By: Grant Cardone
Grant Cardone is a controversial dude. He is rough around the edges and talks in absolutes. He has a history of addiction but has redirected that energy into business over the last 20 years. Say what you want to say about him. Frankly, a lot of what he has to say just isn’t for me. But make no mistake, Grant is a force of nature. Do we see eye to eye? Nope. But he is a man in the arena, not on the sidelines, and I’d like to learn from his wins and failures in real estate.
“A fool learns from his own mistakes, the wise man learns from the mistakes of others.”
Invest in Real Estate! But what kind?
Grant, like me, prefers the Commercial Multifamily Asset class when it comes to real estate investing. His opinions on some of the other common asset types were…colorful.
Single-Family Home Ownership: “Homeownership is not a way to build wealth. It may be a place to save money – not make money.” When you consider property taxes, upkeep, roof repairs, air conditioning/heat repair, insurance, real estate fees and opportunity cost, not to mention your loss of mobility, a single-family home is a terrible investment.
Flipping or Wholesaling: In reality, is not real estate investing but a form of speculating, or at best, another job.
Single-Family Home Rental: A relative of the author, over the years, collected three dozen or so single-family homes. Each deal had to be closed separately. The author’s first apartment deal (48 units), required one closing and one loan and one address. He acquired more in one transaction than his relative did in a decade.
Duplexes & Fourplexes (non commercial): This is the kind of investing most people start with, because they are investing on a budget rather than investing wisely. The problem? When one person moves out, they are at least 25% vacant immediately.
Commercial Multifamily: The author’s preferred investment vehicle given the above.
4 reasons he loves apartments:
- They’re real assets, not paper, and they can’t be easily replaced.
- They produce positive cash flow.
- Apartments appreciate when rents rise.
- Leverage of debt to increase your position.
Why do I believe apartments are the best investment available over the next 30 years?
- Demographics heavily suggest people are more interested in using (renting) than owning. You can see this everywhere. Home ownership is at the lowest level in 40 years. The leasing of automobiles, once frowned upon, is at the highest level ever.
- 80+ million aging baby boomers are more likely to move into rentals in the future, than to buy a new home.
- Millennials are having families later than any time in history and delaying the home purchase and are more likely to rent.
- Affordability of home ownership continues to get out of reach for most Americans due to flat wages, no savings and poor credit.
- The fantasy of home ownership as “The American Dream” was shattered in 2008 when millions of Americans lost their homes.
- America has experienced 26 years of flat wages nationwide and this will continue as we move into automation and higher unemployment in the future.
- Rental property has outperformed stocks, bonds, and cash over the last 20 years.
- There is a shortage of affordable housing stock in almost every growing city in America.
- New housing product cannot be built affordably, putting continued upward pressure on rents.
- Leverage – Unlike stocks, bonds, ETFs and mutual funds, the bank will lend you 65% to 75% of the purchase.
- Cash Flow – Apartments bought correctly will provide positive cash flow monthly, unlike other investment vehicles.
- Debt Pay Down – The income of the property, less expenses, should provide enough Net Operating Income to pay the principal debt down.
- Tax Benefits – All interest, expenses, maintenance, repairs and depreciation, are tax-deductible items.
- Capital Gains – Properties held longer than 1 year are taxed at lower rates than personal income.
- New tax laws – Cash flow produced from real estate is taxed at lower rates.
- Apartments are real investments – Unlike most of what is offered by Wall Street, apartments are real property, with real tenants paying real money, who have a real reason to do so.
Grant’s Rules of Thumb:
In reading industry-specific books, I am always on the lookout for 1 or 2 golden nuggets that will teach me something or make me better. Most of the rest of the book, after making his plea that commercial multifamily is the best, is made up of lists of Grant’s rules of thumb when investing. Here are my favorites:
The right location: Convenient to jobs, highways, easily visible from street traffic, more affordable than the homes in the surrounding neighborhoods, priced below replacement cost, in a market with high barriers to entry (i.e. political environment making new construction more difficult), probably a B Class product in a B Class neighborhood.
Market Knowledge: Knowing the market starts with knowing where the deals are and who has them. You need to know every sale, every comp, what properties are under-rented, what properties are over-leveraged, what that property sold for in the last cycle. You need to know the job providers, the growing parts of the market, dying parts of markets, the politics of the city, the home prices in the area, and the overall economic conditions.
Submarket Knowledge: For the submarket and specific property, you need to know the vacancy and break even vacancy, insurance cost, utilities, management fees, the cost to turn, how long it takes to turn, the cost to advertise, which ads work, foot traffic, closing ratios, and trailing 12 months of Income & Expenses.
Picking the right deal:
You need to know and have relationships with the top 3 controlling brokers in the market. Always deal with the listing broker. Whoever controls the listing, controls the deal. If the deal is easy to get, it probably isn’t any good, and the more interest in the deal, the more value it will have to the next set of buyers. You want there to be competition on every deal you buy. Having to pay more to get a deal is a good sign of the value of the deal.
Warren Buffet says, “Far better to buy a wonderful company at a fair price than buy a fair company at a wonderful price.”
There is no figure more important than Cashflow. Cashflow after all operations, is what will allow you to weather economic pullbacks and avoid having to sell in down markets. You should target to be cash flow positive without improvements at 4% to 6% on cash invested. At closing, have all obvious repair costs for the next 36 months in reserve.
Grant has bought a lot of real estate. His rules of thumb are sound. There is a lot of real and hard work there that we can all learn from. I enjoyed the overview of the industry. I agree with him that commercial multifamily is a very solid asset class. I was challenged by everything he looks at when understanding a market and submarket. You have to have that knowledge to make good decisions.