Posted by John Corey on June 15, 2006 at 09:34:17:
[Speculation here combined with some experience as a HML and having working for investment banks in cities around the world.]
I would say there is very little connection at most levels.
Many HML are semi-retired RE investors who want a more passive way to invest their funds. A way to leverage their RE knowledge in addition.
Similar to angel investors. They are business people who have made some money in a sector and now invest their money in ventures in the same sector. Angels want to be involved and are less about specific returns compared to vulture capitalists (Venture Capital - VC).
Note that a VC told me that I was making VC level returns but taking less risk. I asked if VCs invest in RE and he said they largely do not as they stick to what they know.
On the other side of the argument is the point that HML do not operate in a vacuum. If the prevailing rates are high for conventional financing then HML will still expect to raise their rates. They also know that there are limits where the deals stop making sense.
At the high end of the range are the equity investors who expect to split the profits. That is really the upper limit compared to a HM loan. Over a year compare the costs for half the profits (50% of the profit) vs a HML cost (around 21% to 25% if we are talking approximately 15% and more or less 5 points over 1 year).
Most HML do not invest in the other opportunities (stocks, bonds, etc) so that is not really an alternative. A few HML will borrow from outside the RE sector and therefore will have a cost of funding that is tied to the other investments.
HML takes specialized knowledge. Note that many investors with cash think 5%-7% is a really high return for a cash investment that pays monthly interest. HML can not tap into most of that because the investors with the capital think anything higher is too risky. There are lots of people shopping for the best CD rates. They debate 4.56% vs. 4.7% over 1 month to 2 years. It is very funny to watch the discussions. Little do they know that HML investors make 2-4 times as much.
John Corey