Best way to build your net worth in RE

If you're trying to get into the hundreds of millions in net worth through real estate, how do you go about doing this? I was looking at a real estate companies financials today and saw that the owner had like 7 million in equity, and then there was non-controlling interest equity around 50 million. To be honest, based on these guys portfolio and development activity I was surprised the owner only had 7 million.

Anyone know anyone worth over a 100 million and how did they go about achieving that. I think you start off as a merchant builder to build up equity and then hold back into a large portfolio or just get good at raising funds and performing valued add but I don't know I'm young and still trying to figure out how this business works.

 

They could be in multiple different deals and across different asset classes (equities and other private investments). But a lot of people make their money through promote. For instance, if you have $7m out of $50m in total equity contribution. If you're a GP and you beat you promote hurdles, you're going to get paid more (pending on how well you do against the promotes).

 

I've actually been wondering this as well... You look at the biggest brand name real estate guys like Trump, Ross, Zell, Gray, Sternlicht etc. I think the common denominator here is that they all are incredibly smart and take on a large amount of risk. You can't expect to find that kind of success managing duplexes and using 1031 Exchanges.

Look at Trump for instance... How market demand focused was he? His rational was if I brand it correctly and I make it big the demand will follow. Incredibly risky.

I think the biggest obstacle is funding $100M+ projects early. At what age do you find the sweet spot where credibility and experience intersect without getting too late of a start.

 
Mark Queban:
Look at Trump for instance... How market demand focused was he? His rational was if I brand it correctly and I make it big the demand will follow. Incredibly risky.

Trump also makes a ton of money through branding, not necessarily all real estate.

Commercial Real Estate Developer
 

Keep in mind the JV play is about booking deals and getting AUM. If you have 100% interest in the management company managing those assets, that might actually be your biggest income producer.

I have a few $100mil+ clients. These guys started with bread and butter. Class C 5000sqft strip malls in high traffic areas. And yes, 4 unit deals as their first MF deal. They didn't try to get rich or hit any homeruns on their first deals.

They also live very modestly even today.

 

This is consistent with my experience. The most successful people I know play the long game, and don't go all-in on single projects. I'm not saying that highly successful people don't take risk. Obviously, there's always a story about some developer risking it all on some emerging-neighborhood-master-plan. But the folks that quietly build tremendous fortunes tend to do the following:

  1. They protect their downside. Don't bet it all on one deal, and don't subsidize people you can't control.
  2. They diversify their equity. This is part of #1.
  3. They don't diversify their fee and fixed income streams. We all like to talk about risk premium in real estate. No one is good at everything. The smart people focus on what they are good at; they manage the type of risk where they can reap the biggest reward. Then, to go back to #2, they invest GP equity in deals that they shouldn't be managing, and work with sponsors who are more capable.

When I talk to young CRE people, I hear tons of really, really dumb investment strategies. Guys and gals who think they are RE geniuses because they spent a few years at CBRE or JLL but have all of their savings in tech stocks. People in their late 20's hoarding cash for 'the big one', the monster deal that will make them rich. They should be focused on building an emergency fund (protect your downside), a reasonable retirement fund (protect your downside), and gaining the critical project experience that will enable them to make more money over the course of their careers (focus on what you're good at, play the long game).

 

So hypothetically, if you had say $250k in liquid assets would you invest as a LP with $100k LP with one company that buys office and then take the other $150k and put it with a MF project as another LP? Is that the kind of diversification you are talking about? Or spread it out among stocks, mutual funds, and real estate?

If misery loves company, what does success love?
 

I will keep this very short- I suggest reading several books from people who actually have very high net worths. I really found The Contrarian Playbook by Manny Khoshbin to be a great read. Google him, what he overcame, and what he does. I’ve even met him in Newport Beach- he is the real deal and a very humble and cool guy. Gave me great advice to just work, work, and work like nobody does. Good luck to you. *

  1. *

“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.” - Nassim Taleb
 

I have a few clients who have made $50 Million + and all of them bought at the beginning of the cycle and cashed out investors with an Equity multiple Cap. They hit everything exactly perfectly. They mostly bought and turned RS properties in Williamsburg and Harlem at just the right time and cashed out there investors with Re-financing. I recently had a client's Multifamily buildings for sale and all the offers came in more than twice what they paid for it a year ago. They converted all the units to free market, Re- tenanted the retail and renovated the property. It was like a 3.5X equity multiple in 13 months

 
Best Response

I’m trying but here’s what I’ve observed about building net worth in CRE. Odog’s observations:

  • you need to get in on the promote since you won’t have much initial capital to contribute but I don’t think you necessarily need an exit, you do need a “banker” partner who can help you monetize your minority stakes into new deals, without you having to sell the property. Particularly someone high net worth who like working with you. You help the house make money and then you play with the houses chips. Most high net worth want to hold long term. The merchant build strategy you all are thinking about this cycle and the associated promotes are fraught with risk.

  • own part of the platform. This is where I think CRE is a great wealth generator. People who were part of the early formation of the firm own part of the holding company shares. Future subsequent deals become a pipeline. You hire more and then give some promote / carried interest on the project specific deals, while the platform also takes a stake. Be part of the platform. Many of the National real estate development companies are like this, with the early founders were spin offs from Trammel Crow, Security Capital, etc, and are now worth over $100mm. There is risk doing this, but talk about 90% being in the right place at the right time. Many people are competent enough, but don’t have or see the opportunity. Timing is a big deal.

  • luck, access, skill, team. Try work with older, more experienced people. In this industry, it helps. Always try to bring something unique, and aim to be multidimensional. Like a finance guy/gal with interior design/branding expertise or intuition. Also, avoid crazy, stupid partners. So so deals with great partners can be ok.

  • start smaller first deal (less than $3mm. 30% of a 15% lev yield on a $3mm total cap deal assuming 70% LTC might be able to get you above poverty). I had always been a big project person, always trying to get that Big first one, when really we just need a project that could cash flow about 50-75% of your total comp working for someone else for you to string along some wins to go full independent. Meanwhile I try to raise $16mm and that’s harder to accomplish early on, so small wins add up.

  • lastly, create new asset classes. Wall Street and traditional REPE and allocators invest in cash flow and are followers to innovation. They will eventually catch on. You want to make bank? Create new fresh cash flow and make it investable while maintaining some barriers to entry or win on scale and speed to market. For example, marijuana CRE, still with long tail. Self storage. Limited service hotels. Data centers. WeWork. Etc etc

  • seek billionaire or the like as friends. Often times, help wealthy people when they are in trouble. That’s your in. Be competent, trust worthy, and likable. I’m still waiting to see if this works.

Sam Zell’s book “Am I being too subtle” is a good read. Early first wins including family support. Found a billionaire backer. Created new asset classes (I believe he helped pioneer the REIT).

Lastly, it might not be you with all the glory. You might be the late bloomer, like me. But this business could be intergenerational. That’s a big helping hand, even to Mavericks like Zell. When I was an analyst/associate, about 50% of the people at my level had family ties to RE or wealth, in fact all of my partners. That is the long game. The dynasty game. Therefore, have a good appreciation for history and treat people with respect because you never know.

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

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