Making it in Real Estate

1. Start Small, Grow Big: Real Estate as a Side Hustle

a considerable majority of developers might have been far better off, financially and emotionally, limiting their real estate pursuits to an avocation.

Part-time Power. Real estate offers a unique opportunity to build wealth on the side, without quitting your day job. Unlike many other part-time ventures, real estate allows your capital to work for you, not just your time. This approach provides a safety net and reduces the pressure of immediate financial success.

• Start with a small, manageable property, like a fixer-upper.
• Gradually expand your portfolio over time.
• Use the income to pay down mortgages and build equity.

Long-term Vision. Real estate is a slow-and-steady game, not a get-rich-quick scheme. By taking a long-term view, you can build a secure financial future without the risks of jumping into full-time development too soon. This approach allows you to learn the ropes, make mistakes on a smaller scale, and build a solid foundation for future growth.

Financial Freedom. The goal is to create a passive income stream that eventually allows you to retire comfortably. This can be achieved by acquiring properties, fixing them up, and either selling them for a profit or holding them for long-term cash flow. This approach provides a path to financial independence without the need to rely solely on a corporate pension.

2. Specialize to Thrive: Focus on a Niche

if you don’t specialize, your specialty will be failure.

Niche Expertise. In real estate, specialization is crucial for success. Trying to be a jack-of-all-trades will likely lead to mediocrity. Instead, focus on a specific type of property, location, or market segment. This allows you to develop deep expertise and a competitive edge.

• Choose a niche that aligns with your interests and skills.
• Become an expert in your chosen area.
• Focus on a specific geographic area.

Competitive Advantage. Specialization allows you to compete effectively with larger, better-known developers. By focusing on a narrow niche, you can leverage local knowledge and act quickly, often outmaneuvering larger firms with superior capital. This approach allows you to become a go-to expert in your chosen area.

Strategic Focus. Specialization also helps you avoid distractions and stay focused on your goals. By limiting your scope, you can concentrate your resources and efforts on the areas where you can achieve the greatest success. This approach allows you to build a sustainable and profitable business.

3. Relationships Matter: Brokers are Your Allies

In real estate, a bromance is your friendship with your broker (male or female), presumably platonic but deep nonetheless.

Broker as Partner. Brokers are not just salespeople; they are valuable partners in your real estate journey. Building strong relationships with brokers can provide access to off-market deals and valuable market insights. Treat them with respect and fairness, and they will become your allies.

• Pay full commissions to listing brokers.
• Treat your brokers as friends and colleagues.
• Spend quality time with your favored brokers.

Deal Flow. Brokers are often the first to know about new opportunities. By cultivating strong relationships, you can gain access to deals that others may miss. This can give you a significant advantage in a competitive market.

Information Advantage. Brokers have access to market data and insights that can be invaluable in making informed decisions. By working closely with them, you can gain a better understanding of market trends and identify potential opportunities. This approach allows you to make smarter investment decisions.

4. Size Matters: Manage Risk with Deal Size

If it’s axiomatic that sooner or later you will lose money in real estate—it is—then our 64,000 percent increase in deal size was the equivalent of sitting down at a Vegas blackjack table and letting our winnings ride hand after hand after hand.

Moderate Growth. Avoid the temptation to jump into large deals too quickly. Start with smaller projects and gradually increase your deal size as you gain experience and build your capital base. This approach helps you manage risk and avoid catastrophic losses.

• Start with deals that are manageable for your current resources.
• Gradually increase your deal size as you gain experience.
• Avoid over-leveraging your investments.

Risk Management. The size of your deals should be proportionate to your portfolio. If you lose money on a deal, it should be a setback, not a career-ending event. By managing your deal size, you can protect yourself from the devastating effects of a single bad investment.

Engaging Projects. Choose deals that fully engage you while allowing you to fight another day if they go bad. Avoid deals that are too small, as they may not command your full attention. The goal is to find a balance between risk and reward.

5. Buy Right: Motivated Sellers are Key

all happy deals are alike—they start with a motivated seller.

Motivated Sellers. The best deals start with motivated sellers. Look for sellers who have a compelling reason to sell, such as death, divorce, or financial distress. Avoid chasing reluctant sellers who are not serious about selling.

• Ask the seller, "Why are you selling?"
• Focus on sellers with a genuine need to sell.
• Avoid sellers who are unrealistic about pricing.

Market Timing. The best time to find motivated sellers is when no one else is buying. Be patient and wait for opportunities to arise. Don't be afraid to walk away from deals that don't make sense.

• Buy when there's "blood in the streets."
• Be disciplined and sit out when prices are too high.
• Be prepared to walk away from bad deals.

Due Diligence. Be thorough in your due diligence, especially when dealing with motivated sellers. Insist on written agreements from tenants and verify all lease terms. Don't let a seller rush you into a deal without proper investigation.

6. Yield Chasing is a Trap: Avoid Overpaying

cheating a greedy one is a piece of cake, and no one swings at this pitch unless he’s desperately chasing yield.

Avoid the Herd. Don't get caught up in the hype of a hot market. Avoid chasing high yields at any cost. Be disciplined and stick to your investment criteria. Don't let greed cloud your judgment.

• Be wary of properties priced at all-time highs.
• Avoid the temptation to overpay for "core" assets.
• Be skeptical of overly optimistic projections.

Realistic Returns. Focus on realistic returns based on current market conditions. Don't rely on overly optimistic projections of future growth. Be prepared to walk away from deals that don't meet your criteria.

• Focus on cash flow, not just appreciation.
• Be wary of deals that rely on future rent increases.
• Don't be afraid to miss out on a deal.

Long-Term Value. Focus on creating long-term value rather than chasing short-term gains. Look for properties with potential for improvement and growth. Don't get caught up in the hype of the moment.

7. Cash Flow is King: Net Worth is a Mirage

Cash flow is real estate’s real value.

Cash Flow Focus. In real estate, cash flow is the most important metric. Don't get caught up in the illusion of net worth. Focus on generating a stable and recurring income stream.

• Prioritize properties with strong cash flow.
• Don't be fooled by inflated net worth figures.
• Focus on the income a property generates.

Financial Statements. Financial statements can be misleading, especially in real estate. They often fail to account for the illiquidity of assets and the tax implications of selling. Focus on the actual cash a property generates, not its theoretical value.

• Be skeptical of financial statements.
• Focus on the actual cash flow a property generates.
• Understand the tax implications of your investments.

Real Value. Real estate's true value lies in its ability to generate consistent cash flow. A solid portfolio of properties with strong cash flow can provide a secure financial future. This is more important than a high net worth that may be difficult to access.

8. Partnerships: Choose Wisely, Control is Key

If you knock the ball out of the park and believe you could have done so without them, your partners will prove inordinately expensive.

Strategic Partnerships. Financial partners are necessary in the beginning, but as you gain experience, consider whether you want them long-term. While they can provide capital, they can also limit your control and eat into your profits.

• Start with family and friends' money.
• Be wary of institutional money.
• Consider the trade-offs between capital and control.

Control is Key. With no outside partners, you control your own destiny. You can keep a property as long as you like or sell it overnight on a hunch. You avoid quarterly reports and semiannual trips to explain the fate of your partner’s money.

• Avoid the risk of having someone you have never met change your life.
• You can avoid the risk of having someone you have never met change your life.
• You can avoid the risk of having someone you have never met change your life.

Long-Term Vision. Consider your long-term goals when deciding whether to partner. If you want to build a large company, partnerships may be necessary. If you want more control and flexibility, consider self-funding.

9. The NTM: Know Your Net to Me

“the Net to Me.” Phrased as a question, this is the most powerful tool in your shed.

The Ultimate Question. Before you take a job, enter a partnership, or pursue a deal, ask yourself, "What's the net to me?" This simple question can save you from countless financial disappointments. It forces you to consider all the factors that will affect your bottom line.

• Always ask, "What's the net to me?"
• Consider all the factors that will affect your bottom line.
• Avoid unpleasant financial surprises.

Beyond the Surface. Don't be fooled by impressive-sounding numbers. Dig deeper to understand how profits are actually distributed. Consider all the layers of partnerships and fees that may reduce your share.

• Understand how profits are distributed.
• Consider all the layers of partnerships and fees.
• Don't be fooled by impressive-sounding numbers.

Time is Money. Consider the time commitment required for a project. Calculate your hourly rate to ensure that the potential reward is worth the effort. Don't get caught up in projects that will take too long and yield too little.

10. Politics and Entitlements: Play the Game

If you can’t eat their food, drink their booze, take their money, and then vote against them, you’ve got no business being up here.

Political Savvy. Navigating the political landscape is crucial for success in real estate development. Understand the local political dynamics and build relationships with key decision-makers.

• Understand the local political dynamics.
• Build relationships with key decision-makers.
• Help politicians help you.

Community Engagement. Engage with the community and address their concerns. Build support for your project by demonstrating its benefits to the community.

• Meet with your opposition and compromise.
• Garner public support for your project.
• Be honest and keep your word.

Entitlement Process. Be prepared for a long and challenging entitlement process. Be patient and persistent, and don't give up easily. The best projects are often the most difficult to get approved.

11. Sell or Hold: Define Your Strategy

If you want to run a big development firm, become a merchant builder. If you want the luxury of deciding which deals to keep and slowly building your cash flow, consider investment building.

Merchant vs. Investor. Decide whether you want to be a merchant builder (sell everything upon completion) or an investment builder (hold for long-term cash flow). Each approach has its own advantages and disadvantages.

• Merchant builders focus on fees and sale proceeds.
• Investment builders focus on long-term cash flow.
• Choose the approach that aligns with your goals.

Economic Compulsion. If your return on cost is not significantly higher than the cap rate at which you can sell, you will be economically compelled to sell. Understand the economic forces that will drive your decisions.

• Understand the relationship between return on cost and cap rates.
• Be aware of the economic forces that will drive your decisions.
• Develop a clear exit strategy for each project.

Strategic Decisions. Choose carefully which properties to keep and which to sell. Consider the long-term potential of each property and its strategic value to your portfolio. Don't be afraid to sell properties that don't meet your long-term goals.

Last updated: January 19, 2025