All Forum Posts by: Mark Hulsey

While reading an article on The Motley Fool last weekend about Warren Buffett’s sage advice on investing in the stock market got me thinking. Like most investors, I’m always comparing “the market” to real estate investments. There are strong arguments to be made for each investment path, but I’m a real estate guy. However, that’s not what I want to talk about today.

Instead, Mr. Buffett’s words of wisdom made me wonder if they applied to real estate investing. Fundamental business principles are often relevant to many different industries. We can learn a lot by remaining open-minded to all business growth ideas. It’s too easy to get caught in same small circle of thinking – just like in life.

A few quotes from Mr. Buffett to consider as we apply them to real estate investing:

“Our goal is more modest: we simply attempt to be fearful when others are greedy and greedy when others are fearful.”

This aphorism is a natural for those of us with an inherent contrarian attitude. If everyone is heading in one direction, the contrarian is heading in the opposite. His quote about greed and fear brought me back to the irrational exuberance regarding real estate leading up to the Great Recession.

My fellow real estate pros would often ask me questions like, “…but Mark, the numbers just don’t make sense on this property my investor is looking at! What am I missing?” My answer was nearly always the same, “Nothing.” The numbers work or they don’t. Sure, there can be investment components that sweeten the deal that are not obvious, but when you need to dig hard to find them, it’s probably a lousy investment.

In those days, the herd was heading to the cliff. Sadly, many real estate investors took a hard fall – often life-changing. Some were new, but many seasoned. Many were very smart and plenty were not. Investment failure spanned the gamut. Easy money was just too enticing. While leverage is one of the principles of real estate investing that makes it so incredible, over-leverage is a killer. Remember, folks tapping into their home equity like an ATM spitting out cash, investors buying multifamily properties on stated-income programs, or throwing money at half-baked, residential developments that fell flat on their face?

Clearly, the many months leading up the Great Recession was the time to heed Mr. Buffett’s wise words about greed. The cats sitting on the sidelines holding tight to their cash won that game. Those cash-laden vultures swooped in to get some deals-of-a-lifetime upon the magnificent market crash. While the masses were thinking of greed with their unabashed enthusiasm, they sensed fear. Their instinctive investment senses served them well.

“Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price.”

This quote resonates with me. I look at every income producing property (asset) just like a small business in and of itself. Each small business needs love & care to thrive and most real estate investments require the same. It helps to know this right out of the gate instead of learning the lesson the hard way.

So, what’s a good correlation to Mr. Buffett’s statement relative to real estate investing? How about a good building in an outstanding location at a sensible price? It plays perfectly into the classic real estate axiom, “Location, location, location!” This overused cliché is one of the most important factors for all real estate anywhere in the world. It was true 50 years ago and will be true 50 years from now. The building itself may not be an outstanding property, but the location should be.

When an investor “buys location,” they have mitigated the investment risk substantially from the very beginning. Location always wins – right? It does, but only at a sensible price. That’s the kicker. That’s why every investor rightly asks, “What’s a sensible price?” Fortunately, real estate valuation methodologies are well defined and there’s ample sales data to quantify any acquisition these days.

Buying decent properties in solid locations at a sensible price is pretty straight forward. Then, we let time, leverage, and tax benefits do their thing. Bargain prices are not always necessary even though we know we make our money on-the-buy. I’ve witnessed many wannabe investors cursed with “analysis-paralysis.” It’s fine to be conservative in your investment strategy, but often it stops many in their tracks. I can’t tell you how many times in my career I’ve endured someone telling me, “Mark, I could have bought that property 12 years ago for $750,000. I don’t know how it could be worth so much today!” That’s what appreciation-over-time is all about.

“Risk comes from not knowing what we’re doing.”

This classic quote from Mr. Buffett has been recited thousands of time. But, these simple words should not be taken lightly when it comes to real estate investments. There’s huge value in understanding the risk-versus-knowing connection. It’s why investors stick with what they know. It’s why investors surround themselves with very smart & experienced advisors. It’s why investors understand that due diligence is the name of the game.

I’m dumbfounded by the number of situations we step into where an owner purchased a commercial property and did not understand the risk. They did not know what they were doing. Their advisors did not either. Simple stuff, like buying a commercial building to use for something that is not zoned for that permitted use – even with a CUP. Or, not realizing that upon a sale, the property taxes are going to zoom through the roof and ruin the return on investment. How about factoring the true cost of vacancy, reserves, or tenant improvements? The list goes on and on. Real estate investing is a complicated and costly game.

How about this? Like the doctor who must deal with the patient who perfectly self-diagnoses per their Google search. Suddenly, they’re the medical expert. Maybe it’s the gentlemen that’s owned three or four houses, so he knows all he needs to about real estate or worst yet, commercial real estate. Seriously, we see it far too often. In today’s culture, everyone’s an expert at everything, right? Most investment risk comes from not knowing what we’re doing – plain & simple.

There’s a reason many people often half-joke that the older they get, the less they know. It has nothing to do with their knowing. It has everything to do with their wisdom. They are finally old enough & wise enough to know there’s just too much to know. That’s why a great real-property attorney, CPA, banker, or real estate broker is worth their weight in gold. They not only protect their client, but they nearly eliminate the risk by simply knowing what they are doing. Experience indeed pays.

Thank you, Mr. Buffett. Your words of wisdom are truly timeless, even for real estate investing.

Property Owner: “Give me one good reason to hire a commercial broker? I don’t know that you do anything I can’t do!”

Commercial Broker: “Hmmm. Great question. What do we really do? Well…”

We sort through all commercial data

We go in the dark vacant buildings

We build the Rent Roll

We figure out the disposition value

We write the PA

We wait for the Buyer who doesn’t show up

We calculate the Cap Rate

We negotiate the best terms

We verify rentable vs usable SF

We pick up the earnest deposit check

We meet the photo/video guy

We pay the photo video guy

We build the Pro Forma

We tour in -20 degrees

We over-pay for the commercial data

We work with the Lawyers

We meet the Inspector at the property

We write the LOI

We redline the LOI

We see the rat in the dry toilet

We market the property everywhere

We pay all marketing costs

We make the drone videos

We talk to all of the nonqualified buyers

We draft the Cancellation to PA

We order the Survey

We send the listing to all commercial brokers

We talk to the City

We get all the phone calls

We return all the phone calls

We pay for the For Sale signs

We install the For Sale Signs

We handle all emails

We open escrow

We write the second PA

We write the third PA

We pick up the Floor Plans

We draft the Amendment

We target buyers in other states

We save the deal

We get the Estoppel Certificates

We explain SBA financing

We review the Leases

We negotiate lender consent

We draft the 2nd Amendment

We show the property when you’re on vacation

We build the FF&E list

We verify inventory pre-closing

We handle the final walkthrough

We update the snowy pictures

We provide the tenant contractor names

We give the buyer our banker contacts

We meet the Appraiser

We challenge the appraisal

We study the P&L

We review the Balance Sheet

We handle all property tours

We verify the Certificate of Occupancy

We send the NDA

We structure the deal

We verify the CD terms

We calculate cash-on-cash return

We call the tenants before the tour

We pay for the premium listings

We order the CIC docs

We challenge the Tax Assessor

We talk to the Licensing Department

We get the Roofer access

We pay for the advertising

We update the As-Built plans

We meet with the Watershed District

We order the Wetland Delineation

We call FEMA

We call FEMA again

We verify Soil Borings

We coordinate the Septic Inspection

We talk to cops when the alarm goes off

We talk to the Lender about the Buyer

We check on all city permits pulled

We run the 5 year Discounted Cash-Flow

We email the property to our 26,000 contacts

We go to the Zoning Board meeting

We order the Phase I Environmental

We study & challenge the Phase I Environmental

We order the Phase I I Environmental

We process the Cancellation of PA

We talk to the angry neighbor

We talk to the nosey neighbor

We work on the encroachment issue

We deal with the agent at night

We explain the market trends

We order the Title Commitment

We review the Title Commitment

We pay for the property postcards

We pay to mail the property postcards

We slip on the ice after the tour

We build the 25 page OM

We verify the Settlement Statement

We show the damp moldy basement

We confirm the wire transfer

We make our Sellers a lot more money!

Property Owner: “Okay. Well, I’m still interviewing brokers. I’ll get back to you once I decide. “

Commercial Broker: “No problem. I’ll get docs ready. Talk to you next week.”

I’m going to cut to the chase. Here’s the takeaway: YOU MUST MANAGE THE MANAGER! Why? Two reasons. First, the experience of doing it yourself is absolutely invaluable. What you’ll learn from doing, instead of hearing about it, will have a big impact on your long-term success and sustainability. Second, if you do not have any first-hand knowledge of property management and hire a manager or company, how in the world will you know how to manage the manager?