Being young is the most powerful element in creating long term wealth with real estate investments. But being young alone does nothing. You must couple it with knowledge and action. And you must be bold. Over time, your investments will grow with inflation, your debt will gradually amortize, and provided you do not sell your best assets, with a little luck you will become immensely wealthy.
And so, exactly how do you acquire knowledge?
Follow the following simple steps with persistence and tenacity:
- Pick the one industry that interests you most (e.g., multifamily, office, retail, industrial, hotels, etc.). Focus 100% of your attention on that industry. Later, when you are worth $100 Million+ you will be able to pick a second industry for fun. Focus is the key.
- Spend endless hours driving around your city learning everything about different geographical areas. Good areas, emerging areas, gentrifying areas, expensive areas, poor areas, areas where the city is growing into, etc. Notice every little detail about them. Real estate is a highly localized business. Look only in areas you truly understand, or are willing to learn and understand. Notice everything unique and relevant about them. Develop that special eye that separates you from the next guy.
- Once you focus your attention on a few areas (tend to stay away from high end areas as economic returns normally tend to be better in more challenging areas that are improving and where you can bring value added), spend endless hours driving around your city inspecting every detail about the specific properties that catch your attention (e.g., size, construction, type of tenants, rental rates, stability of tenants, types of construction, etc.).
- Go home and read everything online about your city, the industry you selected (remember, start with only one!), the economics of the type of property you selected, the appraisal methodologies for such properties, the capitalization rates (cap rate) as function of risk, and the best and most successful realtors in that specific market.
- Become friends with one or more of the more successful commercial realtors in that industry in your hometown. A good realtor is worth her/his weight in gold. They tend to be friendly and accessible. Simply look up which ones have the listings. Exchange valuable industry information with them from time to time so the relationships flourish. Learn from her/him everything about the business you can. Ask them to put you on their mailing list. Resist negotiating their commissions. Otherwise, you will never get the really good deals.
- Befriend the commercial loan officer at your local bank. Ask her/him what is their appetite for financing the type of property you are seeking. If they do not finance it themselves, ask her/him who does and go talk to them. Be sure to always keep up with what terms of financing are available (loan to value/purchase price, interest rates, term, length of fixed rate, personal guaranty requirements). This knowledge is fundamental in this business.
- Review closely the most recent sales and focus on the economics of each such sale (e.g., cap rate (which is always a function of location and risk), location, property condition, motivation of seller, special issues with the property, etc.). Be sure you understand where the market (i.e., cap rates, demand, supply, investor appetite) lies at that moment.
- Study and ascertain at all times where in the economic cycle you are in at the present moment in time. Values of properties oscillate depending on where you are in the economic cycle. Cycles typically last between 7 to 12 years. You always want to buy at the bottom and never at the peak. Learn to resist the herd mentality. It can destroy your financial security. Buying commercial real estate in 2006 was disastrous to many buyers. Buying in 2010–2011 proved mostly quite insightful and profitable (at least it did for us).
- Review online listings periodically (there are many services that offer this service, including some free ones (such as loopnet) and learn more about why certain listings linger longer than others. Normally it is because some sellers aspire unrealistically high prices. Search for “off market”opportunities from local realtors and property owners as these often result in better values.
- After following all these steps, write down specifically the attributes of the property you wish to purchase (create an “envelope of attributes”). Include the parameters for price, down payment, financing terms, cap rate, location, condition and how you are going to operate the property (are you going to operate it yourself or are going to outsource management?). Stay faithful to that envelope.
- Research every property for sale within your envelope until you land one that meets your established criteria.
- Then, arm yourself with as much courage as you can. Then go for it. Use a good local real estate attorney who comes highly recommended. Be extremely disciplined in not exceeding your price threshold. FYI, for me only about one in 10 typically gains traction. Do not despair. Be very patient.
An important element to remember is that if you buy and then sell your entire life, the day you retire you will have little or nothing to show for it. You will have spent your fortune. Instead, always retain your gem properties as these are the ones that over time will make you very rich. Resist at all cost selling these!
Be gentle and conservative. Do not over-extend. Do not over-leverage. Always have cash for a rainy day. When everyone is exuberantly buying, run for the hills. When everyone is frightened and not buying, wait for prices to drop, return from the hills, and carefully purchase the best quality assets you can find. Again, be a contrarian and avoid the herd mentality.
One final piece of advice: Make it a point that every deal you close is win-win-win for everyone involved. You, the counterparty buyer or seller, the realtor and the lender. Always leave some money on the table for others. Make sure you endeavor for everyone to leave the closing table reasonably happy. Always strive to do the right thing. Never be dishonest, nor even betray an appearance of dishonesty in your dealings. These are fundamental principles in this (and probably every) business. It will ensure you be first in line for the best deals, it will make your life (and others) much more enjoyable, and it will make this world a little better place.
The beautiful thing about real estate is that if you follow these simple steps, you will have lots of fun, over time will create great wealth, and you will be able to help others and leave a legacy to your children and your favorite philanthropic cause.