The Sound of Music
The siren songs of real estate
One of my closest friends, an insufferable real estateur, has an uncanny ability to draw a crowd. He’s an indescribable character, but a mutual friend once introduced him as a “bon vivant, world traveler, international lover, and last of the big spenders” as he arrived wearing a Jimi Hendrix wig and a Dolce & Gabbana silk shirt unbuttoned to the navel.
He collects wonderful friendships and has a jeweler’s eye for opportunity. He’ll say he spends his days searching for beautiful women with shaky morals but what he’s really doing is engineering serendipity by dragging together a group, sometimes unwillingly at first, for a good time. “Good” can often be replaced with dangerous, outrageous, or regrettable - but the outcome is only known in retrospect, through bleary eyes and a splitting headache.
Back from a European ski trip he told me how fantastic the experience was, the wide slopes peppered with charming independent cafes - unlike the corporate-controlled overpriced cafeterias common in America. So fantastic, he said, he ended up taking a multi-hour lunch of schnitzel and riesling with newfound friends that spoke no english. He described their grand and riotous afternoon, a bluebird day communicating in charades on an alpine deck. And “the service was impeccable - they thought of everything - they even had sunscreen on the tables!”. A welcome relief for a bald man.
He told me how he went into a long story, not stopping as he applied the sunscreen, and had his audience rolling. “They couldn’t understand me, and the story wasn’t that funny” he said, “but they were cracking up so I went with it and ordered another round for everyone on the deck”. He could feel his head sizzling in the snow glare and found he got more laughs with each sunscreen application, so he continued with more vigor, culminating in squeezing the entire tube onto his head while the small crowd roared.
Only when the server, an english-speaker, arrived with their next round did he learn the tube contained mayonnaise, not sunscreen.
Every so often an amazing deal shows up. A few investment opportunities we’ve seen:
A San Francisco financial district residential building for $45 per square foot
A NASCAR parking lot at a 30% annual return
A Michigan Avenue office building at $100 per square foot
A 28% interest loan on premier Honolulu hotel
With each of these (and many more) we got bug-eyed deal fever and spent a colossal amount of time and money only to get educated on why these “deals” didn’t work.
Even though they seemed easy to understand, they were just outside our expertise.
In each case we’d end up finding a pro - although not soon enough - who explained in one short meeting why things weren’t as they seemed. Add these up and years were wasted, not to mention dollars.
The best real estate operators have a core “thing” they do, a business process that creates economic value, and they stick with it.
Examples:
Buying operating businesses that own properties (chain restaurant franchisees for example), rewriting the leases, and spinning them out to property buyers as individual leases and keeping the business for free (or less than free).
Or, buying (or better yet, just contracting to buy) buildings with short remaining lease terms and therefore high cap rates (low prices), negotiating lease extensions prior to closing, and then reselling at lower cap rates (high prices).
Or, buying (or, again, just contracting to buy) properties with environmental problems like dry cleaning solvent spills and, with a specialized team, fixing the pollution and selling the property at unimpaired value.
Or, using a long-term relationship with a leading cell tower company, adding towers to properties, negotiating a lease with the tower company, selling the tower, and sharing the profit with the cell tower company while retaining the balance of property at lower basis.
There’s plenty of other esoteric tracks like build-to-suit Starbucks development, converting condominiums to rental apartments, developing medical buildings for dermatologists, or even building doggy daycare facilities. The tactic is important only so much as a) it works and real value is created, b) it’s repeatable, and c) the operator can implement it.
The value is the lens, the filter. Having a unique business process allows successful operators to say no to almost everything to then get to the “thing” where they have an advantage.
Look around and you can’t unsee it. Real estate success comes to those who can discern sunscreen from mayonnaise.
😂 The sunscreen.