The 2nd wealthiest guy I know and how he prints money out of thin air

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Lets dive in:

Let me tell you a quick story about trampoline parks and gyms and how my friend Frank got very, very stupid wealthy. He’s the second wealthiest guy I know behind (Ryan) who you heard from two weeks ago. He also drives a used car, but his is a little nicer (2017 Mercedes he bought at an auction for fun).

My friend Frank buys and sells large retail strip malls. He loves the asset class. It’s easy, he says. And he’s right. Because I only really see him playing golf and drinking bourbon and traveling the world. He is living the dream.

Here’s how he does it:

He looks for property for sale with a lot of vacancies. Picture a property with 300,000 SF that has three or four areas for rent, but only 2 or 4 of them are rented. About 50-75% full. A distressed asset. Sub-optimal NOI.

We’re about to start discussing cap rates and NOI and how they work together. Take this free quiz if you aren’t sure and want to understand the rest of this email.

Since the property is not performing well, it is likely to trade at a discount. Remember how we talked about in-place NOI vs. going-in NOI in the quiz above? And in-place cap rate vs. going-in cap rate?

He pulls these same levers to make money. Let’s discuss how.

Let’s say Frank finds a big 300,000 square foot strip mall for sale in Seattle, WA. A retail plaza. I know this is his wheelhouse because I did some consulting for him on potentially building out a storage facility inside one of them. The storage facility didn’t work out, but the deal did and I got to see him work his magic.

Let’s say this strip mall has 150,000 square feet leased, and those tenants are paying $8 / square foot / year NNN. That is $1.2MM in revenue to Frank. But there are expenses because the landlord (Frank) covers the taxes, maintenance, and utilities on the other, open buildings. So let’s say the building is generating $1.1MM in NOI. But remember, there is vacancy, so the max potential revenue is $2.4MM. And if it’s all NNN that’s all NOI because NNN means the tenant pays the expenses related to the space and common area maintenance (CAM).

So the $1.1MM is the in-place NOI. The $2.4MM is the “potential” NOI.

You can’t ask a 6 cap on the $2.4MM NOI because it is currently nowhere near it. Much more risk there. This asset would more likely be priced at a 12 cap on $2.4MM or $20MM. That would be an in-place cap rate of 5.5. That sounds about right, given the upside potential and risk. [This is pre-covid].

So he puts in an offer on it for $20MM and gets it under contract.

But he has an ace up his sleeve. He has very close friends who run and own Planet Fitness and trampoline park franchises. Frank is an investor with his friends and has an equity stake in the franchises, but these guys do the work and operate the businesses. He meets with them, shows them the building (all before he owns it), and sees if they like it.

They do. They’d love to open up locations here in Frank’s new location. So he shakes hands and signs a lease with his two buddies for the entire 150,000 SF section of unleashed space. He’s moving in a Planet Fitness and a trampoline park shortly after he closes. Boom baby.

Frank closes on the shopping center and takes ownership. The day he buys it he starts the build-out for the two new tenants, and a few months later they move in and start paying rent.

Net Operating Income is now $2.4MM – up from $1.1 million when he bought it. Done deal.

What is his new value? You guessed it. Around a 6.5 cap on the new in-place NOI.

New NOI = 2.4MM / .065 = $36.9MM.

So what he had purchased months earlier for $20MM is now worth $36.9MM. He created $16.9MM of value instantly. Out of thin air. He didn’t even have to take any risk or build anything.

That is the power of real estate when you have an operational advantage.

My operational advantage in self storage is that I can cut expenses with remote management and raise rents to true market rent. Frank’s advantage is that he can lease space to tenants he has relationships with. Ryan’s advantage is that he can build buildings really efficiently.

Many real estate investors don’t have a competitive advantage. They simply buy a building and run it with third party management like anybody could and collect their modest returns.

But the people I know getting REALLY WEALTHY in the real estate game all have something in common:

They run it like a business and have a competitive advantage. They can do something themselves to increase revenue or decrease expenses and thus make a building more profitable and thus more valuable.

This is why I discuss small business, hiring and management so often in this newsletter. Operations truly is the key to real estate.

Bolt Storage can buy $50 million a year worth of real estate and operate over 60 properties and 1.9 million square feet because we have the processes, employees and systems in place. We have 50+ employees.

We treat real estate like a small business.

That’s all for now – talk soon.


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About Me

I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.