Thread by @TihoBrkan

1/ Academics sit down, write a paper & tell us why real estate is not a good investment. Link: papers.ssrn.com/sol3/papers.cf…

Meanwhile, in the real world, real estate investing isn’t about buying anything which won’t work. It’s only about finding a “good deal” in a “great location.”

2/ Let me try to explain this another way. I had a DM a while back asking if I thought real estate in Spain is attractive relative to other places in Europe?

Firstly, my own chart for reference. One could say that Madrid or Barcelona are more attractive than London, right?

3/ But that is not what real estate investing is about, at least in my opinion. It doesn't matter about the relativity of different markets.

It's about understanding all of the key metrics in the market you are investing in & then finding a "great deal" there.

4/ If the average price of London center is around 17,000 USD / m2 (1,580 sqf) — it isn't about thinking about how one could buy 3 units in Barcelona for each one in London.

It is more about finding a deal in either London or Barcelona, which would be BELOW market price.

5/ In other words, I rather buy a below-market price deal in a good location of London which might set me back 12,000 USD / m2 (30% below market, needs slight renovation) than to buy a similar location in Barcelona but at market price or even a new build with a premium.

6/ So all these academics papers are useless. They are trying to figure out how the average / median house & condo performed over the last 50 to 100 years. I can tell you without the research... not very well. Otherwise, everyone, not just the 1%, would be wealthy.

7/ The same way academics found out that the majority of stock underperformed Treasury bills. Link here: papers.ssrn.com/sol3/papers.cf…

The researchers concluded that "the best-performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926."

8/ Investing in real estate, as the great Sam Zell explained, isn't about timing the cycle & asking if its the right time to buy?

Instead, it is about finding a great deal irrespective of cycles. There are always great deals for those that know what they are doing.

9/ There have been several papers published about real estate being a bad investment, so this just another with the same old message.

My message is to learn how to build wealth in real estate the right way. Not by reading academic papers.

10/ Whether you're buying your 1st condo for 100k in Flordia; flipping a Kensington flat in London worth 7 million USD; or working with a syndicate in the multi-family that does 100 million USD annually, the same thing applies: know your market so you know what’s a “great deal”!

11/ So people always ask — what is a great deal? What does it look like? How do the numbers stack up?

To understand your local market, you need to invest time and follow it week by week. Eventually, with some common sense, you'll get a feel for it and know what is a bargain.

12/ When an agent is selling you a property, s/he will always finish with "...and it's a good location."

No, it isn't. Majority of the time good locations cost a premium. You'll pay an arm & a leg for it, so understand what a good location really is.

13/ If I can get a -10% discount, is that a good deal?

No, not even close.

If you factor in your buying costs or even round-trip costs (if you plan) for an exit as well, 10% is not going to do much for you.

You need to think bigger... much, much bigger.

14/ I'm not a big fan of using rules of thumbs, because every deal would be different from the previous. But here is how I would think:

If I buy a run-down property in an expensive top location area & plan on doing a luxury renovation project (usually what I prefer)...

15/ ...I would reverse engineer the numbers process. If other comparables have traded for $3 million in a close radius over the last 12-18 months, that would be planned exit price too.

At that point, the question becomes, what price do I need to buy a run-down property at?

16/ In real estate, you make your money on the buy. Said differently, the price you pay will determine if the deal is great, good or disappointing.

“It's not what you buy, it's what you pay for it that determines whether something is a good investment”. @HowardMarksBook

17/ Considering costs of renovation, round-trip costs of buying/selling, taxes & other fees — for a successful $3 million exit I would probably need to buy something at 80% of the final exit price, as well as also subtracting the cost of renovation + contingency.

18/ $3 million x 80% - (cost of renovation) = your buy target.

If the property is in the mid ranges, the formula might look like this instead:

$650k x 70% - (cost of renovation) = your buy target.

This is just a rough estimate, nothing concrete here.

19/ Hopefully this thread gets you thinking about things a little more. Real estate is such an interesting asset class & it is possible to be so creative with it.

Always have an open mind. For example, a person close to me is doing a very interesting deal with no money down.

20/ Everything is negotiable in real estate. The price, the finance, the terms with the seller/buyer, special deals, payment plans, price of labor & materials, the timing... everything is negotiable — use it to your advantage. Get creative!