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Wealth Through Real Estate

Snake

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Hi Everyone,

First of all, I'd like to personally thanks all the incredible contributors here which make the forum such a valuable place.
Special thanks to @SteveO, @JScott, @MJ DeMarco, @biophase and @Vigilante - thanks to your posts, I get started in entrepreneurship few years ago, and I will never be able to thank you enough for that.

Here are my thoughts, on which I'd love to pick your brain..

- I started entrepreneurship with online businesses. Especially e-commerce, thanks to which I make a living today, with few brands that I own.
- During the journey, I found to be very true the following adage "It takes money to make money".
- I found way easier to borrow money for Real Estate projects, rather than for inventory financing , cash-flow needs or acquisitions.
The reason is simple: A business can lose everything overnight, which is not the case with RE.

Consequently, it seems to have a lot more really high net worth individuals in the RE development field rather than the e-commerce space.

I know that @biophase has experience in both industries, I'd love to have your opinion about it.

Have a nice day!

Snake

Tldr: I found way easier to make money with money, and lending entities are way more at ease to lend for RE projects rather than online ones.
 

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MJ DeMarco

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A business can lose everything overnight, which is not the case with RE.
I disagree.

Both entities will be subject to macroeconomic downturns or cycles. Really depends on the type of business insofar as "how much" the impact would be. The only way a business can fold overnight is if they violate the control commandment, or are directly tied to whatever catastrophic event occurs; for example thousands of mortgage brokers went out of business during the last housing crisis.
 
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Snake

Snake

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I disagree.

Both entities will be subject to macroeconomic downturns or cycles. Really depends on the type of business insofar as "how much" the impact would be. The only way a business can fold overnight is if they violate the control commandment, or are directly tied to whatever catastrophic event occurs; for example thousands of mortgage brokers went out of business during the last housing crisis.
Hi @MJ DeMarco ,

Thank you for your reply,

It's a very interesting reply.
I do agree that RE, as any businesses, are subject to macroeconomic cycles, whatever the field they're in.

You outline the advantages of online businesses in both of your books.
I can conservatively say that more than 80% of online businesses rely excessively on one company, being Google, Amazon, or Social Media.

It makes them very risky for any lenders.
Tell me if I'm wrong, but I believe that Limo was mainly reliant on Google.

How faster would have you been if you had access to lenders with the same ease that RE developers have ?
Would you say that lenders lend money for small businesses with the same ease that they lease for RE or construction projects ?

Thank you for your opinion, and all the knowledge you share, and have a nice day!

Snake
 

JScott

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I do agree that RE, as any businesses, are subject to macroeconomic cycles, whatever the field they're in.

You outline the advantages of online businesses in both of your books.
Businesses and Real Estate are both potentially cash flowing assets that can drive wealth, but they have very different "profiles" when it comes to risk and value.

Real estate tends to be less risky in the sense that a real estate asset will likely never be worthless, while a business certainly can be. But, the value of real estate is going to be much more uniform over time, regardless of your investing ability and your actions. You don't have much control over the value of real estate, other than your ability to put it to the highest and best use. It's low risk because you can't easily screw it up; but, this lack of ability to screw it up means you also don't have much opportunity to increase value based on your actions.

Businesses, on the other hand, are infinitely scalable based on your skills and actions. They are high risk (they can go to zero), but you have full control, allowing you to greatly increase their cash flow and value.

Depending on your goals, skills, experience and host of other factors, real estate may be a better choice, businesses may be a better choice, or perhaps a combination of the two are the best choice.
 

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Why not both? Use your business to create excess cash and invest in as passive RE as possible or you can use RE to earn the money to invest in starting your business...

There are a ton of ways to go with RE such as buy and hold, rentals, SFH, MF, flips, wholesaling, private money lender, etc...
 

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That's interesting.
RE is the only field on which you can (easily) fully finance your project via the banks.

It makes a wonderful leverage to create wealth.
People always say this, but it's not really true because the debt produces anti-leverage.

Unless you're running some kind of real estate syndication, you aren't really using a lot of leverage.

Most RE Investors are getting 15% ROI.

Great RE Investors are getting 20% ROI.

Again, I'm not talking about syndications.

So, why not save your time and invest in a REIT instead?

REITs have more diversification, less risk, and they're passive.
 

JScott

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People always say this, but it's not really true because the debt produces anti-leverage.
I don't understand this comment...

If the loan constant for your loan is lower than the capitalization rate of the investment, your leverage is positive, and you'll boost your returns versus purchasing the asset unleveraged.

For a typical 20-year amortized real estate investment loan these days, you'll have a loan constant of somewhere around 6% -- in other words, if your investment is generating an unleveraged cash-on-cash return (cap rate) of greater than 6%, that debt is going to boost your leveraged cash-on-cash return above the cap rate.

That's why they call it leverage... ;)
 

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Hi Everyone,

First of all, I'd like to personally thanks all the incredible contributors here which make the forum such a valuable place.
Special thanks to @SteveO, @JScott, @MJ DeMarco, @biophase and @Vigilante - thanks to your posts, I get started in entrepreneurship few years ago, and I will never be able to thank you enough for that.

Here are my thoughts, on which I'd love to pick your brain..

- I started entrepreneurship with online businesses. Especially e-commerce, thanks to which I make a living today, with few brands that I own.
- During the journey, I found to be very true the following adage "It takes money to make money".
- I found way easier to borrow money for Real Estate projects, rather than for inventory financing , cash-flow needs or acquisitions.
The reason is simple: A business can lose everything overnight, which is not the case with RE.

Consequently, it seems to have a lot more really high net worth individuals in the RE development field rather than the e-commerce space.

I know that @biophase has experience in both industries, I'd love to have your opinion about it.

Have a nice day!

Snake

Tldr: I found way easier to make money with money, and lending entities are way more at ease to lend for RE projects rather than online ones.
Are you basing this whole thing on the ease to borrow money?

Are you saying that it is easier to borrow money to build houses and buildings than to get more inventory?

I've never developed real estate, but I would think that getting a building loan isn't that easy either.

You have to look at the risk that a bank is taking. With building a home, they control the funds and make sure that you are building an asset that has value in case you default.

With inventory, it's very hard for them to value 1,000,000 Iphone cases a year from now. They certainly will have a tougher time selling them if you default.

For me the biggest difference in real estate is that it is a stand alone project that doesn't build upon its past. I talked to many people about this.

If I build a 3 flat for $400,000 and sell all 3 units for $1,000,000. I've made $600,000 in the course of 2 years. But then I'm starting all over again with another project.

If I spend that time building a business for $400,000 and it makes $100,000. In year 3 I've still got a business that makes $100,000. My effort in year 3 is compounding my business growth.

This is why I'd rather build businesses and take that money and purchase real estate with it.

To me it's basically selling milk and buying more cows vs. raising cows and selling them.
 

Rawseed

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if your investment is generating an unleveraged cash-on-cash return (cap rate) of greater than 6%, that debt is going to boost your leveraged cash-on-cash return above the cap rate.
That's the exact point.

You obviously understand RE Investing much more than a novice.

It's only good leverage if your unleveraged COC return is greater than the loan rate.

That's a big IF.

How many novice investors actually do this basic calculation.

I call it basic because IRR is a better way to assess this.

When most people discuss RE they don't acknowledge that leverage works both ways.
 

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Rawseed

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if your investment is generating an unleveraged cash-on-cash return (cap rate) of greater than 6%, that debt is going to boost your leveraged cash-on-cash return above the cap rate.
On a $300,000, I need to have a monthly NOI of $1,500 to get an unleveraged COC of 6%.

Assuming 33% operating expenses, that's a rent of $2,250 a month.
Assuming 50% operating expenses, that's a rent of $3,000 a month.

So, to use the 'all powerful real estate leverage', my rents need to be higher than those numbers above. And, I can't have any vacancies.

Or I could just put my money in a REIT.
 

JScott

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On a $300,000, I need to have a monthly NOI of $1,500 to get an unleveraged COC of 6%.
.
.
.
Assuming 50% operating expenses, that's a rent of $3,000 a month.
Yup, we often refer to that as the 1% Rule -- getting 1% of the investment in monthly rent, and assuming a 50% expense ratio (including vacancy and capex), your unleveraged return (cap rate) is going to be 6%.

These days, if you can get a 1% deal or better, you should be able to generate positive leverage with a typical bank loan (portfolio or conforming).

While I typically shoot for at least 10% unleveraged returns on my real estate, my rule of thumb to others these days is that you need to hit at least the 1% Rule for leverage to make sense from the standpoint of boosting ROI.
 

JScott

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I call it basic because IRR is a better way to assess this.
The big problem with IRR and novice investors is that IRR requires the ability to forecast the exit strategy and to also predict the conditions under which that exit strategy will occur -- two things that even most experienced investors can't do... :rofl:

Though, I agree that when I'm raising money and I have equity investors, I'll always focus on IRR, as that's what my investors really care about...
 

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Yup, we often refer to that as the 1% Rule -- getting 1% of the investment in monthly rent, and assuming a 50% expense ratio (including vacancy and capex), your unleveraged return (cap rate) is going to be 6%.
Thanks for explaining that.

I've read about the 1% rule before, but never really took the time to understand the assumptions behind it.
 

Rawseed

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@JScott

You're obviously a pro and probably killing it.

But, for the average joe like me, a Vanguard REIT is probably the way to go, if you want to be involved in real estate.


Average annual returns of 13.41% for 10 years. Completely passive.
 

JScott

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But, for the average joe like me, a Vanguard REIT is probably the way to go, if you want to be involved in real estate.


Average annual returns of 13.41% for 10 years. Completely passive.
Just curious why you picked 10 years?

Had you picked 12 years as your horizon, the returns would have been 3.6%.
Had you invested on February 7, 2007, your returns would be 0.7%.
Had you picked all the way back to the beginning of the fund (November 2001), the returns would have been 9.3%.
And my guess is that if the fund had started a few months earlier (before 9/11/2001), the returns would have been in the 5-7% range.

That's the reason I don't like REITs or indexed funds, in general. Lack of control. You're completely at the whim of the time period you happened to invest, and if you had bad timing, you could spend the rest of your life with sub-optimal returns on that investment.

Not saying REITs are bad place to invest if you have no investing expertise, but for those who want to maximize their investing gains, I recommend learning about investments where you have some control and sticking with those.

Just my $.02...
 

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@JScott

I’m on my phone. So, I can’t do the research.

But, my guess is that regardless of whatever the REITs returns, they are completely inline with what the average residential real estate investor has made over corresponding time frames.

I stand by my hypothesis that:

ROI of a good REIT + the value of time saved is greater the ROI of pure debt-based residential real estate investing.

Your situation is obviously different. You seem to be equity-based. Most RE investors don’t have that luxury.
 

Rawseed

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Had you picked 12 years as your horizon, the returns would have been 3.6%.
Had you invested on February 7, 2007, your returns would be 0.7%.
And I’m pretty sure that the bursting housing bubble during that time affected most RE investors, including the REITs.

So, those returns are typical of most RE investors.

You’re right. With REITs you lose control.

With debt-based residential real estate investing you have less diversification, less liquidity, less time, and more stress. The time and stress is assuming you didn’t hire a real estate management company.
 

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ROI of a good REIT + the value of time saved is greater the ROI of pure debt-based residential real estate investing.
This comes down to control. If you have a few SFH, you know the market, their rents, the maintenance.

If you own shares of a REIT, they could have just invested in a new condo skyscraper in Detroit. Who knows?

I personally own a bunch of SFH, and I go onto zillow every once in a while and see what neighbors are selling for. I know what my PM is asking for rent. I know the ages of my appliances. I know where I stand all the time.

REITs, just like owning shares in any stock, can be one bad move away from tanking. You just don't know what the people running it are really doing.

It's because of this, that I control all my own investments.

I would argue that the ROI on my REI does better than most REITs just because I'm picky about what I buy.

And I want to add that once you get a good PM, it's 99% passive. I have to make at most 3-4 decisions a year on my real estate. Most of the time it's approving a repair estimate that's over $500.
 

JScott

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This comes down to control. If you have a few SFH, you know the market, their rents, the maintenance.

If you own shares of a REIT, they could have just invested in a new condo skyscraper in Detroit. Who knows?

I personally own a bunch of SFH, and I go onto zillow every once in a while and see what neighbors are selling for. I know what my PM is asking for rent. I know the ages of my appliances. I know where I stand all the time.

REITs, just like owning shares in any stock, can be one bad move away from tanking. You just don't know what the people running it are really doing.

It's because of this, that I control all my own investments.

I would argue that the ROI on my REI does better than most REITs just because I'm picky about what I buy.

And I want to add that once you get a good PM, it's 99% passive. I have to make at most 3-4 decisions a year on my real estate. Most of the time it's approving a repair estimate that's over $500.

^^^ This...
 

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Snake

Snake

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Thank you for your thoughts guys, that's a very interesting discussion.

Are you basing this whole thing on the ease to borrow money?

Are you saying that it is easier to borrow money to build houses and buildings than to get more inventory?

I've never developed real estate, but I would think that getting a building loan isn't that easy either.

You have to look at the risk that a bank is taking. With building a home, they control the funds and make sure that you are building an asset that has value in case you default.

With inventory, it's very hard for them to value 1,000,000 Iphone cases a year from now. They certainly will have a tougher time selling them if you default.

For me the biggest difference in real estate is that it is a stand alone project that doesn't build upon its past. I talked to many people about this.

If I build a 3 flat for $400,000 and sell all 3 units for $1,000,000. I've made $600,000 in the course of 2 years. But then I'm starting all over again with another project.

If I spend that time building a business for $400,000 and it makes $100,000. In year 3 I've still got a business that makes $100,000. My effort in year 3 is compounding my business growth.

This is why I'd rather build businesses and take that money and purchase real estate with it.

To me it's basically selling milk and buying more cows vs. raising cows and selling them.
Thank you for your reflexion @biophase.

I indeed base the whole reflexion on the ease to borrow money, in case you have no/very little personal cash to build your firsts ventures.

Indeed, it's a lot easier to make 1m with 1m, making a 100% ROI, than making 1m boostraping a business with $1000, or even $10,000, making a 10,000% ROI.

As a sake of example, in EU, for a development project, banks usually ask for about 10% of personal cash in the deal. They finance the 90% and back them up on the building, which they cannot do with a business loan.

You outline a very good point about the value of the company, which I haven't thought about. Thank you for that! There's still the issue of: How do you raise the $400,000 for your first venture ? I hardly see any lenders to accept to lend that sum for the development of an e-commerce business.

That said, the average personal cash for a LBO asked by the lenders is about 30% in the EU.

Thank you for your thought guys!

Snake
 

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I understand where you're coming from with the reduced risk of real estate and ease of leverage. However, the competition for real estate is immense, and not everyone is thinking rationally from an investment standpoint, especially if you're in the SFR space. You're competing with anyone who can afford to buy a house, which is a lot of people, and they are more concerned about the schools, feel of the house, etc. than the IRR.

The good news is that when you have an economic downswing, those people are selling when they shouldn't be, so you can scoop up more product. But with a non-real estate business, you likely have less competition and thus more control over your destiny.
 

tpuffer

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In my experience investing I've found that if you find a good deal that the money will be there. What I mean by that is that you can partner with someone who has capital and net worth to provide the downpayment and to help acquire a loan.

Doing this does require putting in the work to know how to analyze a good deal and then find someone to partner with you - definitely not easy. For those who don't want to put in that work then they are better off investing in a REIT most likely.
 

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