On a recent 710 WOR “Mind Your Business” broadcast, Yitzchok Saftlas (YS) spoke with guest, Ira Zlotowitz (IZ), Founder And CEO Of GPARENCY.
YS: What does someone need to know before jumping into real estate investing?
IZ: There are two personas in real estate in investing. There’s who I call “GP Gary,” the big real estate tycoon. And at the other end of the spectrum, there’s “Acquisition Alice,” who’s just starting out. So, Acquisition Alice can be one of two people. They could be someone who’s looking to invest with a GP Gary, or someone who just wants to start buying real estate. So, there's a few points that I want to give as a backbone for real estate investing. Number one, you have to realize when you go into real estate that it's an illiquid asset. If you put your money in the bank, you can pull it out whenever you want. If you buy stock, you can pull it out whenever you want. But with real estate, you can’t pull it out whenever you want. You're going to sell it when the time comes to sell. If you're desperate for the money, you're going to lose it all, because you're going to sell it at a discount. So, it's an illiquid asset. It's the type of deal you're putting away for the long term. Number two, if you're going into real estate, before you look at the numbers of any deal, the first thing you want to do is look at the person. You want to follow someone that you trust to be honest. Obviously, they have an ulterior motive to a certain extent, because that’s how they make money, but it’s usually aligned with your goals. As far as a minimum threshold for real estate investing, there is no minimum number. It's all about the people you're investing with. In real estate investing there are basically two people, the GP (General Partner), who calls all the shots. And then, there’s the group of LPs (Limited Partners), who are the investors. Each GP could have a minimum. So, one GP could say, “I only take money. $10,000 checks.” That's why certain platforms opened, similar to crowdfunding. These platforms opened up and said, “you have the ability to put in as low as $5,000,” and they would invest in a bunch of different deals. My personal opinion is, if you're investing, you want to really invest directly with the GP. The closer you are to them, the better, because you get to know them, build rapport, and grow with them. You don’t want to just be a check and a number somewhere.
YS: Is getting involved in real estate worth the investment of time, money, and effort for an average person who doesn’t have a lot of financial assets?
IZ: The answer is two sided. If a person wants to become a GP, that means they want to be the person who's going to buy the deal and collect other people's money. If that's the career that they're choosing for themselves, then obviously, it’s worth the investment. But, in your first deal, do your due diligence, find an experienced GP, and become their Co-GP. Become like a partner to them. They will take the main lead, you'll get a smaller piece of the pie proportionally, and then together, you’ll raise money on the deal and build the account from there. On the other side of the equation, if for example, you own a small store and have little extra cash to invest, I think that you should for sure go into real estate. Take up to a certain percent with the right person and invest. People often will ask, “is there a better asset class? Should I invest in these types of deals or those types of deals? Should I do construction, development, or land?” A lot of this has to do with your own risk tolerance, and even more to do with the fact that certain things just pull at you. Say I was talking to a group of 30 people who aren’t involved in real estate right now. Imagine I asked them, “you found out that your great uncle left you $10 million in a will, and you can't spend it. You have to buy a piece of real estate and live off the return. What would you buy?” Some of them might buy ten $1 million buildings. Others might buy one $10 million building. Some of them might buy houses to keep flipping and sell off the profit. There's no right or wrong answer. In real estate, it’s different strokes for different folks. But the fundamentals and the starting points are the same. Find someone you trust, make sure you do your due diligence, and keep taking the steps from there.
YS: What are some of the potential benefits and challenges for jumping into real estate?
IZ: If everything goes well and you buy a building in a certain area, supply and demand can bring a lot of benefits. For example, think about when Amazon started opening up warehouses. Before, you could have bought something for $20 million and the price might trudge along to $21 million or $22 million. But, all of the sudden, when Amazon wants to be in that neighborhood, it goes through the roof and you can sell it for $50 million. So, sometimes you can have that kind of crazy upside. There's also tax benefits and other great things. The challenge is that you risk losing the tenants, can't afford the payments, and the bank wants to foreclose on you. So, there are a lot of these risks that get involved. That's why, if you're going with a syndicator or a GP that you trust, and they have a good track record and know the cycles, they know never to take more than a certain amount of leverage. Back around 2021, people were taking floating rate deals because they saw it was only getting better and better, and thought, “why lock in?” Now, those people don't look great in hindsight. Some people will say the opposite. “Don't take a long-term rate today. Rates are up. Take a floating rate today, because at least you’ll get the benefits if they keep going down.” Other people will say, “no, it’s going to keep going up.” You can't time these things. I used to tell a client, “what business are you in? If you’re in the stock business, buy stocks. If you’re in real estate and the loan makes sense today, take the loan.” But other people have different opinions. Overall, real estate has ups, downs, and risks just like any other market. But there’s one huge difference that separates it from anything else. It's illiquid. The pro, to a certain extent, is if you're a big enough investor in the deal, you have a say in what we should do differently for the building. “Should we upgrade it? Is it worth taking that risk?” If you invest in Microsoft, Apple, or Google, you have no say. So, some people like the fact that in real estate you have a say. Other people like the fact that there’s an actual, tangible asset that you’re dealing with. At the end of the day, there is a building there. And if you can figure out how to juggle the payments for the next 30 years, one day you might not have a mortgage, in theory. You'll see all different strokes for different folks about how they do business, based on how their mentors told them they should buy real estate.
YS: What should a business owner be aware of in order to stay ahead of the curve?
IZ: We're moving into to a world of gig economy. Uber is a great example. I once took an Uber, and the driver was this really professional looking guy. I said, “you're an Uber driver?” He didn't fit into the usual stereotype. He said, “I work downtown. I used to take the train, but I wanted a car. So, I signed up as an Uber driver. I leave my house an extra 50 minutes earlier, I put the destination of my office building into the GPS, and I drive to work while picking up passengers along the way. And when I leave, I can leave that second. I don’t have to wait on the train. And I make money. It covers the cost of the gas and the tolls.” So, the world is changing to that of a gig economy. My whole company is remote, and I hire experts in each space. I don't just hire a marketing person. Instead, I hire based on their specific expertise. If we need someone for SEO, I hire someone who does SEO. I hire based on the niche of each person. I think that’s going to become a lot more prevalent going forward. People are going to say, “what's the difference if this person is working part-time or full-time? What’s the difference if they are remote or in person?” Positions are becoming more and more fractured. So, if you have a great niche of what you do, then you’re going to be able to charge hourly for that at a higher rate.
YS: What change in the real estate market led you to move from running a major mortgage brokerage company to founding GPARENCY?
IZ: My partner used to talk about how there were two train companies. One had the tagline, “best in transportation,” and the other had the tagline, “best in train transportation.” But train transportation isn’t really relevant anymore. How do you get around today? With cars, planes, and whatnot. The first company still exists because they adapted. So, I went into the mortgage brokerage business as a trusted adviser. But, as the market and technology evolved, I felt that I needed to change to a new business model in order to continue providing the same value as a trusted adviser. When people invest in real estate, there's two terminologies that get used. One is called “cash-on-cash.” If I put in $1, how much cash am I getting back? The second is called the “IRR (Internal Rate of Return).” Basically, over the life of the investment, I don't care if I get $0 in the first couple of years. What I make up in years 3-6 to sell, will be enough to make up for that lost time. To me, the cash-on-cash was a terrible idea. But, I was pretty confident in the IRR and that when the market changed, it would make up for that lost time. I looked at the example of Netflix versus Blockbuster, and I said to myself, “I never want to be “Netflixed” out of my own business. I saw the handwriting on the wall. You can't time the market. Maybe I could have waited six more months. But I felt that the business was going to totally change, just like travel agents and stockbrokers changed. You’ve got to become Netflix and take that risk before it’s too late.