Best Real Estate Investment? Buy the Building.

We didn’t want to write the post. But. This is going to be geared towards the real estate fanatics. As many people have noted, rich people practically *always* own real estate. Naturally, we also own real estate. We just don’t do it like most people.

Outline: 1) Overview of Private Equity Real Estate Transactions; 2) How to Spot a Good Value; 3) How Does it Actually Work?; 4) Rentals: Short-term, Long-term, Fees and Why We’re Against Hotels; 5) S-Corp and Exit Strategy

1) Overview of Private Equity Real Estate Transactions

Many people don’t know what Private Equity is, but our readers are elitist so they definitely know. Private Equity is simply the act of buying poorly run or broken down assets and fixing them.  No need to complicate the definition. If you want to add additional detail, the goal is to eventually sell the asset or take the company public (if we were doing this with a poorly run company with operational issues).

Reiteration. Since we are talking about Real Estate in this case, your goal is to find a broken down building, fix it, and sell it for a profit.

Structuring the Deal: There are only two real parties in the transaction: 1) Private Equity Firm and 2) the Investors. We don’t like complicating definitions or using finance lingo such as “consortium” so this keeps it clear and simple. You are either working for the private equity firm or you are an investor.

Investor: The investor supplies practically all of the cash for the deal. To keep things simple we’ll assume 100% of cash comes from investors. In return, the investors receive a *preferred* dividend. This means the investor is paid a dividend of ~6-10% (annually) paid out on a monthly, quarterly or semi-annual basis (after the ~1-2% of operating expenses are taken care of). What does this mean? If the Private Equity firm is not able to generate returns *above* the preferred dividend… They will make ZERO dollars in the form of dividends. In addition, when the real estate asset is sold, the investors will receive between ~40-60% of the upside in valuation. (Note: the two and twenty rule is for companies, not true for real estate… Yes there are always “exceptions”)

Private Equity Firm: The firm takes on the headache.  The Private Equity firm is not using their own money so they take care of everything. They 1) spot the undervalued asset, 2) hire the right people to fix the asset, 3) manage the property and 4) participate in *upside* only. If the asset produces a yield or cap-rate that exceeds the preferred dividend… That is money in their pocket. Also. If they are able to sell the asset at a higher valuation than the total investment (they better!) then they receive a handsome return.

Return Profile: The same return profile applies. You generally want to see a ~20% return on a year-over-year basis. If you can clip 20% returns then both the investor and Private Equity firm will make a grip of money. The real estate asset should be sold roughly 3-5 years down the line. So. You’re trying to double your money in about 4 years.

Concluding Remarks: That is an extremely basic overview. But. Now you know how the transaction works. 1) Investors receive preferred returns and are “hands off” on the process, 2) The Private Equity firm generally participates in the *upside* only, 3) You’re looking for 20% annualized returns – as we have stated before rich people don’t own a ton of bonds and 4) you are doing this with straight cash because equity is the highest form of leverage while regular people take out debt for their 30 year mortgage @ 4%.

2) How to Spot a Good Value

We always come to the same conclusion. Do the opposite. Or more clearly:

“Crisis is just a another word for opportunity” – @WallStreetPlayboys

Back in 2009 when the housing market crashed, practically everything was a screaming buy. You could have bought housing assets in *practically* any major metropolitan area and made a huge return over the next 5 years. When everyone is selling because there is a [insert name] crisis, you know it is time to do some due diligence. Wait for regular people to start purchasing, see them lose money over 6 months, then buy when they think they made a “mistake” and are back to selling.

High End: No surprise here. If you’re going to go through with a Private Equity transaction, you need to do this in a place where money is sloshing around like white water rapids. This means… Luxury only. While you can certainly make money by going through the headaches of renting to Low Income Housing tenants… You shouldn’t. It just isn’t worth it. Dealing with these groups is just not worth the time.

Multiple Sector Exposure: Choose a city that is exposed to many different economies. New York City is a great example and has many major economies: finance, fashion, entertainment etc. Even if one of these sectors is slow to recover… Others will certainly come back to life. You do not want to be exposed to a large city with *only* one economy. If that sector is down for 5-7 years, you’re going to be in a world of hurt from a cash flow perspective and your returns will nose dive. Valuations for the actual asset will also drop off a cliff.

Minimal Foreclosures: While many will say that the best value will come in areas that had a high foreclosure rate, we’d look for cities with a *low* foreclosure rate. Why? It means that most of the people living in that area are actually well off. During the housing crisis the best metropolitan areas saw housing prices decline but not fall off a cliff. In addition, the foreclosure rate was relatively low. This means that rich people are going to stay in this particular location. A net positive and should be looked into.

Education: Everyone and their mom is trying to become an entrepreneur. But. At the end of the day *top-tier* colleges will be in demand. Parents want their kids to go to great schools and top tier schools offer decent careers that pay $150K+ out of college. Want an example? Just go to Boston. We realize mentioning both NYC and Boston in the same post is a hate crime to baseball fans, however, Boston has a fantastic college system. Even if you purchased at the peak of the housing market in 2006, you’re likely up ~20% today.

Poor Rent vs. Buy Math: Finally, if you really want to get leverage out of the model you want to search for areas that have low yields. This may sound contradictory but is not. If people cannot afford housing in the area, they are going to be forced to rent. This hurts in the *short-term* but you will make up for this huge on a long-term horizon. Simple math below:

If Cap Rate is generally 10%: This means a $1M income building is worth $10M

If Cap rate is generally 5%: This means a $1M income building is worth $20M

You want to slowly raise the rent over time and the *multiple* on the asset is going to carry the valuation of the building. This is where the value is. Don’t play the game for the short-term, it hardly ever works.

Concluding Remarks: We’re not going to give away the exact cities we’re talking about in the USA. If you work in private equity or in real estate you have an idea of what cities were ripe for real estate transactions in the past and which ones are starting to look good today. That said the key points are 1) rent to high end, 2) invest in cities with multiple “sub-economies”, 3) don’t buy in areas with extremely high foreclosure rates, 4) Education can help cities return to growth and 5) play the long-game and play the upside to the actual valuation rather than the yield.

3) How Does It Actually Work?

So you’ve taken a look and have a list of cities you’re targeting. Lets get started.

Minimum Investment: For Real Estate Private Equity you need about $1 million to invest through a firm. This will allow you to be exposed to many options and you will develop a long-term relationship (assuming its profitable of course! No one hates someone who makes them money!). Yo

If you’re unwilling to put up $1 million, you can get into specific investments for around $100K if you’re friends with the firm or are looking at a single asset. Check out real estate crowdfunding for lower minimums and fees.

(Note: We are sure there are many exceptions to the rules, there always are, but generally $1 million for a Private Equity investment is standard and $100K would be normal for a single specific outlay. $50K is usually the minimum for higher risk private investments in *companies*)

Informational Memorandum: There are many phrases for this “Confidential Information Memorandum” (CIM), “Confidential Memorandum” (CM), “Information Memorandum” (IM). We’re choosing the latter since it is the most clear. You will receive a package with the short sales pitch for the investment you’re looking at. Within the document you will find the following:

Returns: How investors will be paid and how the Private Equity firm will be paid. Preferred dividends (usually 6-10% for investors), Equity upside (usually 40-60% of the upside for investors) and expected time horizon of exit (usually 3-5 years).

Pitch: The actual memorandum is much more thorough but we like to cut straight to it: 1) who the target market is, 2) why they believe the rates will be X% – expected occupancy, 3) city overview, 4) location specific overview, 5) investment minimums  and 6) Base case and upside case – (it’s a pitch so they rarely show the downside!)

Facade and Design: Once they give you the quick overview, they will also provide photos/sketches of the expected architecture, number of units and expected yield of each apartment (again we are focusing on buildings). A good example of a sketch is below (no this is not the building we own, we’re not *that* dumb):

Untitled

Contacts: You’re probably wondering why you don’t just do it all yourself! The answer of course is scale and contacts. The Private Equity firm will have deep relationships with construction companies, architects, designers etc. They will procure materials at much lower rates than an individual and will likely get the job done in a much shorter time frame as well. The Private Equity firm will also allow you to contact individuals you wish to speak to (Ie: provide emails and phone numbers for architects, designers etc.)

Gathering Up the Dollars: Once you are ready to sign the dotted line you place your deposit. This is usually 5-10% of your contribution to the project which waits in escrow (or held straight at the Private Equity Firm). It shouldn’t take more than a month or two to fully fund the project and once it is done you the rest of your cash is released and the project begins. ~6 months later you should be practically done and ready to go.

Concluding Remarks: Once you’ve decided to take the plunge you gather your list of private equity firms and 1) calculate the amount you’re willing to invest, 2) comb through IMs, 3) Dot all your I’s and cross all your T’s for which project you wish to participate in and 4) Make your initial deposit. Note: This is written from the view of an investor. For a Private Equity firm you’re calling and sourcing funds through your client list (new and old).

4) Rentals: Short-term, Long-term, Fees and Why We’re Against Hotels

Now that we’re through the high level items, it is going to get even *more* opinionated at this point. We’ll outline what we believe to be good and bad investment choices for short term and long-term rentals.

Short-Term: Calling all tourists. Repeat. Calling all tourists. This is the best time to invest in short-term rental buildings. If you have a building in the center of town in a tourist destination hot spot you should turn it into a short term rental. Many people will assume the occupancy rate will be in the 60-70% range but because of the location you should exceed this mark. Materially.

The best part about a tourist hotspot is simple: Emotional Decisions = Expensive decisions. People are going on vacation so they have an “I deserve the best!” attitude. This is going to line your pockets.

There is no need to “price gauge” anyone. You’ll find that the best location in the best part of town from a tourist perspective is going to be highly overpriced. It doesn’t matter. If everyone is renting at $X/day and you’re renting at $X/day +/- 5%…. Who cares. You’re simply giving market prices for the best area.

Lets reiterate. Emotional Decisions = Expensive Decisions. This is the main takeaway from motivational speakers who make good money catering to losers and morons.

Long-term: Education, Families and Frugality. That is your bread and butter. If you are going to go for a larger complex (mainly 2+ bedroom apartments) then you’re likely better off targeting families and areas with great education. They should be *close* to metropolitan areas… this will drag in the right crowd.

What type of person cares about their child’s education? What type of person is going to be financially responsible and watch his cash flow like a hawk? You guessed it. Responsible risk averse families.

They will make great tenants and in this case you can actually bring *down* your rent a tad. They are going to jump all over the value of the rental unit! They don’t realize that you both win in this case. You’re giving them a slight discount to market rent for the 1-2 year lease agreement, but at the same time… They are good tenants! A good tenant is a huge positive and will keep your occupancy rate well into the 80 percentile.

Say No to Hotels: This is simply a belief. Hotels will be of value for corporations so we’re not saying you cannot make money off of them (Hat Tip: Donald Trump).

Instead. We believe that we’re entering into a sharing economy. As more and more people begin utilizing sharing and connected applications such as Uber, Twitter and Air BNB… The demand for rental apartments should increase. This is both on a short and long-term basis since the millennial generation in particular is all about freedom.

Concluding Remarks: Short and sweet here: 1) target short-term rentals in tourist destinations, 2) long-term rentals should be targeted towards responsible families, 3) we believe sharing will continue to grow in the future and 4) Emotional decisions = Expensive Decisions… utilize that decision for *your benefit*

5) S-Corp and Exit Strategy

Ahh yes. The golden part of the post and the part where we can quickly weed out the scammers from the legit winners.

S-Corp Wins: When you start making real money off of a *REAL* Business (not $200K a year or some BS you can make at 26 years old as an investment banker).  You will set up your entity as an S-Corp.

To avoid going into details we’re literally going to copy paste the basic explanation from Wikipedia:

“S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. The S corporation rules are contained in Subchapter S of Chapter 1 of the Internal Revenue Code (sections 1361 through 1379). S status combines the legal environment of C corporations with U.S. federal income taxation similar to that of partnerships.

Like a C corporation, an S corporation is generally a corporation under the law of the state in which the entity is organized. However, with modern incorporation statutes making the establishment of a corporation relatively easy, firms that might traditionally have been run as partnerships or sole proprietorships are often run as corporations with a small number of shareholders in order to take advantage of the beneficial features of the corporate form; this is particularly true of firms established prior to the advent of the modern limited liability company. Therefore, taxation of S corporations resembles that of partnerships. As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made. Thus, income is taxed at the shareholder level and not at the corporate level. Payments to S shareholders by the corporation are distributed tax-free to the extent that the distributed earnings were previously taxed.

Unlike a C corporation, an S corporation is not eligible for a dividends received deduction.

Unlike a C corporation, an S corporation is not subject to the 10 percent of taxable income limitation applicable to charitable contribution deductions.”

We have emphasized the important parts of the overview. You’re smart enough to read between the lines and pay significantly less taxes once you understand what all of the bolded items mean.

Exit Strategy: Rolodex, Rolodex, Rolodex. Easy play on words. If you have a solid rolodex you’ll be rolling in money once it is time to sell. At the end of the day, real estate assets are cash flow kings. Rich people primarily own stocks, real estate and cash (minimal bond exposure).

If this is your “first rodeo”, from an investor perspective, you’re going to thank your lucky stars that you are working with a solid Private Equity firm. They simply display the last three years of cash flow net of expenses and should be able to sell at the current cap rate based on a trailing twelve month basis (TTM).

Concluding Remarks: We’re at the end of the post. The key actionable steps again are 1) set up an S-Corp and 2) have a thick rolodex come exit time.

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Normally, at this point we outline key bullet points to write down. Unfortunately this post was extremely detailed and nitty gritty so the main “bullets” are going to be different for everyone. Unlike other posts, if you have an interest in this type of transaction you should probably read every single section. Don’t be afraid to go against the grain, we are simply stating how we think about things.

One thing is for sure. If someone is rich… They should always be able to make a *Real Estate-Ment*… If you don’t get that triple entendre please leave =)

Recommendations

Invest in real estate more surgically: If you don’t want to constantly pay massive property taxes, don’t have the downpayment to buy property, or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. You can invest in deals around the country for as little as $5,000. It’s free to explore and they’ve got the best platform around. Here’s a comprehensive RealtyShares review by our friend at Financial Samurai who is a real estate fanatic.

Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. Interest rates have finally started to tick higher post election.

Updated for 2017 and beyond.

Comments

  1. Sreyas says

    Great post guys! Thanks for all the info-detail is king when it comes to actionable advice.

    I’m assuming this is for 30 year olds who have already become rich (1MM+) and have spare cash to invest right. I am 20, starting out in the business side of Silicon Valley and looking to jump to VC. Sticking to VOO and Wealthfront for now (robo-investing with index funds is probably the best choice for young guys, but my robo-investing returns have sucked of late…who knows).

    I’m looking to start a business, in the process, and I’m strapped for cash. I’m going to build a share-economy business (like Airbnb but for a different service) so the website needs to look great, but could potentially be 10K for even a decent designer. Thoughts on how to bootstrap/who to approach for funds OTHER than family?

    • Wall Street Playboys says

      Stick with anything that will prevent you from giving up ownership.

      If it’s going to be cash flow negative you’re going to be in a world of hurt for funding to be honest.

      Would contact everyone you possibly know and don’t see why it would cost more than $50K to set up. That’s not a hard number to hit cash wise in a year or so… if you believe in the idea… Should be able to self fund.

      So therefore don’t know what you’re actually asking.

      If it’s going to cost over $1M… Then you’re selling an actual product and are building inventory. Doesn’t sound like that is the case so just bootstrap it with your own money. 1-2 years of hard earned money should do it.

      Going to assume the first part was a joke since it clearly states $1M is how much you need to give to the PE firm or a minimum of $100K for an individual item.

      • Sreyas says

        Issue is that this would be a matching business which pairs people who have something to offer and people who need that service, with me getting a portion of each transaction (recurring revenue model). So cash flow will be fairly limited at first but will increasing exponentially with a network effect (more people on network = higher transaction percentage fees for me).

        The issue is site needs to be smooth, with seamless user interface, AND a large network of service providers to begin with, all of which will take a huge cash expenditure. My question was really whether I should solicit financing from VCs or just approach angels who have the cash to take a gamble on a new idea.

        btw not a joke, asked because there are a good number of crowdfunding investment opps/REITs in foreign countries where you don’t need that much money to invest. I could be wrong, but would you suggest staying away from any smaller investment amounts/opps since the gains would not be sizeable enough?

      • Wall Street Playboys says

        Still don’t see a need for funding in that case. Ebay was started in a living room.

        If you still want to fund, Vc’s are not even going to open the door for you (zero history). Not being mean, saving you time. Angel investors are your only shot and based on having done none of the back work at all at this time… you will not get any traction. Build the basic frame work, then maybe Angels will look. They won’t give you more than $25-50K. Even zuckerberg only got $50K to start.

        Your crowd funded international REIT idea = correct would stay away. Not worth it, but that is an opinion. You may be more informed.

        Good luck!


        Note: your idea sounds *exactly* like task rabbit. Make sure there is a legitimate twist.

  2. PE Associate says

    I’ve looked at a few of these transactions for work and was always wondering how you decide what amenities to provide. HOA fees vary widely and I have not been able to find good information about the returns of each item. Is there a way to think about this for buildings or complexes?

    The quote on crisis being opportunity is gold btw.

    • Wall Street Playboys says

      That’s a good question.

      Will give a quick overview:

      Short-term non-families: stick with “equipment” amenities depending on which market you are targeting. The most obvious equipment amenity is a gym which will be low maintenance and allow you to charge higher HOAs if you’re long-term renting. Equipment amenities take up less floor space and are quite easy to operate (only need1-2 staff members, can just have the cleaning crew do it if it’s higher end). The tenants won’t mess it all up.

      Long-term: generally outdoorsy items would be better. This is why many complexes or areas have pools.

      If you are strategic with the amenities you offer, you can squeeze out a modest premium. Maybe 100-200bps when managed appropriately. Won’t make the numbers go through the roof but can help and should be operating margin accretive.

      Overall, would focus more on 1) location and 2) target market if you’re looking for your first RE PE investment.

  3. Canadian says

    I was interested to read this post as it pertains to my side business. You hit a few nails on the head on the rental side (families are great for cash flow). Probably the most important takeaway people should have is patience: if people are thinking of investing in RE, you can wait for the fat pitch. Make sure the terms are favourable, and find your motivated sellers. Your Rolodex is hugely important, you should be in touch with people a few times a year, as circumstances can change quickly. Your contacts will be your exit strategy and could be bringing you opportunities as well.

    • Wall Street Playboys says

      Intersting. Are you managing complexes or buildings?

      We should have added that a duplex or triplex is a good way to start since it won’t be hard to manage. You can outsource the actual management of the property if needed and negotiate a good discount since it’s really just “one” property.

      • Canadian says

        Currently managing a few buildings, although the goal is to build and manage a senior’s complex. My experience has been that buying land and developing is the best way to add value, but obviously that will depend on location.

        I started with triplexes, buying land, developing, then renting. Again, with the right contacts in your Rolodex, you can build a 10 to 13 cap, rent for a few years to build a rental history, then sell at a 7 cap and make a substantial profit.

        At this point, I am certainly on the cusp of outsourcing the management. Once you have the potential to increase earnings from your job by 40-50k per year, showing apartments to potential tenants becomes a massive waste of time. I have not yet found a manager that I trust enough to run the buildings at 80 percent of what I would do (since no one will manage your investments with the same diligence as you).

        The only concern I have with the complexes is that instead of a 15000 dollar fix for a new roof, you are looking at an 80000 fix. Boilers instead of water heaters, etc. That can be a tough pill to swallow for an owner operator (as compared to a REIT).

        At the end of the day, I needed a business to diversify away from the markets (to which my employment income is directly tied), and real estate was a good fit. In my opinion, wood lots are the ultimate RE investment, since the value of your asset grows while you literally do nothing. One of the few true passive investments.

      • says

        Excellent post. Great job giving the advice only successful people can use.

        I own and self manage my real estate holdings. I have expanded the management side to include managing for third parties and it is worth paying someone else to deal with the headaches. This gives me leverage on my own investments and also provides a way to gain other real estate transaction activities (I’m a licensed REALTOR).

        I find the best approach is reaching out to rich young wall street kids, and business owners that don’t want to deal with the toilet over flows and other tenant BS. Luxury is great but what a pain in the ass theses entitled little pricks are, I manged several Luxury HOA’s.

        My opinion is to also do the following: 1- Include low income subsidized housing investments because the Feds pay the rent and all you need to do is keep them happy. This is a technical arena but worth the “guaranteed rent”. 2- If real estate is what you want to invest in, then get a real estate license in your state. You may be able to leverage your professional licensing to get in on a deal or get a small commission up front on the buy side and then again on the sell side, while other investors wait for their dividends.

        Great Job with the site. With your attitude I don’t need to wish you continued success but I mean it.

  4. Tony says

    Yes…everyone is jumping the gun to become an entrepreneur nowadays…do you suggest to do the opposite when it comes entrepreneurship also? Thank you.

  5. Recent graduate says

    Hey WSPB,

    We own a commercial property in a college town, and everything is peachy now. But this is without many bumps along the way so I just want to add a few knowledge from personal experience.

    1) Politics is king because permits are controlled by the city planning department. If you don’t take the time to know (and schmooze) them, you may have to wait months for simple permits and inspections.

    2) If you’re in a suburban college town, buy old houses, demolish and build townhouses. Old houses are good because A. Cheap and B. has a large lot. Once you demolish it, you can build a 3/4 unit townhouse, which means 3x or 4x the rent. Building will “only” cost 1 – 1.5 million, but can then be sold at a much higher price. BTW, from personal experience, the cheapest constructors are almost always the ones you find in Chinatown. Way cheaper than the cheapest American company and they do the exact same job.

    3) As you may have suggested, good college towns are almost always growing. Why? Population is always growing AND Chinese students are coming in. If the town is growing, occupancy is pretty much 100% at a very inflated rate (about 50% to 100% more rent than normal residential rent). This is because college dorms are very expensive and so to the students, living in an apartment is cheaper, and better.

    4) Know people. I live in a medium size college town. The town is dominated by two real estate groups. We know both of them personally and we know their agents. If you want to sell, they are the only ones with the money because they know the town well and they will pay a higher price because they can afford it and/or they know better than any outsider how the town will grow.

    5) Know a few Chinese people. This is just a side note and isn’t meant to be racist, but in college towns, there are a few extremely rich Chinese people. And these people are in their 20s and/or early 30s. Since China allowed 1 kid/family, the Chinese kid basically have a large influence/control on their parents’ money. (You can tell they’re rich because they drive Porche and Maseratis.) Chances are, their parents want them to stay in the US because of politics back in China (their president is cracking down on “connections”). The best way to network is to befriend the most socially active Chinese person. The Chinese community in the college town is small so most likely, the social person will know pretty much everyone.

    The only bad thing about college real estate is that the window to find tenants is small and if you miss it, it is quite hard to secure leases. Yet another example of why sales is such an important skill.

    And lastly, S is much more easier to manage than C when you sell the property. You will basically get double taxed when you sell with a C corp structure.

  6. says

    Great Post. Kind of what I had in mind you guys would talk about when you used to mention real estate. But kudos on breaking out down so well and making it actionable.

    Two things: You did not mention anything about commercial real-estate. I am not quite aware of market in the US, since my sphere is mainly mainland EU and India. However, that is one segment that has done really well for my friends that are in real estate.

    Secondly, regarding the sharing economy. While I understand where you are going with the “growth” in stuff like AirBnB etc. but hotels and serviced apartments are actually way more attractive in terms of streamlining things and scaling up.

    One of my cousins is a major property developer in Hong Kong and has recently invested about USD 1.2 billion in Chile in Hotels. That kind of scalability (while keeping it manageable) is almost impossible for places to rent on AirBNB. Plus, to keep them streamlined in terms of manageability would be a nightmare.

    Also, I was sleeping with the HR manager for a local holiday-inn and she was telling me the financial figures, which kind of blew my mind. But then, I had seen the rise of a Turkish acquaintance of mine who went from being a car mechanic to owning 6 hotels (and today is valued around 600 million).

    Maybe your target there is small scale investment and maybe you have different experience but when it comes to short-term rental I would look for something way more organized and scalable.

    Keep up the good work.

  7. says

    I stopped reading halfway through, when i realized i was wasting my time since i’m not there yet. See Section 3 of the “How to Remain Happy at All Times” post.

    TBH i will probably come back to it though, as your posts and comments are filled with precious little advice here and there.

    • Wall Street Playboys says

      Good work. No need to read beyond the first section if you’re not going to buy any real estate.

      If you get bored you can read it for leisure later. Reading more then 4 blog posts a week in aggregate is a colossal waste of time anyway.

  8. Jim says

    Not as much upside but less headache, another good option at CRASHES not so much now is buying a healthcare REIT or senior living REIT.

  9. Rob says

    I appreciate your post on a rather technical topic, no doubt some of your more technical readers will get a lot value out of this.

    You make a good point about low cap rates being sort of an indicator of value and an opportunity to increase NOI over time. However, for geographies like NYC where valuation (my knowledge being limited to residential) is sky-rocketing and rent yield staying relatively flat, my question is: would you still look at the low cap rates as an opportunity or be cautious of the crazy valuations?

    I lean slightly on the optimist side; there will always be rental demand for housing in prime locations (NYC, SF, some parts of Boston) ==> solid, predictable cash flow…but curious to hear your take on whether the balance between earnings and valuation, essentially the multiple, getting out of whack.

    • Wall Street Playboys says

      Not sure what you are asking exactly…

      If rents continue to climb doesn’t really matter if the cap rate is 5% or 6% or goes down to 4.5% on the valuation of the actual building.

      Ex: as you said if cap rates are flat… Say 5%… And rents went up… The building value went up 20x that amount. So thats a benefit *long-term*.

      As long as you beleive the economy won’t be doomed in the interim (in that city), you’re going to be fine because cash flow will be positive and you play the long game on the appreciation. Then set it up under an S corp to pay minimal taxes on the exit.

      We do our best to avoid specific recommendations on cities and purchases. The title is about as specific as it will ever get around here because if people can’t figure out if a place is a good investment themselves… They shouldn’t bother.

      We’ll never give actual opinions on specific stocks/cities etc because that will draw in retail investors asking questions. Ie: idiots.

      • Rob says

        Thanks, your answer hit core of the question – ie. ‘play the long game’. Understand the part of giving specific advice, people seeking out investment opinions on forums are hopeless from the start.

  10. James says

    Great post as always. Quick question.

    “Remember that once you get your money, you want to hide in the best place possible. In plain sight. Blend into the crowd and have fun being “The Watcher””

    Would you care to elaborate on hiding your wealth in plain sight. How do you go about doing this?

    • Wall Street Playboys says

      It means you blend into your environment.

      Live in a nice area of xyz city. Dress in-line with the herd (dress up when you want to meet girls but the vast majority of your time don’t stand out).

      If people think you are “just like them” they leave you alone. They will think your net worth is at or below their level. Agree and amplify. Easy as pie.

      Pro-tip: calculate how much the person you’re speaking to makes. Then if he forces you to give an income number, give him a number 85% of his income. He will feel good about himself and you move on.


      Finally, no, this is not contradictory. There is a time and place to use money and go all out for fun. Letting people know you’re rich publicly is only for morons. Regular people will now harass you for “business advice”. Their business idea will always suck.

      • Rob says

        I think public appearance can work both ways. Dressing slightly better than the ‘normal’ crowd gives you some level of credibility/respect and can go a long way, not just in night-life. As long as you’re not obnoxious/flashy (ie. decked out in designer labels), people will just treat you better, period. Otherwise, they will either resent or bother you.

        On the other hand, completely agree about explicitly revealing your income. Long time ago I made the mistake of this on a night out with friends. We were all fairly drunk and they were egging me to reveal my income, and being tipsy I let my guard down a little bit and said the rough number. It suddenly became very quiet in the room followed by some awkward comments/backhanded compliments…it definitely changed the relationship. Do not ever, EVER, tell anyone how much you make.

      • Wall Street Playboys says

        Yes as we’ve ststed many times dressing sharp suited up etc can have value.

        “Dress to impress” – ie: choose the impression you would like to make

        Also 100% agree revealing you income is crazy. If forced, calculate their income and name a number below what they make. Win win.

  11. RE Guy says

    Real estate guy here, I’ve exceeded your benchmarks for my age and am financially independent. Allow me to shed some light on one thing.

    Here’s what you missed about low income housing. If you can make it in low income housing you can make it anywhere. It is the most headaches and you shouldn’t do it forever or as your main business, but low income teaches you everything that can go wrong with a property.

    You have to learn to think like a degenerate, write your lease to account for every contingency, develop policies to get your money regardless of their stupidity and emotional volatility, and learn to screen tenants very well. My lease has without exaggeration 30+ ways for me to penalize or evict someone based on them doing something I don’t like. Do I carry it out on every offense? Absolutely not. But the power is in my hands to keep the tenants in line and paying. The point is that you have to be firm but fair, acting like the father these people desperately needed. Then once you buy in nicer areas (not necessarily luxury ones) with more well adjusted people it’s a cakewalk.

    The problem is most people don’t see it that way, either they want to make all their money in low income because of the high ROI’s and get burned out with the work, or they are too soft to do it and get abused by their tenants (I consider not paying me my money or bothering me with bullshit problems abuse).

    When I started out I had to evict many people. I’ve had someone be behind in rent and they then cut out the ceiling, beat their kids up, took the kids to the hospital, and claimed the ceiling fell on them to get money. But I know how to avoid that now, my ability to screen tenants today is top-notch because I’ve failed many times.

    If you view real estate as a business with a skill set you are going to develop for the long term you can make a large amount of passive income (well behaved tenants are passive income trust me on that). When someone does something I haven’t thought of before I laugh it off, take the $100-$200 hit, and amend my lease and policies to stop it from happening in the future. If you do this for a few years you’ll find your income will consistently go up.

    By the way, the game analogy should be obvious.

    • Wall Street Playboys says

      Great comment! Never in there did we say there is no money in the biz, just that it is a crazy headache. We don’t think it’s worth it.

      As you stated:

      “Then once you buy in nicer areas (not necessarily luxury ones) with more well adjusted people it’s a cakewalk.”

      However… If you do want to go the way of low income… Then people should all read your comment and adjust appropriately.

      We would rather go to the high end, not deal with the headache, focus the larger amount of spare time on other businesses.

      Everyone has their own path, glad it worked out!

    • says

      Man, kudos to you for going the low income housing route. I’ve heard Section 8 tenants not pay on time, or not pay at all even though 80% of their rent is paid for by the government!

      It seriously bums me out when people don’t honor a contract, which is why I just focus on property I want to live in, and will rent out 5-10 years later when I find something else to live in. Do that for 30 years and you can amass a very healthy RE portfolio.

  12. G says

    How does one go about investing in real estate outside their geographic location? I live in NYC right now and want to start purchasing some small multifamilies but only have enough $ to invest in other locations. Plus certain areas are obviously more attractive than others.

    Thanks

    • Wall Street Playboys says

      Easy solution, just get a property manager.

      You have to go through the headache yourself of finding someone you trust. As noted by this post, it’s a private equity transaction, so that solved the headache itself. We don’t own any single multi-tenants so we cannot help. It would be a miniature version of an apartment complex purchase.

      If we do one, we’ll update this post with a small section added.

  13. CX says

    Hello,

    Slightly unrelated post but I saw that comment up there that mentioned sales is the most important skill. I am 20, currently waiting to enter college (military service after high school, living in Asia, possibly entering target school in US).

    I recently joined a direct marketing (sales) company that does street approaches and door-to-door sales, selling a product (let me know if it’s important to mention what the product is). The product is worth about ~$1000, my commission for each sale is ~$20-$80. I’m not expecting to make it big in this company because I have college and everything, but is it a good idea to continue? The aim is to enter Wall Street at the end of college, provided I get into my US target schools (applied to 9 in total).

    Question is, are these products too low value to help me obtain any skills that may be helpful in the future in finance/WS? I don’t think anyone goes around on streets trying to sell to regular people, correct me if I’m wrong.

    P.S. I’m living with my parents, it’s a culture thing. The money isn’t that big of an issue, I’m more concerned with acquiring skills. Also, around $800 is enough for me to cover my needs and playing expenses so I don’t even need to be a high roller to survive.

    • Wall Street Playboys says

      1) being good at sales means you are good at life. So any investment in sales is going to be positive.

      That said…

      2) your current sales role is unrelated to Wall Street so won’t help you. Read our faq and post on standing out as a non-target. It will not change. If you get into a target school, the path will be easy. Get into finance, get an internship (follow the Post called “navigating Wall Street”). Done. You’ll break in.

      Good luck


      Ps: in the future please place your question on a more appropriate post. Giving you a break because you are young.

      We usually delete these unrelated questions.

  14. FutureIBAnalyst says

    Hi thank you very much.

    This posts and the comment sections are really opening my eyes Outside of just working a job.

    As a question I’m a bit confused. I’ve read your posts on investing (trade the S&P 500, monthly And get 5-7% returns over a 5 year period or so worse case break even) then on higher risk investments (VC, PE, and other related).

    My key question is how are you supposed to leverage your income to the point where you have the 1M by 30 (Thus enabling you to take part in real estate )

    Most of the posts you’ve said have done wonders for me so far (non target) but I’m really wondering how in can leverage everything I’ve got to get to that level Once I reach associate level.

    Will you ever do a post on leveraging your bonuses in an expensive city? Or leveraging your way up to that income as an entry level banker.

    • Wall Street Playboys says

      There are so many issues with this comment we don’t even know where to start so we’ll just do it in quick bullets:

      1) don’t ask what to do until you’re in that situation. Worrying about associate pay when you don’t even have an offer is mental masterbation.
      2) the answer is clear, use all your money to continue dollar cost averaging.
      3) finally as noted in our post on living a balanced life you must start a company by age 25-26. A product or recurring revenue company.

      So here you go. 1)dollar cost average, 2) spend the money on your company, 3) all your real upside (money wise) is going to come from the company not your $150K bonus.

      Everything else is a colossal waste of time.

      Good luck!

      • FutureIBAnalyst says

        Okay perfect thanks For taking the Time.

        And yeah I see your point but gotta ask if I don’t know right !

        Thanks !

      • FutureIBAnalyst says

        Pretty much in one sentence: Job/Investments should be main driver of income.

        That’s not common advise and I’m not sure it’s been said explicitly!

        makes sense though and has changed my mind set thanks again.

      • Wall Street Playboys says

        Again. No.

        Re-read the post.

        Your business will be your primary source of income. Your Wall Street career will fund your business and the remainder (not needed for working capital) is dollar cost averaged into an S&P etf such as VOO.

        That is as explicit as it can possibly get.

  15. Engineer says

    Hi,

    And thank you for a great post.

    I was wondering how this is different in let’s say Sweden?
    I’m currently 20 years old, and have huge connections here who can invest and connect me with the right people.

    Since the prices has gone up so much lately here in Stockholm (and only in Stockholm) the demand is still very high.
    Taxes are bad, but acquiring loans are pretty easy.
    How can I use all this to my advantage?

    This might not be the right place to ask for partners or a guide on how to do it, but do you have any information you can share so I can start?

    Thanks in forehand.
    Best regards

    • Wall Street Playboys says

      Unfortunately we must say no to both.

      1) we don’t talk about things we don’t know. We don’t invest in Sweden

      2) not enough connections to recommend a Swedish real estate person.

      Good luck in your search.

  16. Padawan says

    Hi WSP

    Great post. I’ve been binge reading alot of your posts. Inspiring stuff.

    I’m 20, still in uni and I’ve started an ecommerce business and would like to diversify my profits from stocks. (Valuations are getting to rich for my blood)

    I’m curious regarding the short term rental proposal as a potential investment. I am thinking about buying a property in the centre of downtown and rent it out through Airbnb. And the math works out beautifully, but how would you scale this idea so that it is not 1 unit but 100s of units.

    Thanks in advance.

    • Wall Street Playboys says

      Well the only way to scale it is:

      1) debt
      2) equity from outside investors in a PE transaction

      Decide which route you want to take and run the math clean. If the nunbers work without any blue sky rosy scenarios you know it’s a good risk to take.

      This is up to you and we will not provide more color than that as we’re dabbling into risky/highly dangerous situations where you can go belly up from over leverage.

      The outline here is all you need to get started, after that it is location specific and up to you to find all the rules and “diamonds in the rough”. We’re not going to do that part for anyone, otherwise we’d do it ourselves!

  17. says

    Thanks for another excellent post. I understand what you’ve stated about S-Corps vs. LLCs, but what about a Sole Proprietorship (SP) in the following situation?

    I’m going to start freelancing as a Web Developer next month and I’ve had some other freelancers recommend that I just get set up as a SP because 1) I don’t have any employees (at least not initially) and 2) there isn’t a high perceived risk for lawsuits in this line of work.

    Does this make sense? Should I start as a SP until I reach a certain income level and then make the switch to an S-Corp? Or should I just set up an S-Corp from the beginning?

    • Wall Street Playboys says

      If you plan on generating a large income now or ever in the future… S-corp is the way to go.

      By setting anything else up “for now” you are mentally telling yourself you’ll never make meaningful money.

      The self doubt alone makes any other option a waste of time.

      Do everything once. Do it right. Otherwise it better just be a hobby. Then it doesn’t matter.

      Least that’s how we’d think of it. If it’s real money (not a hobby) then do everything once and do it right.

  18. wallstreettaxguy says

    So you know, an LLC can make an “election” for tax purposes to be treated as an S Corporation. This is simple paperwork exercise that needs to be filed at the time you form the LLC. That way, you can avoid the hassle of carrying out all of the corporate formalities associated with an actual state-law corporation. If you want to convert your LLC to an actual state-law corporation, you can always do that later on.

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