Can a Dead First Lady Help You Succeed in Real Estate?

Do you remember Nancy Reagan’s campaign against drugs? The first lady encouraged America’s youth to "Just Say No." When peer pressure mounts, or the crowd around you urges you to say yes, or you feel compelled to compromise and give in, Mrs. Reagan told us to "just say no." I’ve never appreciated the former first lady’s advice more than I do today.

Recent Trends in Real Estate Investing

As the author of a book on multifamily investing_,_ I studied and wrote about how the investing world has been going crazy ever since the Great Recession, with everyone chasing multifamily and other commercial investment opportunities. It has truly been an unprecedented run. And like those who said bitcoin would be worth $1 million last winter (before it dropped by 80 percent), the allure has been real. For instance:

• I’ve watched several friends acquire questionable assets in risky locations. Some have refinanced or exited, pulling out millions. They continue to buy now.
• I’ve stretched our underwriting as far as it made sense but have still been outbid by 20 percent by other well-funded operators who told their investors to “count on appreciation” to make up for questionable cash flow. (Didn’t we hear this in 2006?)
• My company missed out on a great self-storage opportunity last summer. We could see its potential but came to grips with the fact that we didn’t have the internal team to pull it off.

_ Related:  _ However, I’ve also seen cracks in the ice. There are significant signs of a bubble in single family, multifamily, and many self-storage markets. All real estate is local. And not all operators, locations, and assets are created equal. When my wife and I spent a day driving through some of the posh suburbs around Beverly Hills, Calif., last March, we saw only one or two "for sale" signs. Now—just 11 months later—there are an abundance. What’s going on? If California is still the forerunner of all things American, we could be in for trouble. Yesterday I heard about a new self-storage facility that went up in an already overbuilt Charlotte, N.C., location. Yes, it’s been said that, “If you build it, they will come.” Wrong! This particular operator spent $9 million on the upscale facility. After a few years, he realized that its value would top out at $6.5 million once stabilized. So, he handed the keys to the bank and moved on. In December, I was at an investor event when one of the nation’s most famous multifamily syndicators unexpectedly took the stage. I was delighted! He is a hero to 10s (or 100s!) of thousands of real estate investors. His message was something along the lines of not worrying about overpaying for multifamily. Just get a great property in a great location, and get in the game for the long haul, he advised. I was stunned. I waited for the punchline... It never came. He was serious! What's more, one of my investors told me they actually saw a document showing that said real estate hero was apparently buying a large multifamily deal at around a 1 percent cap rate. I returned to my hotel wondering if I was wrong. This guy has luxury cars, a private jet, and millions of followers! But then I remembered the words of Warren Buffett. “The difference between successful people and really successful people is that really successful people say no to almost everything."

The Power of Saying No in Real Estate Investing

I’m on a path of learning to just say no. I feel like my company dodged a bullet—many bullets actually—by not giving in to multifamily’s siren song. We refused to join the crowd and overpay these past several years. Instead we launched our new funds and dug our heels in even further, committing to ourselves and our investors that we would say no to the vast majority of operators, assets, and deals. And we have already had to do so, saying no to quite a few operators and opportunities. Some of them are friends of ours, and some are flashy and profitable. For example, I was recently wrestling with myself as I considered investing in a clearly profitable apartment deal. Our fund is set up to invest in self-storage, mobile home parks, and (theoretically) multifamily. I say theoretically because we have yet to find a deal that fits all of our criteria. Our first criterion is to solely deal with highly experienced, cohesive, internal teams that worked together through the Great Recession. Like Warren Buffett, we are betting on the jockey first and the horse second. This apartment complex was a great asset in a nice location, and I believed it would be profitable. The team, however, was made up of loosely affiliated contractors. But they were a great team! And here’s what made it tougher: two of the key guys on the team are trusted friends. It was tough to say no. I struggled with it. I expressed my frustration to another trusted friend, hedge fund manager Andy Goldberger. Andy helped remind me of our commitment. He said, “You may be my best friend, but if I’m playing basketball with you and I’m driving for the hoop, I’ll knock you over with an elbow to the chest to get to the basket.” I remembered that my commitment was to our investors—not my syndicator friends. And it is better to not invest at all than to compromise on a fundamental investing tenet. It was awkward, but we said no. And I came to peace with it. Here's another example. We said no to a very cool ground-up opportunity offered by an experienced developer across the street from what will eventually become a theme park. The land is currently owned by Disney, and Disney hand picked this developer for the deal. However, the projected returns were not a fit for our investors. We also said no to a wonderful multifamily project in one of our favorite West Coast cities. The developer (another friend) has a great track record and an "in" with the difficult planning and zoning department. The location is optimal, and the project will be very profitable. But—again—we didn’t feel that the internal team was a perfect fit for our fund. At this point, our default is to say no. Therefore, we can all rest assured that when we say yes, we feel it is a perfect fit that meets our criteria in terms of being the right asset class, operator, team, location, and asset.

How We Decide When to Say No

There are many ways to craft a fund, and we don’t claim to have a corner on the market. But we believe it makes sense to provide diversification in the following five arenas:

• Asset Class:  We elect to invest in asset classes that have stellar performance in recessions and outsized returns in almost any economy.
• Operator:  We partner with high integrity operators, those who have been in the game through one or more recessions and who offer us a premium that we can pass along to investors.
• Team:  Our experienced operators don’t rely on an array of independent contractors. Instead they have a dedicated, cohesive team with a shared history in the trenches.
• Location:  It’s not ok to go after a great asset if it's in the wrong location. We partner with operators who share our conservative mindset and critically analyze the demographics and inherent risks of each site.
• Asset:  Our income fund only invests in assets that produce a return from day one. Our growth fund invests in assets targeting significant appreciation without regard to income. By investing in self-storage, mobile home parks, and (theoretically) multifamily that also have a value-add component, we are able to achieve outsized returns and target refinance (or sale) opportunity windows in four- to seven-year timeframes. This allows us to provide a tax-advantaged early return of principal while investors maintain ownership for years to come.

Our fund has been a long time in the making. We realize a lot of our investors have been frustrated with the lack of investment opportunities we have offered. And I’ve been frustrated, too! But that is just part of us learning to say no, which we ultimately feel is for the best. To quote Gary Keller, real estate pioneer and author of the bestseller The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results: “Saying yes to your one thing means saying no to a thousand other good things.” I used to think that was an exaggeration. But now I think it could be closer to 10,000 nos! Nancy Reagan was right, and so are Keller and Buffett. I think we would be wise to listen to them—a former first lady, the world’s most successful real estate broker, and the most successful investor of the 20^th century. Have you learned to avoid compromise? What do you say no to in order to say yes to your highest priorities? Leave a comment below.