John Jacob Astor was America’s first real estate millionaire – and that was back in 1800. But much of what fueled Astor’s success still holds true today, and that’s the powerful combination of factors that makes real estate capable of creating huge returns. From leverage to security to the simplicity of the business model, real estate has been one of the main ways to create wealth in the U.S. for over two centuries. If you are looking for an investment platform that has the best odds of success, then this episode will explain the strong case for creative real estate.
Episode 1: The Power Of Real Estate To Create Wealth Transcript
Real estate has created more millionaires than any other investment sector. But how did they do it? This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. We're going to talk about the power of real estate to create wealth from A to Z. And let's start off with the A. The A would be John Jacob Astor. Most people don't even know who John Jacob Astor is, but he was America's first millionaire. He was also probably the richest person that will ever exist. He lived back in the late 1700s. He died about 1848. At the time he died, he was worth around $600 billion. He was worth a multiple of the wealthiest people today, such as Jeff Bezos and Mark Zuckerberg and even Elon Musk. But how did he get there? How did he do that? Well, here's the story of John Jacob Astor. Astor, he had a day job, and his day job was he was a very large fur trader. He would go around into the early remote areas of America when it was a frontier. He would gather up pelts, and he would sell them to people who used them to make hats and garments and things like that.
But he had a side hustle, which became where all his wealth was amassed. And that side hustle was in buying and renting real estate. And the way he liked to do it was he would go out and buy land, but he didn't want to build buildings. He didn't want to be responsible for any of the expenditures on the land or the upkeep on the land. Instead, what he would do is he would simply rent it out to a tenant who could then build a building on it if they would like, but all he had to do was they'd just pay the regular monthly rent for the land. Now Astor was very fortunate, although it wasn't just sheer luck. He saw in advance the future of this one specific site that he owned almost all of his land in, and that later became Manhattan in New York City. Astor pretty much owned virtually the entire island of Manhattan at the time of his death. And in so doing, that land had outpaced any other thing he could have done in his business, in his day job. In the end, his hobby job, his side hustle, became more lucrative than what he had originally intended his day job to become.
Then we're going to skip from the A of Astor over to the Z. And the Z would stand for Sam Zell. Now many people don't know who Sam Zell is. Sam Zell is the only person in American history to be the largest owner of not one, not two, but three real estate sectors. He was the largest owner of office buildings in America, the largest owner of apartment buildings in America, and the largest owner of mobile home parks in America. And he did all this in one single lifetime.
He died a couple years ago. He wrote a terrific book called Am I Being Too Subtle? And he was known as the grave dancer. He was able to know exactly when to buy real estate, exactly when to sell it before the crash, and then when to buy it back again before it went back up. Zell was in many ways very similar to John Jacob Astor, although his investment criteria was a little different. Number one, he didn't end up owning anything in Manhattan. And also, he liked to buy the buildings. He would often own the land and the buildings. So his investment criteria was a little different, but again was wildly successful at it.
But I think what's important is, what do Astor and Zell have in common? Astor, the biggest real estate tycoon of the early years of America, and Zell, the most recent large real estate champion. What do they share? What do they like to do together? And what can we learn from that as far as creating wealth in commercial real estate? Well, one thing is that they liked only income property. Neither Zell nor Astor had any desire to own things that did not create regular monthly income. There's some forms of real estate that have no income, such as just raw land speculation, for example.
They didn't like that. They liked having those regular monthly checks, which they then used to fuel buying more property. They also liked very simple business models. Of course, Astor's was more simple. Here, I'll just rent you the land, do what you want with it, pay me every month. Zell's a little more complicated. He would build an office or an apartment on it, but as far as mobile home parks go, same model as Astor. He would rent a little parcel of land to someone with a mobile home, and they would pay regular monthly rent. In that way, they did kind of share a similar business model. Also, Zell was much more into leverage than Astor, because in Astor's era, there really wasn't much banking, although he did have loans on his land. He did believe in debt. Zell became a master of using debt as a tool, as a lever.
A lever is basically a tool that allows you to lift large objects by pushing on one end of a rigid bar. And we all know how levers work. We see them used all the time in displays and examples. If you had to lift your car off the road, you would use a lever of some type to do so. But when it comes to debt as that lever, it's able to push your yields higher than they would be in the absence of debt. If you buy a property at a cap rate, and a cap rate is defined as a net income by the price of the property, if you pay all cash, your cap rate is the same as your cash-on-cash return, because you have no leverage. But if you can buy a property and borrow money at a bank to buy, say, 70% or 80% of it loan-to-value, then if you buy with a cap rate one point higher than the debt interest rate, then you'll make 10% return. Two points will give you a 15% return, and three points will get you a 20% return, which is not possible if you pay all cash.
And Zell was a master of using leverage. He was very, very good at obtaining good, sensible debt. We can also learn from both of them that debt is a good thing to use as a tool to get higher yields. Also, both of them knew, and I'm sure realized in their lifetime, certainly Zell, that the inflation hedge of real estate is a magical thing. Because if you look at what a dollar was worth back in the time of Astor, Astor's entire estate when he died was worth about $30 million U.S. Dollars back then, and $30 million back in 1848 today is about $600 billion. That's how much inflation has been. Inflation wasn't quite so high back in the days of Astor, but in modern times we all know how high inflation can be. We've had one of the largest runs of inflation during the Biden administration we've seen in the last four decades.
Real estate is a great hedge to inflation because it holds its value. A typical house, like the one I grew up in back in the '60s, that house that might have cost $15,000 in the '60s today might be worth $300,000. If you kept the money in the bank, if you put your $15,000 in the bank and left it there, it would be worth still $15,000. But real estate has a magical ability to go up right in tandem with the dollar as it devalues. Also, real estate is a hard asset. It's not a piece of paper. Astor, I'm sure at some point, was tempted to invest in all the early American enterprises such as riverboats and locomotives, but he didn't. And he didn't because he knew all he would get in exchange for his money was a piece of stock, a sheet of paper, and if that company went down the drain, that stock was worth nothing. But he knew that as long as he owned land, that land would always have value, that he wasn't just gambling on somebody else, gambling on some kind of nebulous business, but he actually owned raw, hard land. Another thing that attracted both Astor and Zell to real estate is the fact it has a very attractive supply and demand function. On a macro sense, they're not making any more land. The only time new land is produced in the world is during a volcano when all of that volcano residue solidifies into land.
Occasionally Hawaii will grow slightly, for example. But beyond that, the land of the world is in fixed supply. But yet we're growing in population constantly. The demand is always growing and the supply is finite, and that always gives real estate value. But also in certain niches, you see the same thing. In the mobile home park niche, which was Sam Zell's favorite, it's the only thing he never sold a single one of, kept it his entire life. In the mobile home park space, you can't build any new mobile home parks by city and county zoning. He knew that every mobile home park he bought, he never had to worry about competition of one being built nearby. And if you look at all the real estate sectors, there is some element of restriction of supply on any and all of them. Astor, I'm sure, saw the same thing. He knew that Manhattan was finite. And so what he needed to do was he needed to go in there and buy as much of Manhattan as he could because they weren't going to be making any more of it. And therefore, he knew the values would go up.
Finally, both Astor and Zell were all about liquidity. In fact, if you read Zell's book, again, it's called Am I Being Too Subtle? He talks throughout the book about the necessity to only buy real estate that you could immediately, at the drop of a hat, sell or finance. And that's simply because Zell knew that there would be times you'd make the decision, okay, it's the right time to sell. Let's push the button and sell, but you couldn't do it if you did not have a lot of liquidity in that property. To have liquidity, you have to have something that's hotly in demand. It ticks all the boxes that the banks like to see as far as something they would want to make a loan on. Same with Astor. Astor was very convinced that Manhattan would be the hottest market in America at the time, and that's why he only bought there. He liked the liquidity of being in only a hot spot that he knew he could sell off. The bottom line to it is there's been more millionaires created beyond Astor and Zell in real estate than in any other sector. That's because commercial real estate offers so many huge advantages, and many of them are only escalating. As inflation goes up and other megatrends hit America, there simply is no better place to put your money than commercial real estate.
This is Frank Rolfe of the Commercial Real Estate Mastery Podcast. Hope you enjoyed this. Talk to you again soon.