All Forum Posts by: Grant Cardone

1) They’re real assets, not paper, and they can’t be easily replaced.

2) They produce positive cash flow.

3) Apartments appreciate when rents rise, the Multiplier.

4) Leverage of debt to increase your position.

-GC

As long as I can remember, I have been fascinated with real estate. I have been drawn to it for my entire life; and for the last 30 years I have been buying apartments. It didn’t matter whether it was a piece of land, a house, or a store front, I have always had an affinity for real estate and I also had some basic understanding that real estate was valuable.

I remember my Dad would drive my Mom and us five kids around on the weekends looking at real estate. My Dad owned three homes during his lifetime, and each one represented the fact that he was going somewhere, succeeding with each move. Just a few years before my Dad died he bought his dream house and he told Mom, “We’ve made it.” It was almost two acres, on the waterfront, had lots of big trees, and was in a neighborhood filled with doctors and lawyers and people who belonged to the local Country Club.

When he died, my Mom had to immediately sell the dream house because it was too much for her to manage. That was a huge lesson that I would not fully understand until I started investing in real estate myself, many years later, and one you must understand if you are going to create financial freedom using real estate.

-GC

Remember, to create wealth you can't just score once, you must be able to report it. 

This is called scaling. Scaling (repeating) is critical to creating wealth. Can you do it over and over again?

This is why wholesaling doesn't work and why the stock market is an awful gamble. Even when you win, you know it is difficult to repeat. 

If you can't start with $350,000 like I did, then start with what you have and raise money, but don't do small deals; they don't work.

-GC

The place to start is where you know the market, code for: where you live. Don't try to go into new markets in the beginning, shop where you live and stay close to where you live until you start to learn the market. The first market I ever shopped was within a 10 mile radius of where I lived. For 3 years, every weekend, when I wasn't working my main job, I shopped deals, exhausting every broker in the market and I never bought a deal. 

But, I got a great education and I learned what a good deal looked and felt like. I realized after leaving Houston to move to California, how much money I would have made had I invested. I saw what I thought were a lot of good deals, but I wasn't ready yet. I didn't have the confidence yet, because I hadn't yet done enough homework to know the difference between a bad deal, a good deal, and a screaming deal. What you learn from walking properties is 10 times more valuable than any book you could possibly read.

-GC

The right apartments, in the right location, bought at the right time, at the right price, should provide investors consistent positive cash flow, while we wait for rents to go up and the loan amount to be paid down and appreciation to take place. 

-GC

Let's quickly cover the property classes. Property classifications were created to make it easier to communicate among investors and lenders to the quality and rating of the property amongst themselves. The class can refer to the property and the location. 

A Class - Newest, shiniest asset and represents the highest quality building in the market. These are generally newer buildings under 15 years of age and contain many amenities catering to white-collar workers. Expect lower cap rates, around 2% to 4% on this asset. 

This class of asset won't generate as much cash flow but has the ability to appreciate greatly. Class A Properties are great for preserving wealth, while investors wait patiently for appreciation. This investor has a reduced need for cash flow.

B Class - One step down from A and built within the last 20 years. This class caters to a mix of white and blue-collar workers and the property may show a bit of deferred maintenance, but overall, it has a nice mix of cash flow and potential appreciation. Look for returns on cash invested of 5% to 7%, before appreciation.

C Class - My first real estate broker defined C Class properties as "crap" properties, but loved their ability to generate substantial cash flow. I tend to agree with his candid analysis. 

These properties are usually 25+ years old and have deferred maintenance issues and are located in more difficult areas as well as needing big capital expenditure investments (new roof, interior remodels, etc.) to remain competitive. Look for cash on cash returns on cash invested of 8% and above on these properties, before appreciation. 

D Class - The lowest class of properties usually located in cities with lower employment opportunities making it more difficult to collect the rent and more difficult to exit but greater cash flow for your trouble. 

These properties are highly management intensive, and the tenant base is often difficult to deal with. Investors get lured into investing in these properties due to the low prices, but soon realize they got more than they bargained for. 

The assignment of Property Classes A, B, C & D are complete arbitraries and these descriptions are generalizations used more to communicate than anything. This is more opinion and less science and should only be used to give you an idea of the quality type and the location rating of the property. 

Sometimes whether you are buying or selling impacts the property class used to describe the property. When I am buying the A Property, I see it as a B Property for negotiating purposes, and when I am selling, I described it as an A+.

-GC

Real Estate Riddle:

If you and I buy a $20 million property with $5 million down and it cash flows at 10% a year what did the property cost us?

Answer:

The $20 million property cost us nothing. 

The $5 million less the cash flow of the 10% per year for 10 years ($500,000 a year) means our original investment is returned in 10 years. Now, we literally own the property with no cash.

-GC

Know your market completely. 

You need to know every sale, every comp, every rental, what properties are under-rented, what properties are over-leveraged, what that property sold for in the last cycle, the vacancy in your market, and the cost of every expense. 

Insurance, utilities, management fees, the cost to turn, how long it takes to turn, the cost to advertise, which ads work, foot traffic, closing ratios, trailing 12 months of operation, and then you need to know and have relationships with the top 3 controlling brokers in the market to find the best apartment stock within.

Look, I am not trying to scare you here, but there are so many courses out there suggesting real estate is easy when, in truth, there is a lot to know. There are a number of tools you might want to invest in, like Real Capital Analytics, which gives you the selling and financing history of a property. Axiometrics provides you with rent comps and Co-Star breaks down property detail information, rent comparable and sales history.

These programs can cost up to $20,000 a year for your local market and can give you a lot of intel. LoopNet is free and is basically for amateurs (I call them Loopsters), but can be a great source to find brokers. The top brokers don't typically list their properties on LoopNet but only on their sites. When you call a broker, don't even mention you saw it on LoopNet, you will lose credibility. 

-GC

Consider the first deal I did in multi-family..... 

I invested $350,000 to buy a $1.95 million, 48 unit complex. I can't lose my money as it is invested in the property. Because of leverage, I was able to buy a $1.95 million asset that produced $40,000 of positive cash flow a year while I waited for appreciation. 

39 months later, I sold the property $5.2 million resulting in a total profit before taxes of $3.7 million. That's a 10X return.

$350,000 Down     $1,950,000

Sold                         $5,200,000

Payoff Debt            $1,600,000

Remaining              $3,600,000

Cash Flow               $130,000

__________________________

$350,000 turned into $3,730,000

Today I oversee 7,068 units with a total of $1.5 Billion AUM.

Moral of the story......

To create wealth you can't just score once, you must be able to repeat it (this is the power of scaling).

-GC

Just remember, while fewer units would appear easier to buy, they are harder to keep long term and much more difficult to make money on. 

Why?

Because fewer units reduce your economics of scale and will never allow the property to produce enough income to warrant the work involved. 

What do Walmart, Amazon, Facebook, Coca-Cola, Sprint and AT&T have in common?

They have scale. The sell lots of units every day, not just a few. 

In real estate, the fewer the doors the easier it may be to buy and the harder it is to make money. 

-GC