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More from @TheRealEstateG6

The Real Estate God

@TheRealEstateG6

Apr 23

You want to start your own real estate private equity firm but you don’t know how much it’ll cost

Here’s how to think about start-up costs:

There are basically 2 ways to set up a real estate private equity firm

1. First way is to start a fund. This means you raise the money first and find the deals later

2. The second way is to operate deal-by-deal, which means you only raise money for specific deals as you need it

Starting a fund involves a ton of legal costs, compliance costs, administrative costs

Wouldn’t recommend even thinking about this path unless you’re planning on raising a lot of money ($50MM+)

It involves a ton of startup costs and a ton that can go wrong

Read 19 tweets

The Real Estate God

@TheRealEstateG6

Apr 23

Most people treat real estate like a numbers game

That’s the wrong way to look at it. Real estate isn’t just numbers in an excel file. It’s living and breathing

Here’s what to look for in a property to make sure you don’t make that mistake:

First thing most investors do when they see a deal is open excel and look at the numbers

“What’s the cap rate?”

This is extremely stupid. You’re not buying numbers in excel, you’re buying real estate

If you buy solely based off numbers, you’re going to make a costly mistake

The real estate drives the returns

If you buy bad real estate that no one wants to live in, no amount of number crunching is going to save you

Bad real estate is bad real estate and you’ll be stuck holding the bag

So you want to vet the physical real estate *first*

Read 16 tweets

The Real Estate God

@TheRealEstateG6

Jan 16

// $0 to $1MM in 5 Years //

Probably the most common question I get from younger guys is “How would you do it all again if you were my age?”

I’ll do you one better. Here’s an extremely realistic gameplan to get from ~$0 to $1MM in 5 yrs

I’m going to assume that you have a W2, are roughly 22 and have limited capital coming out of college

We’re going to get you from $0 to $1MM in just 3 deals

// Deal 1 //

You’re broke and have no skills. Everyone was here at some point. You can either whine about it or you can get moving

Reason most people think making money is hard is that they focus on how hard the end goal is (making $1MM) instead of focusing on the first step of the process – gaining the knowledge necessary to start making money

This first deal doesn’t matter at all. The only reason it matters is to “get you in the game”. Once you buy a deal you start accruing market knowledge, you start accruing relationships (lender, investor, broker, etc) – you start to become “dangerous”

You obviously want it to be a good deal but it doesn’t need to be a *great* deal. Because the purpose isn’t to make money, it’s to gain knowledge/skills/relationships so you can make real money on future deals

So what does this mean in a practical sense?

Step 1: Figure out how much equity you either have yourself or can raise

I was literally dead broke for my first deal so was only able to put $2,500 of my own money in. I reached out to my entire network and was only able to gather ~$100k. That wasn’t enough to buy a triplex all cash in my market (which is what I was targeting)

So I reached out to friends who could possibly partner up in the deal. Meant splitting the GP profits but didn’t matter to me. Was going to do whatever it took. If I needed to take on 10 more partners, I would have. It wasn’t about the profit, it was about the skillset

I finaly found a partner and using our combined networks, we were able to muster $200k, which allowed us to buy a triplex

I’m going to assume you can raise a similar amount, but if not, no problem. Whatever amount you can raise, you back into a deal of that size. If you truly can’t raise any money (this is probably a severe character flaw if no one you’ve met in 20+ years of life would be willing to give you any money – but that’s a separate point), start up a real estate social media account, share your thoughts/analysis, create a network and raise the money that way

Step 2: Finding the deal

-          The market: You’re going to go into a market where deals sell for less than $150k/unit. Additionally, deals in the market should be selling for 6% cap rates at minimum otherwise you’re going to find it too difficult
-          You’re going to search on Zillow/Redfin for duplexes, triplexes and quads (loopnet and crexi only really work for bigger properties)
-          Open up excel. Make a list of every property listed in the market. Track the price per unit it’s listed for and note the price per unit it sells for. There should be 50+ properties on this list or you’re doing it wrong. Download any and all financial information that’s included in the listing. If there’s no information in the listing, call up the broker and get it from him. By the end of this process, you should know exactly what price per unit properties sell for in the market and exactly what cap rate they trade at. You’ll be looking to buy a property below the market price per unit and above the market cap rate (stabilized yield). Simple
-          Market rents: Same thing. First use the mls/costar if you have access to it. If not, get comps from brokers (still have to vet them yourself). Worst case scenario, use Zillow/apartments.com for active comps. Put them all in excel, discard any outliers and take the average. You’ll still need to run the “market rent” for each new deal you look at as each property differs slightly, but this should get you close initially

-          Expenses: Use the P&L information you now have. Line each individual P&L up next to each other in excel & for each individual line item, note the cost per unit, cost per square foot & the overall expense load as a percent of revenue. Now you’ve figured out both revenue & expenses. You now should be able to create a brand new P&L for new properties you look at from scratch
-          Brokers: Every time you see a broker on a listing, you’re going to call him up, ask him a few questions about the deal, tell him your criteria & ask him to add you to his mailing list. You should start receiving “passive” deal flow to your inbox every morning. Should also set Zillow/redfin alerts for your criteria. You’ll probably have to look at over 100 deals before pulling the trigger
-          Underwriting. You’re going to underwrite 3-5 deals a week minimum. You’re going to underwrite them based on their stabilized yield (if you don’t know what this is, search my tweets for it). You’re looking for a 200 bps+ spread between your stabilized yield & the market cap rate. The higher the stabilized yield, the better. The goal is to understand exactly what price per unit & stabilized yield you’d buy a property in this market for so you’re ready to pull the trigger when the time comes

Step 3: Pulling the trigger

Your “buy box” should already be established, only thing left to do is find a deal that fits it. You should be tracking the aggregation sites daily, have plenty of broker contacts at this point & have a lot of deal flow hitting your inbox

When you see a deal that fits your criteria, pull the trigger
Since this is your 1st deal, you may have a hard time getting a loan. Instead of whining about this (like most people do), you can
1. Do the deal all cash
2. Use seller financing
3. Get a guarantor to hop on the loan

Doesn’t matter which one you use, just get the deal done. As quickly as possible

Deal 1 Summary: Depending on your access to capital, your first deal should be 1-5 units in the $200k to $500k range. The timeline should be quick (doesn’t take long to renovate 5 units or less) & the profit doesn’t really matter so I’m not even going to bother listing it. The idea is to “get you in the game”

// Deal 2 //

While you’re stabilizing Deal 1, you should be working on Deal 2. It’s not hard to operate a sub 5-unit property so you’ll have plenty of time. Idea is to close Deal 2 ~18 months after closing Deal 1. This is a very realistic timeline (I know because I’ve done it)

Deal 2 is different. You’re no longer a beginner. This makes life a lot easier. You’ve already established your market, you know your buy box, you have lender relationships & broker relationships. The only thing that’s changing is the deal size, which should now be bigger

This is the big mistake people make. Instead of scaling up after Deal 1, they do a similar-sized deal. They stay in their comfort zone. This is the opposite of what you want to do. Instead, you want to treat the first deal as a stepping stone to larger deals

This next deal should be in the 10-20 unit range, $500k - $2.5MM size range. The timeline should be roughly 18 months and your personal profit should be $38k - $188k. Honestly think this is a low bar but we’ll go with it anyway (you can beat a 2x return on a deal this small)

So how will it work?

You’re going to buy another value-add multi deal using the same process laid out above. Stabilized yield 200bps+ above the market cap rate (gets you to roughly a 2x return)

Let’s say you buy a $2.5MM deal. 75% debt, 25% equity. You don’t have to syndicate this deal but I’ll assume you’re still capital constrained & need to

$2.5MM * 25% = $625,000 total equity. I’ll assume you’re putting in 10% of the equity or $62,500

I’ll assume you’re able to 2x your equity in the deal over the course of 18 months (short timeframe again because of the low number of units), which is very doable for a deal in this size range. 2x means $625,000 in profit

Since you syndicated the deal (assuming a 30% promote), you’re entitled to 30% of the profits even though you only put in 10% of the equity

$625,000 profit * 30% = $188k. Not bad for 18 months of work

And you also obviously get your initial capital back, which gives you a decent chunk of change to invest in your next deal. But you’re just getting started

// Deal 3 //

At this point you really have the hang of things. You have 2 successful deals under your belt. The learning is (mostly) over. You spent 3 years making pretty much nothing while banging your head against the wall and now you’re looking to make real money

You should have an edge in the market by now (accrued market knowledge and relationships) and should be ready to take advantage of it

So you’re going to scale up again. This time you’re going to look for a deal in the 50-100 unit range and the $2.5MM - $12.5MM size range

At risk of sounding repetitive, you’re just going to use the same exact process (the process outlined above) you used on the prior two deals, just on a slightly larger one. It’s literally the same thing except the numbers are bigger

But you’ve been developing a skillset for 3 years doing smaller deals so it shouldn’t be a problem

Some things will change this time around (on a deal this big you may need a guarantor to help you out with getting a loan, which means giving up a piece of the promote), but the process of analyzing real estate remains the same, the process of buying real estate remains the same, even the execution of the business plan remains the same

It also gets harder to find deals as you get bigger. It’s not impossible by any stretch but it’s definitely harder. This is where your accrued market knowledge and broker relationships pay off. You’re looking to utilize your relationships to scoop up a deal off-market

We’ll assume you’re able to find a deal that stabilizes 200bps+ above the market cap rate, execute your business plan and 2x your money again, this time in a 2 year span (once again, very realistic for a deal in this size range, especially since you have 18 months from the start of Deal 2 to find this deal)

$12.5MM deal = roughly $3.125MM of equity

$3.125MM profit (assuming 2x) * 30% promote = $937,500

Not $1MM on the nose but close enough. And if you outperform (3x+) , you clip $1MM easily

That’s it. If I were 22 again, this is exactly what I’d do (I’d also start up a side business as well while still at my w2 for additional cashflow to pump into deals)

5 years, $1 million dollars, millionaire by 27

Is any of this “easy”? Of course not. Is it all extremely realistic? You’d better believe it. Each step follows the next. As long as you proceed methodically, it’s very achievable. It’s only 3 deals in 5 years - actually wouldn’t be surprised if many of you were able to outperform that. If anyone tells you it’s not possible, they’re just flat-out lying to you

Main reason why people won’t do it?

It’s slow, it’s boring and it requires barely making any money for the first 3 years

Good news is 99% of the planet has the attention span of a rabbit, is unable to follow a simple process, and is flat out incapable of delaying gratification so you have no competition

Good luck!

// If you’d like to learn how to underwrite and buy deals like this (or even smaller deals, my first deal was $200k and I only used $2,500 of my own capital) apply in the next tweet for the Acquisitions Bootcamp to work 1-on-1 with me //

Read 4 tweets

The Real Estate God

@TheRealEstateG6

Dec 14, 2023

“A Roadmap For The Future”: How to not only avoid being left behind in today’s world, but a step by step process on how to thrive (next 5-10 yrs will be one of the easiest times in history to get rich)

Read 5 tweets

The Real Estate God

@TheRealEstateG6

Dec 11, 2023

Since you syndicated the deal (assuming a 30% promote), you’re entitled to 30% of the profits even though you only put in 10% of the equity

$625,000 profit * 30% = $188k. Not bad for 18 months of work

And you also obviously get your initial capital back, which gives you a decent chunk of change to invest in your next deal. But you’re just getting started

// Deal 3 //

At this point you really have the hang of things. You have 2 successful deals under your belt. The learning is (mostly) over. You spent 3 years making pretty much nothing while banging your head against the wall and now you’re looking to make real money

You should have an edge in the market by now (accrued market knowledge and relationships) and should be ready to take advantage of it

So you’re going to scale up again. This time you’re going to look for a deal in the 50-100 unit range and the $2.5MM - $12.5MM size range

At risk of sounding repetitive, you’re just going to use the same exact process (the process outlined above) you used on the prior two deals, just on a slightly larger one. It’s literally the same thing except the numbers are bigger

But you’ve been developing a skillset for 3 years doing smaller deals so it shouldn’t be a problem

Some things will change this time around (on a deal this big you may need a guarantor to help you out with getting a loan, which means giving up a piece of the promote), but the process of analyzing real estate remains the same, the process of buying real estate remains the same, even the execution of the business plan remains the same

It also gets harder to find deals as you get bigger. It’s not impossible by any stretch but it’s definitely harder. This is where your accrued market knowledge and broker relationships pay off. You’re looking to utilize your relationships to scoop up a deal off-market

We’ll assume you’re able to find a deal that stabilizes 200bps+ above the market cap rate, execute your business plan and 2x your money again, this time in a 2 year span (once again, very realistic for a deal in this size range, especially since you have 18 months from the start of Deal 2 to find this deal)

$12.5MM deal = roughly $3.125MM of equity

$3.125MM profit (assuming 2x) * 30% promote = $937,500

Not $1MM on the nose but close enough. And if you outperform (3x+) , you clip $1MM easily

That’s it. If I were 22 again, this is exactly what I’d do (I’d also start up a side business as well while still at my w2 for additional cashflow to pump into deals)

5 years, $1 million dollars, millionaire by 27

Is any of this “easy”? Of course not. Is it all extremely realistic? You’d better believe it. Each step follows the next. As long as you proceed methodically, it’s very achievable. It’s only 3 deals in 5 years - actually wouldn’t be surprised if many of you were able to outperform that. If anyone tells you it’s not possible, they’re just flat-out lying to you

Main reason why people won’t do it?

It’s slow, it’s boring and it requires barely making any money for the first 3 years

Good news is 99% of the planet has the attention span of a rabbit, is unable to follow a simple process, and is flat out incapable of delaying gratification so you have no competition

Good luck!

// If you’d like to learn my exact process on how to start buying deals, apply for the Acquisitions Bootcamp to work 1-on-1 with me in below tweet //

Read 4 tweets

The Real Estate God

@TheRealEstateG6

Sep 28, 2023

// Why losing money in your 20s is near meaningless and why people who focus on maximizing earning capacity instead are the wealthiest by far //

When I was 22, I lost $30k on a real estate deal. At the time, it was pretty much my entire net worth.

According to every official "personal finance" rule ever, I’d committed a cardinal sin by losing my principal.

But it ended up being one of the best things that ever happened to me.

In order to understand why this was the case, you first have to understand why “personal finance gurus” are wrong about everything. And the reason they’re wrong about everything is that they view everything from a purely financial perspective – as if it’s all happening in the cells of an excel model.

What pretty much no financial guru gets is that losing money doesn’t happen in a vacuum. In my case, they would tell me – “you invested $30k and lost $30k, so you had a 0x return”.

The next thing they would do is plug that $30k into a compound interest calculator and show me how much money I lost out on over the next 40 years. “$30k at 8% over 40 years would be $650k. So you didn’t just lose $30k, you actually lost $650k. Yadda yadda yadda, yap yap yap.” From a purely financial perspective, they’re right.

Unfortunately for them, that’s not how life works. Life isn’t played in a box. It can’t be accounted for in a model. You can color outside the lines.

The results of your prior investments are linked to the returns of your future investments. This is a critical thing to realize. Although the investments appear to be separate on paper, they’re not – they’re connected by you. And you’re a living, breathing, changing organism. When you lose $30k, $50k, $100k, $1MM, the return on that capital doesn’t stop the day that the investment is toast. It’s not etched as a zero for all of eternity.

The lessons you learn from a failed investment are crucial to helping you make better investments and better returns in the future.

Once again, this doesn’t show up in an excel model because it’s intangible – the “change” is occurring in your brain (in the form of becoming a better investor) and your brain can’t be reflected in an excel model. It's a 0x return on paper but a massive return in terms of future earning power.

In the most simple terms possible – the reason why losing $30k was one of the best things that ever happened to me is that I lost money in the short-term but gained earning capacity. And the earning capacity that I gained far outstripped the money that I lost.

The thing that I’ve always found odd is that people tell you that, in the beginning, learning is more important than earning when it comes to your job (“learn in your 20s, earn in your 30s”) but they never talk about the importance of learning when it comes to investing. They just tell you that you need to start early and you need to be compounding. But what if you were able to learn skills that made you capable of out-compounding the average person? Wouldn’t it be worth losing some money to learn those skills?

That’s where earning capacity comes into play.

**Earning Capacity**

This concept of earning power is extremely important. High earning power is actually quite literally the most important trait you can have financially. We’ll get into why that is more at the bottom of this section, but first off let’s define the concept.

What is earning capacity?

I like to quantify people’s abilities into a specific “earning capacity”. Everyone on earth has a different earning capacity based on their skillset, their resources, their work ethic and their network. Someone who works at McDonalds has a very different earning capacity than the CEO of a publicly traded company. Just like a tech sales rep has a very different earning capacity than a hedge fund analyst.

I define earning capacity as your ability to generate net worth over a 10-year time-span.

So if your current abilities allow you to add $3MM to your net worth over a 10-year time-frame, that’s your “earning capacity”. There’s some fluidity between ability to add income and ability to add net worth, but for the purposes of simplicity, let’s just stick to ability to add to your net worth right now (the ability to add value to your net worth is far more important anyway).

Earning capacity can be gained but it’s very rarely lost. Because it’s hard to lose the knowledge once you have it. In a sense it’s like a video game. You perform a task and you “level up”. It’s hard to track the upper bound of your earning capacity, but it’s relatively easy to track the lower bound of your earning capacity. The lower bound is the minimum amount you should be adding to your net worth every 10 years

As a baseline, this number should at least be in the 7-figures. If it’s not, you have a major earning capacity problem (we’ll address how to solve this problem later on). A sub-7-figure earning capacity should be considered crisis mode – not even kidding, I would put everything on hold in your life until you work your way into 7-figure plus range

So why is earning capacity so important?

For a few reasons. The first is for downside protection. If you get zeroed out and you have very high earning capacity, it’s not even a big deal. It’s actually pretty close to impossible for being zeroed out to affect you for long if you have serious earning capacity because…you can simply earn your way out of the problem

And that’s a good way of testing how powerful your earning capacity is as well – if you got zeroed out tomorrow, how quickly would you be able to make it all back? The quicker the better obviously

If the answer is that you wouldn’t really be able to make it back, that’s a huge problem. That means you got lucky making your money and you can’t repeat it. It means your earning capacity is poor & that you need to develop skills ASAP

The second reason why earning capacity is so important is the obvious one – it’s how you make a lot of money

So the question really becomes “how can you generate excess earning capacity?” – & the answer is almost exclusively from mistakes (experience).

Let’s dive into an example from my own life.

**Continuing the Example From My Own Life**

In my case, that $30k I lost was on a real estate deal. I lost the capital but I gained experience. I learned how to structure deals. I learned about risk & reward. I learned which deals to take down moving forward and which ones to avoid. I learned how to make money

The lessons I learned by losing my principal in that deal helped me in every single one of my future deals

How does this work?

Let’s look at an ex of a deal I’m currently doing. In Sep 2021, I bought a 48-unit multi deal for $2.6MM. Since then I’ve increased the rents from an average of ~$700 to an average of over $1,200. In turn, that has increased the NOI to over $500k, meaning that the building is worth roughly $7MM at a 7% cap rate. The details really aren’t important, but what is important is the returns at the new valuation.

Below are the real returns of the deal at the current estimated valuation (feel free to handicap the valuation as you see fit). I’m the “Sponsor” which means my returns will be 7.5x (disclosure – I have 2 partners so the promote is split 3 ways)

These are obviously not normal returns – they’re entirely abnormal. And do you know why that is? It’s because I haven’t lived a normal life. I’ve taken risks. I’ve made mistakes – a lot of them. Those experiences have made the person I am today - a person who’s capable of generating these types of returns. I don’t mean to brag but it’s important to emphasize – I’m the person I am today because of the mistakes I’ve made (including losing my principal on several embarrassing occasions)

Reason my earning capacity is so high is that I’ve learned from my experiences

[kept initial writing in place but deal has since sold for $6.4MM]

Zero people who’ve never lost their principal (or at least a portion of their principal) have returns like these. Zero. It’s simply not possible. You can’t generate above-market returns without the “detour” of several expensive lessons along the way.

You need experience (generally through mistakes) to have a high earning capacity. As my dad likes to say, “every so often, the market teaches you a lesson so expensive that you’ll never make it again”.

If I hadn’t done that deal when I was 22 (and lost $30k), I wouldn’t have had the experience to do this deal and make a 7.5x. I’m telling you right now – this deal never would’ve happened if I hadn’t been completely wiped out in that earlier deal.

So that’s what all these personal finance guys don’t understand. Yes, that initial deal was a 0x return. But I gained such massive amounts of earning capacity that it doesn’t matter. I won’t claim to be able to hit 7.5xs on all my deals. But with a real estate private equity fee structure and a reasonable investment, I should be able to regularly 2-5x my capital.

As a side note, if you’re interested in the rough math behind this: Let’s take a sample $1MM deal. $250k is equity, $750k is debt. The sponsor (me) puts down 10% of the equity or $25k. Over a 5-year horizon, the deal equity doubles (roughly a 15% IRR, which is pretty standard). You return the first $250k as principal. The sponsor is entitled to 20% of the profit (“2 and 20” – this is the promote) or $250k * 20% = $50k. $50k + your $25k principal = $75k total proceeds. $75k divided by $25k initial investment = 3x sponsor return on a pretty mediocre deal. And that’s not even counting the money made from acquisition fees, management fees or anything else. Running a private equity firm is one of the highest earning capacity skills on the planet.

Back to the main point - you should always be willing to give up capital in the short term in exchange for more earning capacity in the long term.

You have to internalize that it’s good and natural to make mistakes early on. “Never losing your principal” just means you’re playing life scared. Does this mean you should start running around like a chicken without its head and losing money left and right? Of course not. You should always be careful with your investments. But if you’ve never lost at least a portion of you principal before, you’re not taking enough risks – and that’s a fact.

**The Big Mistake Most People Make**

The big mistake most people make (personal finance gurus included) is focusing on small dollars early on instead of earning capacity. All you hear about is the wonders of compound interest. Cool. How about the wonders of increasing your earning capacity.

If you could learn a skill that could add $5MM to your net worth over 10 years, would you really care about getting 8% on your tiny little $30k investment? Would you even care if you lost your entire $30k investment? Of course not. People are focused on the wrong thing.

Whenever I post about 401ks (hate those things) people get really emotional and start yapping to me about how I don’t get it and about how a 401k is free money. No, *you* don’t get it. DCAing into the S&P teaches you nothing. It informs you about nothing. It doesn’t let you build new pathways in your brain. It doesn’t allow you to invest better in the future. It doesn’t teach you risk/reward. You gain zero earning capacity from the activity.

And that’s all that matters early on. Every investing action you make early on should be measured not by percentage return but by earning capacity gained (ECG).

Here’s the crux of it. Investing that money in your own way and learning how to actually manage it will beat out the returns from the S&P 500 over a long-term horizon (hint: it’s not by investing in public equities). With ease too.

People who only invest in their 401k only have 1 path, investing in their 401k. Market down? DCA into 401k. Market up? DCA into 401k.

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