Real Estate Investing: A Beginner’s Guide

Looking to get involved in real estate investing/development? Look no further. 

The 4 main pieces of value to any deal from a development perspective – The acquisition, the construction, the financing & the deal positioning. Yes, there's also the sale/management which comes post construction, but I'm referring to a deal from the standpoint of a developer or investor -- which transitions at stabilization.

Let's break these down individually . . .

The Acquisition

Nobody that I know has enough deal flow! Or at least enough solid deal flow ... There's always deals out there but 99.9% of them suck (yes that's an accurate estimate (probably)). Seeing deals is not unique, but seeing deals with a heavy upside and a comfortable floor is definitely unique. 

A developer (us included) would happily give anybody a piece of a project if they brought them a good deal. This is how we started in this business and to be honest, we would've been better off continuing to partner for a bit longer than we did. We could've saved ourselves from a few hurtful beatings. I can't say I regret it, because those beatings forced us to get creative and bring construction in-house, but looking back -- we could've achieved the same thing with less pain.

The Construction

Every deal starts with a plan to add value! The construction is the execution of that plan and boy is it easier said than done .... We came into this business thinking that we would hire experts to sort out the gaps in our knowledge. And in theory, that's a great plan, However in execution it's much more difficult. I don't know about other industries, but the truth is that in construction there are 9 jokers for every 1 professional. And all the really good one's scale up their business to do larger, more profitable projects. Which leaves a huge talent gap in the smaller, more manageable projects. 

Counterintuitively, if you're doing a 200 unit development, finding talent will be easy, but if you're doing a 3 unit development it'll be very difficult. If you're in the construction business and have a track record working with a company and building projects efficiently, you can absolutely find equity for yourself. Anybody experienced knows what I'm saying here is true and will take on construction partners with a smile on their face.

The Financing

There's debt and equity. Equity is paid as cash by an investor and will grant you a piece of the deal right off the rip! Debt is usually from a bank or private lender. You can invest cash as debt as well. It's a safer way to invest in that the property is collateral but it caps your return. Some investors would be better as debt investors, some would be better as equity investors, but today we're talking about equity so get ya cash up and stay ready. For this one all you have to do is wait for us to reach out, sit back and collect your returns!

The Deal Positioning

This is the true job of a developer. This is learned with experience. It's actually amazing to me looking back at me from 3 years ago and realizing how little that version of me knew. And that thought is inspiring because I think about how good me 3 years from now could be. When I say deal positioning I'm referring to the entire package. Understanding what you can do with construction to add value. How many units can you add? What is the best layout for those units? What's the most efficient layout for the building with the least amount of non performing sqft (hallways/stairs)? 

In summary, this is the art of finding the most efficient use of this $1 - to where it will return $4 instead of $3. Getting good at this takes specialized knowledge in all other categories (including the post-stabilization categories like leasing/management/sales). There is no substitute for experience here. I'm better than yesterday and not as good as tomorrow and I take every instance as an opportunity to learn and get better here. As you get better in this category, all of the other categories (acquisition, construction, money) will start chasing you rather than the reverse.

Why is it important to understand each of these individually? Because, in my humble opinion, the best way to get started with investing is to add value in one of these categories and find someone who is experienced in the other three. Leverage someone else's experience by adding value in one of these four ways and pay attention to how they handle the other three. After some time, if you choose, you can slowly start doing each of these yourself and own 100% of the deal, but when you start it's better to keep your focus on adding value to someone who's more experienced for the purpose of learning. Holding on to 100% of a deal may be the most expensive thing that you do.

I'd rather own 1/2 of a watermelon than a full grape!