Chapter One

1. Why Invest in Real Estate

I assume that if you’ve picked up this book, you’re interested in real estate already, or you’re interested in the real estate space in general, right? If you’re like me, you enjoy reading books about the positives of this industry, and there are many. In fact, if you’re reading this, you’re ahead of where I was when I first started. I learned a lot of things the hard way, by trial and error, and I later learned (as I became successful) that there is a wealth of knowledge out there. In this book, you’ll reap the rewards of my own hard-won knowledge, and I’ll also point you to other fantastic resources.

Real Estate Investing Isn’t Sexy

Maybe it is. This all depends on your view of sexy. If your mission in life is to gain stature and wealth, you can do it through real estate; however, real estate investing can be boring and slow-moving. The best deals should be boring. The sexier they are, the worse they tend to be—usually.

Real estate tends to be stable and predictable. Everything moves VERY slowly. If you’re paying attention, you can and should always be one step ahead of things. You don’t need to be right on top of the latest news and information because it moves slowly. You have months to try to figure things out. When we talk about real estate being bricks and mortar, literally, you’re buying something tangible. You can touch it and feel it.

The stock market provides intangible financial products—conjured items, if you will. You may have a claim on a company’s earnings if you’re a partial owner, but you’re such a small piece that you have no say in what happens. If you invested in Ford when it initially went public, at times you’d be very wealthy (on paper) and at other times broke, and then you’d be rich again. If you hold a stock long enough, eventually you will lose your money because every company ultimately goes out of business. No company lasts forever. That’s the reality of companies. Think about it: how many times have you driven by a restaurant you knew, only to discover that it had closed or that all of a sudden, there was another restaurant in its place? It happens all the time. Businesses come and go. But real estate lasts forever in the sense that a location is not going to go out of business. Whoever owns the property of that restaurant (or retail space, or office building) is still getting the rent check. Someone will be putting a business there, and the only sure way to make money is to own the space, not the business. The businesses that rent from us come and go. We want them to be successful, of course, but because we’re in real estate, we never go out of business as long as we buy solid locations.

Whatever real estate you own—whether it’s a home, an office, a warehouse, or a factory—it provides value. It provides a space where someone can do something that creates value for others. It seems so simple to me, and it should to you. At minimum, real estate investments should represent at least 20 percent of your portfolio—they represent 80 percent of mine. The trick is finding the right people to invest with, and that’s what this book is about.

Diversification Is Important

Even though I invest heavily in real estate, I understand that diversification is important to financial success. It leads to greater returns and better sleep at night, knowing all of your money isn’t tied up in one thing. For most people, anyway.

My rule of thumb is to divide investment funds into three to five different baskets. There are many ways to accomplish this. For example, you could choose to put 20 percent into real estate and the remaining 80 percent in other investment avenues such as stocks or bonds.

Another option, and obviously my preferred one, is to put the majority of investment funds into real estate but diversify within that arena. Own buildings in different geographic regions, or diversify by investing in different building types. For example, I own industrial buildings, apartment complexes, multi-tenant office buildings, and residential units. I invest in development projects as well. We build condominium buildings and sell out the units, we build hotels and keep them for cash flow or sell them to REITs, and we take raw land and develop it into buildable lots so people have a place to live.

Most importantly, if you follow this book and choose to work with a real estate partner, do not put more than 20 percent of your money with one person. Find five different deal sponsors that do real estate really well, and allocate 20 percent of your funds to each of them.

NOTE: Beware of financial advisors and have an understanding of how they are compensated. The financial advisory industry is known for pushing their clients into investments that make the advisors money. Or, at the very least, they are highly motivated to keep your money under their umbrella so they can get paid on it. Almost no investment advisors are set up to make any money by seeking out real estate investment deals like the ones we will talk about here. We are not regulated by the SEC, and therefore we don’t pay brokers to put people in our deals. In fact, most stockbrokers are not legally allowed to recommend investments like ours. More on this later.

I want you to understand how financial advisors are compensated and how that affects where they invest your money. You’re smart, and I know you’ll keep track of your investments. Once you’ve diversified for a while, you may consider consolidating some investments based on your returns and preferred growth strategy.

The Downside of Real Estate

The downside of real estate investing is…well, it doesn’t really have one—if done correctly. The downside is getting into the wrong real estate investments with the wrong people. If it’s done the right way, the risk is very, very low. You’re unlikely to lose all of your capital in real estate, as long as you’re doing it the right way: not taking on too much leverage or using rosy projections. Yes, there are a lot of mistakes that can be made, and yes, there are bad people who want to make big fees at your expense. That’s what this book is going to help you avoid.

A quick example: My investment group is currently building a hotel in Denver. If we open the hotel and don’t hit our initial projections, it’s okay. Perhaps there’s a blip in the market, or occupancy rates go down, or we just don’t generate the income we expected. It doesn’t matter in the long run because the building is still there, the product is still there, and things will eventually go back up. Real estate investment requires patience and dedication. As room rates increase, as you improve operations, as you get more people to review it online, you will grow that hotel and get the returns you ultimately expected. The key is to have plenty of room for this potential challenge. We call it margin for error.

We purchased an apartment complex at the height of the market in 2007. It struggled for two years. Many tenants were problematic, late payers who trashed the place. Of course, the good tenants became uncomfortable with their neighbors and started leaving the building. Wouldn’t you? We had no choice but to address the issue, so over two years, we evicted the problem tenants, renovated those units, and allowed only quality tenants to move in. The building increased cash flow for the next eight years, and we sold it for a substantial gain. The investors did well despite the initial setback.

Good partners work the situation and exercise the control available to them in order to get the property or project to perform.

A deal may look great on paper, but then you get in and things can change. When the market imploded in 2007, I owned twenty single-family homes that dropped in value by 70 percent seemingly overnight. I couldn’t sell them for what I paid for them ten years earlier, but they were all rented out. More people were turning to renting, and so my rental rates increased. What did I care? On paper, I had lost money, but my cash flow still existed. Over time, debt continued to decrease as property values rebounded.

In fact, I took it a step further. I looked around the neighborhoods and bought eight more homes in the area. If I could pick up homes for 30 percent of true value and lease them out, why wouldn’t I? I sold my rental homes in early 2017, once fully recovered. I had a solid gain. I hate selling things, and the buyers of these homes will do very well if they operate them correctly. But TIME IS PRECIOUS, and sometimes trading up to larger, easier-to-manage assets can save that precious time.

There are opportunities to make money in either a buyer’s or seller’s market. You may have temporary setbacks along the way, but both markets can and will change. You just need to be patient and nonreactive.

Reserves Are Key

Cash reserves, or the ability to get cash, are crucial for when opportunities arise. Not many people own all their real estate free and clear. That’s not logical. You want to borrow from the bank at around 60 to 70 percent loan to value, depending on the deal. That number is pretty conservative, but the fact is you’re going to be better off.

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