Commercial Real Estate Mastery: Episode 31
Why There’s No Money In Original Thought
In the technology world, innovation yields success, but in commercial real estate it often yields failure. In this Commercial Real Estate Mastery podcast, we’re going to explore the reasons why original thought has not proven to be profitable in real estate and instead review where the real money is.
Episode 31: Why There’s No Money In Original Thought Transcript
I'm a baby boomer and I remember before there were cell phones. And back then, if you wanted to call a client, you had to use a payphone. Later on, they invented what they called a bag phone. It was a bag about an eight and a half by 11 and about six inches thick. You carried it on a handle. If you want to make a call, you'd have to unzip the bag, pull out the phone, put in the number. Wouldn't work in most buildings. Often had to go outside to have enough reception to even work. We jumped from the bag phone to the brick phone, those giant handheld cell phones that literally were the size and mass of a brick, about the same weight. And then, of course, fast forward to today. Your smartphone is an amazing invention. It has everything on it. It's got email, it has texting, you can read the news. And that innovation made fortunes for all those involved. And each progressive step from one option to the next, everyone got rich because they had the next best, better idea, had reinvented the mousetrap, and everyone was happy. And all those stories have literally nothing in common with the American real estate investment world.
This is Frank Rolfe with the Commercial Real Estate Mastery podcast. We're gonna talk about why there's no money in original thought when it comes to real estate. And at a time when America is in a giant metamorphosis of technology, it seems almost to be a heretic to say, "Well, new thought, original thinking, no, don't do that. It's bad." But here's what you have to initially ponder. When you look at most of these businesses that are fast-growing with innovation, they're fairly technical. What they're doing is they're coming up with faster and better ways to get things done. But real estate is all about bricks and mortar. There's not a lot of technology, not a lot you can change to them. Most buildings today in America, in fact, are more closely tied to even the Romans than they are to modern technology and all the different things that we do as a society today. So real estate is predominantly old-fashioned, always will be.
That's just its niche. It's old. But you might say, "Well, even on old things, aren't there some original things you can do, new innovations?" Well, yeah, sure there are. People, for example, have been taking old office buildings and trying to make them into apartments, but it's not been hugely successful. I myself know of several of those projects which have gone completely bankrupt because people just got confused on what Americans wanted. They got a little lost in the cost to build those projects. And when they got all done, they found the rents wouldn't support what they paid. You see that in many different retrofit industries. Same is true of people trying to retrofit new ideas into shopping malls. How's that been going? Not very successfully. So, yes, there are new things out there in real estate, new visions of things you can do. But if you want to make big money, that's often not your best approach. Here's why: because you don't have to be original to make money in real estate.
We're an industry in which old things still work, and they work just fine. In most niches of real estate, to be a raging success, you have to get a two to three point spread between the cap rate on the property when you buy it or when you fix it and the interest rate on your loan.
Assuming standard leverage of 70 or 80% loan-to-value. That's the established path and it always works. You don't need to do anything radical and new. And by following the established path, we have liquidity. And liquidity is key. Sam Zell, who was the only person in history to dominate three different real estate sectors number one in office, number one in apartments, number one in mobile home parks they called him the Grave Dancer because he seemingly was able to get in and out of trouble so quick and no one else ever was able to. And if you read his book that he wrote before he died called Am I Being Too Subtle? You'll see the reason he was the Grave Dancer, the reason he could get in and out of problems quickly, was he was obsessed with liquidity. And liquidity meant that he could get a loan, refinance, or sell the property to someone else to get a loan because he always followed the established path.
Sam Zell's career was, in a single word, boring. There was never any new innovation, no original thought. He simply did the same thing over and over and over, but that gave him liquidity because the lenders knew that that established path worked and therefore they had no problem giving him a loan for that. Most of your original thought in the real estate industry revolves around taking a chance, about being a pioneer. But you gotta remember that pioneers often ended up with arrows in them or dying of dehydration in the desert or starving to death in the mountains. Pioneering had a lot of big successes. You see that on the show Yellowstone, right? How'd they get the giant ranch out there in Colorado? Oh, they were pioneers. They were the first ones to settle that part of Colorado. That sounds all kind of great on a TV show, but for every Yellowstone founder, how many people died in Western expansion? If you ever watch those westerns, all the people in the covered wagons all going out to get their fortune out west, no idea what they're doing, they don't have the right supplies, they don't have any money, they're gonna go out there and do it.
What percent actually ever did? It's incredibly small. I can't give you the exact number. I don't know if AI could even calculate it because they didn't really keep headcounts of pioneers going west, but it's like a fraction of 1% made it. Everybody else either died or had to somehow crawl back to wherever they came from because they were unable to be a stakeholder to make anything happen out there. So the bottom line is, when you're looking at real estate, the key item is not to come up with innovation. You don't have to come up with a new idea, some new idea of some kind of niche of real estate which doesn't exist today. You don't have to be like WeWork. That was a crazy brainchild I forgot the guy's name where he bet the farm that we were all gonna want to share communal offices and the whole thing completely crashed and burned. You don't need to be that guy. You don't need to think up something new, something different to get into real estate. No, the key is to go into something that's already established because that's the safe way to make money. And the opportunity is still abundant in real estate following the old original trail. So don't be original. Just follow the old methods and be successful. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. Hope you enjoyed this. Talk to you again soon.
