Real estate is an entrepreneurial business

When it comes to southern hospitality, there is no greater example than Robert Faith—a man who dresses casually for work and runs an office with few walls, smiling often and allowing his team at Greystar to collaborate in a fun and effective environment.

Originally destined to follow his father’s footsteps to become a petroleum engineer, Bob Faith’s path took a hard-left turn over 30 years ago, as he went on to create one of the world’s largest rental housing investment, development, and management groups.

With his freshly printed engineering diploma in hand, he entered a job market with no opportunities (due to the recession of the early 1980s). Like many young entrepreneurs, he decided to quickly exit the job market and continue his education: the perfect way to avoid the recession.

He went to Harvard Business School. After graduating with his MBA, Bob was able to find work at one of the largest property development firms in the country, Trammell Crow, which had a penchant for hiring fresh MBAs from elite business schools around the country and throwing them to the wolves. The great would rise to the top, while the merely good ones would sink to the bottom.

At the time, Trammell Crow was cleaning up the disaster left behind by the savings and loan scandal, which had become a crisis. His first assignment was to help his new employers exit the troubled projects left behind.

Even at the start of his career, he demonstrated a liking for finding solutions to the most complicated of Gordian knots. Knowing that he could always find a solution, Bob demonstrated contagious positivity and became renowned as a morale booster.

By the end of the decade, Bob had helped Trammell Crow in myriad endeavors and was ready to create his own company.

In 1991, he formed an alliance with a friend from his Harvard days named Barry Sternlicht to form Starwood Capital. Twenty-four months later Bob decided to create Greystar.

In His Own Words

People think of real estate as something solely controlled by big players, but nothing could be further from the truth. The world is filled with land. No matter where you’re standing, you’re surrounded by land. Real estate is still a very fragmented market, and that means it is very entrepreneurial.

While there are some big players with massive funds, there are also millions of deals that are too small to interest them. Investors focused on giant high rises in New York are not going to flip single-family homes in a small town in the middle of America. It’s outside their expertise and, financially, the deal is too small for them. That leaves a great deal of opportunities for those new to the real estate game.

I’ve always had an entrepreneurial itch. I began my real estate career at Trammell Crow, a world-class organization. Working at a company like this, you can be an “intrepreneur,” meaning you are an entrepreneur within a large organization that surrounds and supports you. Starting there was priceless and taught me so much.

Back in the 1980s, when I graduated from Harvard Business School, a company could borrow from a financial institution up to 105 percent of the development cost. The extra 5 percent was just so we could pay ourselves. That business plan lasted until the savings and loan crisis of the early 1990s hit, smashing just about everyone and stalling the entire US market.

We were able to get so much leverage for our first deals, whether they were distribution centers or speculative. But then, suddenly, after the crisis of 1991, we had to get equity investments.

Whenever there is a market shift, the real estate market enters the phase of “adapt or die.” We had no choice but to adapt. I had to raise private money, which was something new for me. We could no longer raise all of our money from the bank. The banks were tighter in response to this crisis, and that caused me to form a new company called Starwood Capital Partners with my old classmate Barry Sternlicht.

Together, we raised equity and started buying properties. Our very first deal together was a warehouse building. While at Trammell Crow, we had a long-term deal with AT&T, and I knew some people there, so my first deal was to team up with them to lease this warehouse.

Back in my Starwood days, when we were liquidating assets, we had an apartment complex in Tampa, Florida, called River Gardens. We were so excited to discover that the property was going up for auction. When the time came to bang the gavel, only single-family homebuyers showed up. We sat through over 200 auctions of single-family homes. And then the River Gardens property came up.

Our standard auction policy was to never bid first. We always waited to see someone else’s opening bid. As the apartment complex came up on the block, we sat there waiting for someone else to make the opening bid so that we could follow. Nobody raised a paddle.

Looking around the room, we realized that no one else had the money to bid on a property of this size. The first bid was $50,000 on a property that we thought was worth $5 million. People started getting together and pooling their resources, trying to get in on this fantastic opportunity, but in the end, we swooped in and grabbed it for just $500,000—10 percent of what we felt the property was worth.

There are some “once in a lifetime” opportunities when you have the government forcing a liquidation ahead of the market.

My favorite deal is always the last one that I’ve completed. It’s so exciting to be in the middle of every single transaction. Earlier this year, we acquired and privatized EdR, one of the nation’s largest developers, owners, and managers of high-quality collegiate housing communities, in a $4.6 billion transaction.

Sweat Equity

People often ask how I was able to raise money in 1991 when no one else could—when everyone else was shrinking because of the real estate crisis.

Fortunately, I had a friend from business school who managed some of the money for the Vanderbilt family. His strategy was to bring in money and meet someone who knew an industry and was willing to sweat and do the hard work.

I started off as the sweat equity partner, which is what anyone entering the real estate business can do—find amazing deals that they could never acquire on their own and bring them to investors. Putting in the hard work, grinding, and organizing a deal are things that have value.

My friend from business school put up the bulk of capital for us, and we were off to the races. In a weird way, having no track record at the time was actually a good track record because everyone else in the entire industry had a bad track record due to the 1991 recession.

We were very fortunate to have a partner who believed in counter- cyclical investments. He understood the value of moving in and buying when everyone else was moving out and selling. Don’t follow the crowd if you want to be successful. Instead, take the road less traveled.

The Denver Downsides

We had one crazy development deal in Denver where we learned an important lesson about guaranteeing costs before you have all the details and construction documents in place. We were in a situation where we had to close on a deal or lose the land forever. In this deal, we had to guarantee the cost of the building to our equity partner or we would lose them. We ended up doing the deal, stuck in the middle, in a very vulnerable position. I fell into a common trap, and it wasn’t the first time. I would often overvalue the importance of getting any specific deal done, forgetting that there’s always another deal around the corner.

Recently, we were back in Denver, where we were forced to sell a property for $7 million less than what it cost us to build it. We took our hit, held a meeting, and learned from our mistake.

One of the other important lessons I’ve learned from my Denver disasters was to always lean toward a safer capital structure and to not take on too much leverage. I pass on deals that have too much risk because we spend more of our time trying to understand the potential risks and downsides of any transaction. A great deal is less about having an amazing upside than it is about minimizing the downside.

This mindset weeds out the bad outcomes. “No risk, no reward” is true, but real estate success is about managing risk. When you’re looking at doing your first deals, it’s easy to get caught up in that same emotion that strikes me every time I set foot in Denver.

Even if you follow the principles in this book and get valuable advice from your local mentor, take a moment to step away from the emotion of the deal. Try to reactivate the objective part of your mind. Look at any potential downsides. What happens if this deal goes wrong? How could this deal go wrong?

Never think that a deal can’t fail because there are things that are outside our control. The way we manage risk is by entering deals where we seek to minimize the downside if the deal collapses. When you manage the downside, the upside will always take care of itself.

When analyzing that risk, here are a few factors to look at: Are there any environmental issues? Is the market demand there? Can I raise equity for that specific deal? Can I raise debt? What are interest rates? What is the credit risk of my counterparty? Are there any governmental issues?

These are just some of the downside elements, but it’s far from being a comprehensive list. Every state has different laws, and these laws are constantly changing. Tax laws and capital gains laws can shift in a way that could put you in a very vulnerable position if you don’t stay on top of your risk management.

Adding Value

For every deal, there must be some story about the value add that will generate returns. That value add can be several things: a certain demographic change in the city, something about the building, a micromanagement supply issue, an undervalued asset to replacement cost, etc.

Find out the value creation story. No matter if you are buying a single-family home as an investment or a multibillion-dollar industrial portfolio. How and why will this property go up in value once you take control? You need to know and believe in that story.

I’m a huge believer in studying demographics and understanding their impact on demand. Many people in the US economy made money following the baby boomers. But now the market is filled with Millennials, and they are driven by different needs and desires.

The old and the young are both huge demographic sectors that affect their environments very differently. They have different types of desires and different perspectives on renting versus owning. They also have access to different amounts of capital. Before investing in any property, I would make sure to understand the demand from those two segments in your market.

Research should always track demographics. I circle back to that often because it’s the central element of my thesis when we do ground-up development. Keep track of which cities are growing in population and the income levels that support that growth. For example, as of early 2018, Dallas, Austin, Nashville, and Seattle are all seeing massive population growth; however, only through research and tracking of the demographics can we determine if these cities can sustain and support that growth.

It’s essential to consider supply and demand. The availability of real estate and the number of people who want that real estate controls the value and determines your ability to turn a deal into profit. Sometimes, you’ll want to step away from a deal even if demand is great.

The real estate business is very cyclical. There’s a lot of demand and then there’s a lot of supply, then there’s a lot of demand, and then there’s a lot of supply. The market goes up, and then it goes down. The value of properties goes up, and then goes down. There seems to be some type of recession or crisis in every single decade. Junk bonds, savings and loans, the Great Recession—these things happen cyclically. And yet, large sectors of the market somehow seem to be surprised every time.

The challenge of the real estate business’s cyclicality can become your opportunity. Most of the business with Trammell Crow was built around development, but during downturns, development is the first thing that came to a halt. Trammell learned from this and began to go into the services business.

I started in 1986 in Oklahoma and quickly realized that if we didn’t focus on service in addition to development, we were going to go out of business. By preparing for the cyclicality of the real estate market, one can surpass all the companies that are surprised when the market has a downturn every decade. This preparation and adaptability strategy will allow you to stay in this business for the long-term.

Greystar is the largest operator of rental housing in the world with over 14,000 team members globally. In the housing crisis of 2008, we cruised through that down cycle because we focused on rehabbing buildings, recreating parking lots, providing services, and on asset and property management. That allowed us to be one of the early developers to break through the recession.

In this cyclical business, many of our competitors go bust because they don’t think about the downturns.

This brings me back to debt. Never take recourse risk or, if you are willing to take on this massive risk, set aside the money in order to cover you. Build a resilient strategy.

Additional Advice

The leaner a business’s overhead is the better. Rental housing has vast rent rolls with many tenants. No single tenant moving out will cause any serious trouble, whereas single-tenant assets have much greater risk.

If you only have four tenants in your quadplex, losing one of them costs you 25 percent of your monthly revenue. If you only have two tenants, one of them is half of your monthly revenue. This is an example of maintaining and managing the downside. “What happens if one tenant moves out?” It’s a reasonable question to ask when managing the risk of a property.

Our personal debt strategy is to have 65 percent of costs with an internal cap of 75 percent maximum. There are people who’ve made a lot of money using higher percentages of debt, but that’s the level of risk that I am comfortable with based on my experience.

As much as real estate is about demographics, markets, and finding great deals, the analytical side is critical. This means a solid understanding of finance and numbers, so that you can instantly understand the financial impact of every single decision you make.

One of the greatest skills you can hone and develop is the ability to form relationships and build a network. Combine great optimism and excitement with each new person you meet with a realistic view about the downside potential of each deal.

Study the downside of any deal you’re thinking about. Real estate is exciting, and it’s an opportunity to make a great deal of money, but if there is a part of you that never wants to do a deal, then you shouldn’t do deals.

The Greystar recruitment process is not rocket science. Sure, we’re looking for people that are bright enough, but after that, all we look for is nice people. Nobody wants to work with people they don’t like, and nobody wants to do deals with people they don’t like.

In life and business, if you’re a nice person with a sense of integrity, you can achieve success. Being nice and treating other people well is an effective life strategy. When they like you, people will go out of their way to help you succeed. How simple is that?

Although I can share loads of financial advice and the strategies I follow, these are different for every market. The strategy for purchasing single-family homes is different than the strategy for buying parking lots. But what stays the same is that all deals are about relationships.

When you have integrity, and you’re nice to people, you might not be the highest bidder or the most experienced person, but sometimes, that “once in a lifetime” opportunity will come your way.

This process begins with thinking about your customers, their needs, and their desires. What do they want? The people living in your apartments and your properties are not just numbers on a spreadsheet. They’re human beings with families, children, bills, medical needs, hopes, and dreams. And they matter. When forming deals and building out your business strategy, always think about what your customers want.

Come from a place of empathy; focus on making every deal a win for the other person, and you will experience great success. It’s not about winning every deal and crushing the competition. People with that mindset don’t last very long.

We’re living through interesting times. We’re just beginning to see the tiniest impact of how technology will alter and change real estate. We can’t ignore it; we need to commit to being quick and able to respond to changes in technology. Changes are not fatal, so do not be the last person waving your fist at change. Instead, think about why this change is occurring and what people will need in response to this change.

Success in this business requires long-term thinking. Balance both technical skills and a strong mindset, and that means you need to believe in yourself. When things get tough, it’s easy to start thinking you don’t have what it takes. Do not let that thought enter your mind.

Career Advice

A great way to get into real estate is exactly how I started—working in a company and learning the business. Work hard, network, and put yourself in a position to see and pursue opportunities. Not every real estate success story starts the same way, but for me, there is great value in learning from inside the security and structure of a company.

As an investor, you want to make sure that you’re backing someone who already has some type of experience. You can read books, go to courses and seminars, and watch videos online, but the truth is, you’re only going to learn in the real world. School simply cannot teach you what you’ll learn in real deals. You have to go out and execute; developing your own ground-up training in the business is critical.

Mentors

Role models and mentors are important. I can’t say this enough. One of my great mentors was Trammell Crow. He was a role model because of his humble culture, his openness, and the way he valued relationships and people. He did not have a fancy office in the corner. He always had a normal desk in the bullpen like everyone else, so if you wanted to go talk to him, you could. He wasn’t hidden in a two-acre office behind a dozen secretaries. He was right there in the trenches next to us.

Ronald Terwilliger is another great mentor of mine, and I’m flattered to have his name next to mine in this book. He’s one of the most gifted risk managers in the world. He has amazing insight on how to think about balancing overhead leverage and all the other parts of this business.

It’s possible that Trammell put a little too much trust in his people. While he taught me about relationships, Ronald was my teacher on the practical side.

Surround yourself with role models and mentors who give you feedback and advice. But real mentorship doesn’t come from words. Watch these people and take time to think about what you see them doing. Read other people’s stories and learn what they did right and what they did wrong. I would love for this chapter to only be full of my successes, but my mistakes are where you have the greatest opportunity to learn.

Always think about what you’re learning and find ways to adopt it into your own business plan. The world belongs to those who read. I am an avid reader, and I try to consume as much information about the real estate industry as possible. I am always looking for ideas from any industry that can be successful. I often learn more from reading about Apple than I do from reading about real estate.

My Philosophy

While understanding the core principles of real estate is important, there is more to the newspaper than the open houses section, and there’s more to the library than the real estate aisle. Look for ideas from other industries and draw parallels on your own situation. This is how you can develop an advantage and bring a new idea to your market without having to think of that new idea.

One of my favorite books is Results That Last by Quint Studer. He’s a healthcare consultant who helps companies improve their operations. When I read that book, it gave me great foundational ideas about how Greystar needs to address our property management business. I also love the Bible because it’s a great book about how to treat people and be successful.

In addition to exercising your mind and your spirit, physical health is important. The real estate business involves a great deal of walking, from touring properties to walking into auctions. You are on your feet a lot, and if you are in poor health, you can get left behind and miss a critical piece of information or show up late to that critical bid.

I strive to maintain a balance between career and spirituality. I love to spend time in nature—fishing and hunting or just going for a walk with the dog. Spending time with your family is critical because it helps you maintain that balance. We’re not automatons; we can’t only live by work.

You need to replenish your spirit by spending time doing things that make you feel good. And they don’t have to be expensive. Notice that none of my hobbies cost a great deal of money.

Finally, be kind. Live a life balanced between physical, mental, and spiritual. Value relationships and resist the temptation to work all the time. People are worth more than money, and they’ll be there for you in the ways that matter, so you need to be there for them in the ways that matter. No matter how much success you find, high school basketball, family dinners, and ballet recitals are just as important as any deal—no matter how big its upside.