreover, this strategy provides us with the flexibility to adapt to changing market conditions and adjust our financial plans accordingly.
Rule 4: Effectively Manage Debt
We are constantly thinking about how to handle our debt. It is part of our proactive management style. When considering variable versus fixed-rate loans, even with a floating rate loan or variable rate loan, we implement caps or hedging strategies such as interest rate swaps to effectively create a fixed-rate scenario or establish a ceiling on potential interest costs.
The decision between short-term and long-term financing depends on various factors including lease durations, our business plan objectives, and the current interest rate environment. In low-interest periods, locking in rates for an extended period can be advantageous; conversely, when rates are higher, flexibility is preferred to capitalize on potential decreases.
Refinancing serves as a key tool for equity extraction when appropriate. While we are cautious not to over-leverage properties, after holding an asset for a significant duration—typically five to ten years—we assess opportunities for refinancing.
For example, we currently have a property under consideration for refinancing within the next few years; it has accrued considerable equity over its six-year loan term. Extracting equity through refinancing is an integral part of our strategy but requires patience and timing—it is usually not feasible within short three-year windows but rather over longer periods where value has had time to accumulate.
Rule 5: Treat Each Project as an Island
We consciously avoid pooling all investments into one fund because if a "black swan" event occurs, like the shift to remote work affecting office spaces, it could jeopardize an entire portfolio if properties are interlinked. Keeping each property as a separate entity helps to prevent this domino effect.
This approach allows for greater flexibility and adaptability in the face of unforeseen circumstances. By treating each project as an independent investment, we can more easily pivot strategies or make necessary adjustments without impacting the entire portfolio. This compartmentalization also enables us to diversify our investments across locations and property types, further mitigating risk.
Moreover, this "island" approach allows for more targeted decision-making and resource allocation. Each property can be managed and optimized based on its unique characteristics, market conditions, and growth potential. This level of customization and attention to detail would be more challenging to achieve if all investments were pooled together.
In essence, treating each project as an island not only safeguards against potential domino effects but also empowers us to make strategic decisions that maximize the value of each individual investment.
Rule 6: Relationships Really Matter
Success in the real estate investment industry is built on a foundation of strong relationships. Our team of professionals is dedicated to fostering and maintaining connections with all stakeholders, including tenants, property managers, and service providers.
We believe that cultivating positive tenant relations is a crucial aspect of our "secret sauce." By prioritizing open communication and swift problem-solving, we create an environment where tenants feel valued and heard. This approach not only enhances tenant satisfaction but also contributes to the long-term stability of our investments.
Our commitment to building relationships extends beyond our tenants. We work closely with property managers to ensure that our properties are well-maintained and efficiently managed. By establishing trust and collaboration with our property management team, we can quickly address any issues that arise and implement effective solutions.
Furthermore, we recognize the importance of strong relationships with service providers, such as leasing professionals, tax consultants, and insurance brokers. By leveraging these connections, we can secure favorable terms, appeal taxes effectively, and obtain the best possible insurance coverage for our investments.
Investing in relationships is just as important as investing in properties. By prioritizing the development and maintenance of strong connections with all stakeholders, we create a solid foundation for long-term success and protect the capital investments entrusted to us.
Rule 7: Experience Matters Too
With multiple generations of industry expertise, our team has developed a keen intuition for navigating the complexities of each deal. We have learned that the initial stages of a project often set the tone for its entire lifecycle, and when faced with excessive difficulties or compromises, it may be prudent to proceed with caution or reconsider the venture altogether.
Decades of experience have taught us invaluable lessons from both successful ventures and those that did not meet expectations. This wealth of knowledge has become ingrained in our DNA, allowing us to recognize when to seize an opportunity and when to walk away. We have learned that embracing risk is a nuanced art rather than a mere scientific calculation, and determining one's risk tolerance involves understanding how much uncertainty you can handle while still being able to sleep at night.
Our primary goal is not just to avoid loss but to obtain market-leading returns for our investors. We achieve this by employing the wisdom gained over time, leveraging technology effectively, fostering strong relationships, and respecting each project's unique trajectory from start to finish.
A Last Word
At Heritage Capital, our unwavering commitment to these seven fundamental rules has been the cornerstone of our success.
As we look to the future, we remain dedicated to upholding these rules and leveraging our extensive experience to identify and capitalize on new opportunities. We understand that success is not a destination but a continuous journey of learning, refinement, and growth.
POSTED BY
Jeffrey Greenberg
Founder and Managing Partner
Jeff has over 30 years and cumulatively over $2 billion investment experience in commercial real estate for his 3rd generation family office.
'The best way to make money in real estate,' he says, 'is to make it slowly.'
While having a focus on mid-large size, Class A/B industrial facilities across the United States, Jeff invests in opportunities that provide ongoing income with the likelihood of doubling investor capital over time.
