Real Estate Billionaires Do These 4 Things And You Should Too
Real estate billionaires no longer get the airtime they once had. The high-flying tech billionaires and the electric car/spaceship/solar panel/underground tunnel billionaires are attracting the attention of the financial media. But the real estate billionaires are still there, producing wealth.
Let’s take a look at what some of the most publicized real estate investors are doing today and how two REITs, Residential Equity (EQR 0.08% ) and Prologis (PLD -1.39% )as well as Berkshire Hathaway ( BRK.A -0.65% )( BRK.B -0.55% ) are involved. And find out how you can use these strategies in your own real estate and stock portfolios.
Leaving Tier 1 Cities
Real estate investment legend Sam Zell isn’t in the spotlight as much as he used to be, but his REIT, Equity Residential, keeps moving. Equity Residential is the modern evolution of the Equity Finance and Management Company, which Zell founded in 1969. It has grown into a $34 billion market capitalization multi-family REIT that owns 80,407 units in 310 communities.
As people started moving out of so-called Tier 1 cities (think New York, Los Angeles and Chicago) during the pandemic, Equity Residential followed suit. In 2021, it sold $1.7 billion of older complexes, mostly in California, and bought/developed or closed future development of $2 billion in properties in places like Atlanta, Denver and Dallas.
Equity Residential is looking to the future and getting out of areas that are too saturated. You can also do it in your investment. It’s well known that the amount it would take to buy an 800 square foot condo in San Francisco can buy you an entire strip mall in rural Texas.
Look for saturation and growth in the area where you are buying properties. You want to see a lot of population growth. If you’re forced to buy thirty- or forty-year-old properties because the city was saturated decades ago when millions of people moved out, you’re setting yourself up for poor returns.
Buy an industrial property
Two of the fastest growing real estate billionaires, Leonard Stern and Ross Perot Jr., owe their recent success to industrial real estate. The warehouse and manufacturing focused sector saw strong growth in 2021 which is expected to continue in 2022.
Much of the industry’s growth comes from the storage of goods sold online. The 800-pound gorilla in this type of logistics real estate is Prologis. The REIT owns 1 billion square feet of industrial space. It has 4,735 buildings in 19 countries and, surprisingly, its vacancy rate is currently below 3%.
Prologis has plenty of room for growth, but other than investing in a REIT, industrial opportunities are rare for individual investors. Your best bet is to keep an eye out for offices or warehouses in your area that can be leased to long-term commercial operators.
The key is to give yourself plenty of opportunities to increase market rate rents in the lease. Many industrial investors were content to sign long-term leases five years ago and now receive at least 20% less than market rent.
Billionaire Jeff Greene has made a success of his career thanks to his flexibility. He reportedly owned 18 homes by the time he graduated from college, but owes his jump through the billionaire ranks to a chance he took on credit default swaps in 2008. Greene was able to use his expertise on the housing market to see the crash come and profit out of it.
Today, its wealth is spread around residential, office and retail developments with a few lots dotted around. It is also geographically diverse, benefiting last year from its holdings in Florida while its holdings in California remained flat.
While it may not be in the cards for most individual investors to diversify that much, there are definitely benefits to diversification. You don’t want your rents going down, while your stocks are crashing and the baseball cards you buried in the yard are worthless. One way to start diversifying with stocks is to use the types of companies discussed in the next section. If one real estate industry or geographic area is hit hard, all of those stocks are unlikely to crash.
Bonus: focus on pick-and-shovel businesses
Warren Buffett is certainly a billionaire, but he’s not really a real estate billionaire. Sure, Berkshire Hathaway owns over $150 billion in assets. But what is 150 billion dollars between friends? The mega-cap company has more than that in cash and short-term fixed-income investments. And the company buys the property for its direct use, not to rent it.
The way Berkshire makes money in real estate is with adjacent real estate businesses. Home Services of America is the largest real estate brokerage firm in the United States. It provides just about everything to retail buyers, including mortgages, title and closing services, insurance, home warranties, and relocation services. Berkshire also owns Clayton Homes, which delivered 61,000 modular, manufactured, and tiny homes in 2021.
Many investors don’t realize the extent of their own skill set. When investing in real estate, pay attention to everything around you. What title company is growing fast? Which websites or apps are taking over the industry? Which banks grant the most loans? Every business that piques your interest is a potential investment.
Real estate billionaires don’t get rich using the same static strategy for 60 years (although it can take 60 years to become a billionaire). You must continue to grow. Move geographic locations when it makes sense, switch niches when markets change, diversify and buy stocks within your circle of expertise.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.