Patience is the ultimate virtue

Leonardo Davinci, one of the great minds in human history, said that “simplicity is the ultimate sophistication.” As I spoke to Carlos Betancourt it became evident to me that one of his life mantras is to keep things simple, a way of living that many of the world’s greatest follow. Understanding the laws of supply and demand, comprehending the different cycles, and realizing that liquidity equals value, are all fundamental truths in real estate. These offer a point of view through which Carlos sees potential investment opportunities and ways to mitigate some risks. If you are a seeker of information, and a serious observer that knows how to separate the noise from the meaningful, it’s all there to be seized and learned.

Simplicity is not easy to achieve. Distilling complex ideas into coherent and simple thoughts can be hard work and take time. Carlos is a champion at doing this. As we conversed, two professional advantages became clear about having this ability. First, is that it allows you to focus on being good at what you do. Second, it allows to communicate in a better way with your employees, investors, suppliers, final users, etc. about what you are trying to do.

In His Own Words

The real estate business is embedded within my DNA, and I knew from an early age that it was my destiny. My family has been in the real estate game for generations.

My father was a major influence in my life. He passed away three years ago, and not a day goes by that I don’t miss him. He was born in Cuba when it was still a free country. Shortly after his marriage to my mother, Castro took over the country and turned it into a dictatorship.

My father’s family was not in the real estate business, however. They were in the business of ready-mixed concrete. My father decided to leave while freedom was still a possibility. Working as a manager in Cuba, he took his knowledge to Brazil to see if he could make a better life for him and my mother and their future family.

At the time, the ready-mixed concrete business did not exist in Brazil, and he wanted to expand there. My father didn’t speak a word of Portuguese, but an uncle lent him enough money to get started. With just three trucks, he built the foundation of a new business in a foreign country.

My father brought a new industry to Brazil and had the advantage of being the first one in a new construction market. Soon, he was one of the biggest builders in the region, with several hundred trucks across Brazil and Uruguay. My brother and I grew up in that business, and we played at the plant when we were younger.

The leap from construction to real estate is not a very big one. I simply built on my father’s existing connections.

Although the sands of time can sometimes make it hard to remember some of my deals, I can still remember where and when it all began. In pursuit of a first real estate deal, I was determined to convince my family about a certain location where there were some residential houses. I discovered that the government had recently changed the zoning in this area to increase floor-to-area ratio (FAR) and allow vertical construction. I started thinking big, and I saw a lot of value there.

This was a very ambitious first project; to acquire a large piece of land, we would have to buy 12 homes. Fortunately, I was able to assemble the entire block and acquire all the sites.

That deal taught me one of the most important lessons in real estate: You must have a great deal of patience because things change all the time. One guy would sell his house one month, and the next month another guy would change his mind about selling.

In the end, we put the land together and built 12 office towers. While we took on a lot of risk, it turned out to be a massive success. It took a longer time than expected but it was worth the effort and patience.

My Favorite Deal

My favorite deal is a piece of land that we bought about eight years ago right next to the most important cargo airport in Brazil, called Viracopos International. According to the Department of Civil Aviation, this is the best airport in the country. Air Cargo World considers it one of the best-run airports in the world. It’s one hour from the center of Sao Paulo, Brazil.

I bought some land that’s right next to the airport. It’s not residential, but I used to joke that it was ocean-front. It’s one of the best locations in Brazil because it’s next to the trains, the airport, and the best highways. It’s an amazing location, but it wasn’t easy.

Getting the right documentation was a battle. Even as we were acquiring the land, we were still dealing with government delays and red tape.

We had to buy the land, and for the majority of the payments, we had to make the payment contingent on getting the right paperwork. It took two years. The land was designed to be mixed-use, and in the city of Campinas the process was very bureaucratic.

After buying the land, it took another four years to acquire the building on the site. In the end, the struggle was worth it.

I built a miniature city with offices, hotels, shops, a park with a running track, and a huge fitness center. Security was one of my primary concerns, and we were able to build an entire community where people can live securely and happy. There are certain dangers to living and being successful in Brazil, and we built a safe community that limits those dangers.

Upon completion of the project, I was also able to dedicate a plaza to my dad, making this project especially important to me.

Hard Lessons

There are lessons to be learned in both humility and real estate from my least successful deal.

There’s a city called Manaus in the state of Amazon, north of Brazil. We won an intense bidding process to build a warehouse there, and in the process we used one of the top three law firms in the country to perform our due diligence.

We bought the land, created the design, and began construction. As the trucks began to roll in, some guys came to the lot saying they owned the land and asking what we were doing on their property.

It turned out that the person who sold us the land initially had used fake documents. He had never owned the land. I was mystified. I couldn’t believe it. The notary was in on the scam. Fortunately, I had obtained title insurance to protect my downside.

We began speaking with other players in the area, and we discovered that there were many similar cases. This was a lesson that showed how local the business real estate development really is. Even when you are in your own country, each state and city has its own rules and ways. Certain regions can be completely different, and in this case lawless.

In the south of Brazil, there is law and structure. But in the north, it’s the Wild West. The danger of moving into new regions exists everywhere. If you are in real estate, each time you move into a new region, you have to adhere to market data and local experts. If you start to think that the rules are the same just because you’re in the “same country,” you will very likely make mistakes that could cause you huge losses. This deal was a five-hour flight from where I’d previously done business.

Exercise caution. If you are entering a new market, it makes sense to partner with a good trustworthy local player.

When starting out in real estate it’s best to choose a single region and focus on mastering the business there. Go as deep as possible with your knowledge and expertise. Don’t try to build warehouses across your entire country or single-family homes in a dozen different cities. Focus on a region and focus on a specific segment.

Risky Business

When I’m looking for a property, whether I’m going to build, buy some land, or convert houses into office buildings, the first things I try to analyze are the three cycles (see Figure 11.1).

In the places where I’m investing I study the economic cycle, the political cycle (especially in Brazil), and the real estate cycle. Are interest rates going up or down? Are the politicians going to increase or decrease regulation? Is there a game-changing bill working its way through the local government? Are tax laws changing? Has the new president promised to make some changes to the real estate landscape? Are there new large players in the market? Are banks lending developers and buyers?

Real estate goes through cycles where, at times, there might be more buyers than there is supply. The reverse may be true. It changes relatively quickly. I look at all three main cycles to determine if I should be investing and, if so, in what properties and in what neighborhoods.

Everyone has a personal perspective on when it’s time to be risky and when it’s time to be conservative. Maybe I’m a bit contrarian, but when the market is tight, players are not very active, and people are building speculatively, I try to jump in with my money. That’s my macro analysis.

Whenever I see something I’m interested in, I go to the location. I walk the property, the site, the neighborhood, and the city. Understand the fundamentals.

It’s very important to determine the value and the quality of the location. If I like the location, and it passes my first test, I look at the economics of the deal. Does it make sense financially? Is it well leveraged in a reasonable way?

I invest in properties around the world, so I like to invest in a property that appeals to multiple tenants. If it appeals to just one type of person or a single industry, I get a little concerned.

If I were to go all the way back to my late teens or early 20s, and I was just getting into real estate without the good fortune to follow my father’s successful footsteps, I would have started with residential real estate. At the end of the day, people will always need a place to live. Especially in Brazil, where there’s so much need for housing, and there’s so much that we can provide.

Logistics are very important. Technology won’t eliminate the need for logistics. Disruption won’t happen as much in this segment and it might actually increase the need for logistics.

I also like buying residential within mixed-use properties where you can create a sense of community because, especially in Brazil, we have so many issues with transportation and security. People want to live, shop, and work in the same place, so these are the three main factors for me.

I’m not a fan of investing in commercial properties such as retail and hotels. I have some holdings there, but that’s not the core of my business.

If you’re looking at long-term real estate investments, and are willing to take emerging market risk, there are some very interesting things happening in India, China, Brazil, and South Africa.

Leverage

There are different ways to use leverage. If you’re investing for your own personal use, it’s good to use some leverage as long as you’re disciplined. If you don’t have leverage, its much more difficult to buy the property because real estate is capital-intensive. You have to know the risks and you need to be sure you will have the capacity to pay that loan.

If you’re an investor, be very careful with how much money you borrow from the bank. At my firm, Bracor, we try to stay between 45 and 60 percent loan-to-value ratio. We ask ourselves very carefully if the deal makes sense.

When we invested in real estate in Japan, the banks there lent us money at a rate of just 1 percent a year. It was like free money, and we knew we could increase our leverage significantly. In Brazil, on the other hand, there were times when the banks charged us crippling double-digit interest rates for access to their leverage. They asked for too much money, and we simply couldn’t afford to do the deal. We had to let those deals float away because the risk was too high.

At Bracor, our approach is more conservative. We like to use self-amortizing loans where the lease agreements are tied to the leverage we take. No matter what tools your employ to minimize your exposure to leverage, don’t get lost in the emotion and overleverage your property or portfolio.

Many people first entering the real estate market are still working 9 to 5 jobs. It’s easy for them to mistake a real estate deal for a financial transaction, but real estate is not liquid in the way true financial assets are. When investing in stocks and mutual funds, it’s quite easy to turn them back into cash. Real estate isn’t like that. You can’t turn a property into cash unless you have a buyer.

Even extremely wealthy and experienced investors can make this mistake when entering the world of real estate. They come in and think that flipping real estate is like buying and selling a stock, but that’s a big mistake.

The asset is a property, and as a property, there are maintenance fees, vacancies, and real estate taxes. Keep all that in mind. If you own a stock in a company, it’s not going to go down in value if there’s a kidnapping in the neighborhood or if a water pipe bursts in the winter and floods the house.

A property is very different from traditional financial assets. As you invest, pay attention to where you are in the three cycles. Don’t jump in when things are expensive just because you saw a positive newsfeed.

In real estate, patience is the ultimate virtue; real estate is not a liquid asset. As you invest and look at your first properties, always think about quality. If you’re just looking for a fast rate of return, you will probably be disappointed. By quality, I mean a good location within a market that has demand and where the asset has quality construction.

How is the property useful for the actual needs of our society? Do you need to make capital expenditures to improve or maintain the property? How does the property appeal to people? What type of infrastructure surrounds the property or project? Is there going to be a new highway or new transportation built near there soon? Is there a chance something negative can be built there? What’s happening in the market? Are all the permits in good standing? How far is a gym, a tarbucks and public transportation?

These questions are just the beginning of the due diligence process.

Obviously, I recommend that you make sure the person you’re dealing with actually owns the property. Hopefully, my mistake will prevent you from having to deal with a similar situation.

Operating from a place of need is very dangerous. It leaves you vulnerable to poor and dangerous decision-making.

My team quotes me almost on a daily basis because I always try to be in a position where I approach a deal as a wish or a desire, not as a need. Many players feel like they need to buy or they need to sell to reach the next level of lifestyle or simply because of their pride. When that happens, it normally translates into a bad deal.

If you want to buy or sell something that you need, you’ll rarely end up with a good deal. This is where emotion enters the equation. We don’t want to enter that “auction excitement,” We want to be driven by the analytical, logical part of our minds, not the emotional part of our hearts.

By approaching a deal as a wish rather than a need, I believe you become less emotional and more rational.

Technology

Interestingly, technology is really changing the game. Logistics are not getting replaced, but now we have Airbnb competing with hotels. There are apps like LiquidSpace in the office sector, and Amazon is significantly impacting the retail space on a global level.

In the last couple of years, I’ve tried to be very connected with how the disruption of technology is affecting the real estate market. I’m constantly trying to learn from technology companies.

I go to the Silicon Valley for meetings to speak with the senior managers at Uber, Airbnb, Google, and several other tech companies. Technology is a big issue, and it’s a reality.

I think that autonomous vehicles will have a major effect on all industries, and they will change the way we design shopping centers and property in general—even in small areas, like where we park.

My main worry is that we’re going to move into a more data-driven industry. One of the companies I’ve invested in is already doing this and using a lot of data to help in their decision-making process.

I’m concerned with where the different technological tools intersect with consumer demands. There are so many new tools for consumer “needs,” and there’s so much data, that it can become overwhelming.

The average person thinks real estate is just about knowledge—just about hitting the books and learning about cap rates, and then you can start making a lot of money. But the truth is, success in this world is heavily driven by emotional temperament. I’m often surrounded by extremely smart people from very prestigious schools and top companies—and honestly, they have higher IQs than I do. They have fancy computers and software, but they don’t think about the big picture because they’re too focused on the math, the numbers, and the little details.

When you have that mindset, you get tunnel vision, and you only think about one piece of that big picture.

Leadership Skills

Leadership skills develop in a continuing a process. If you aren’t improving them, they are atrophying. Try to find ways to inspire and motivate others. Leadership in real estate isn’t just about doing the math and snatching a profit. Sometimes, you need to create a type of empathy and inspire the person on the other side of the deal or the person on your own team. We’re in a business where we can dramatically affect the destiny of many people.

In real estate, we’re buying and selling homes where people live or buildings where people work. The last thing I want to do is take away someone’s livelihood or home. I always think, “Am I making this place better?” My goal when entering a deal is, of course, to make a profit, but not at the cost of my own sense of morality or identity. I’m not out to crush my final users. I want to add value to all of them and the community.

You can make a lot of money in the real estate world without ever doing something that you later regret—without building enemies or making people feel like you took advantage of them in their moment of need.

You never know when you might have your own moment of need. Some of the biggest real estate companies in the world have been smashed during recessions. Whether or not you believe in karma, the energy you put out into the world comes back many times over.

That deal in which you took advantage of one person 10 years ago might haunt you in the future, the next time a recession hits the market. You’ll be the one in the vulnerable position, and someone else could do the same thing to you, only at 10 or 100 times the scale.

As a leader, it’s important to understand the elements of psychology. I try to inject as much self-belief into my team as possible. I want the people who do deals with me to walk away feeling great. I try to predict possible problems five years into the future.

While your personality drives your ability to lead, continuing to learn is also critical. No matter how successful you become, there is always more you can learn. I’ve seen this in my partnership with Sam Zell. He’s very objective and literal. Whenever I use a metaphor or a symbol, it goes right over his head, but he has an incredible sense of psychology. He’s a tremendous winner—success isn’t just for one personality type.

My father and Sam have been the prime mentors in my life. My father taught me about ethics, perseverance, and passion. And in my partnership with Sam, for such a long time, I have been inspired by his vision, objectivity, and unbelievable business skills.

Maintaining your fitness and health is also important. Real estate is about patience in a long-term game. The better your health is, the more time you have with which to operate. I encourage you not to sacrifice your health to build your business. You’ll only regret it as you shorten your life.

I have a passion for the sport of rowing. I’ve been an athlete for more than 40 years. I started in my teens, and I was a member of the junior national team in Brazil. When you’re rowing, you have to get up at 5:30 in the morning every day to practice. It really impacted my schedule. I’ve even run 15 different marathons. For more than 20 years, I’ve competed in triathlons regularly, and I still compete.

I exercise seven days a week. I know people will tell you to take days off, but there’s something in my DNA, and I feel lazy when I skip an exercise day. Exercise helps me in everything else that I do. I also enjoy surfing and boxing. I go to the Maldives a couple of times a year just to surf with my daughters.

I’ve been experimenting with meditation for the past year. I always thought I’d be the last guy to try that out, but I see a lot of value in it now. I also have a little bit of a musical streak; I play percussion.

I try to help the kids in the slums in Sao Paulo, and the two biggest passions for disadvantaged children there are soccer and percussion. It’s the two best ways to help them escape the favelas of Brazil.

We’ve helped hundreds of kids throughout the years. I didn’t start the charity group, but I got in early when there were just 15 or 20 kids. We’ve opened concerts for people like Madonna, John Mayer, Wynton Marsalis, and many other amazing artists.

We performed a show for a board of trustees, and someone said, “Imagine if these kids could play halftime at a football game.” And I said, “Let’s make it happen.”

A month later, we got a letter from the University of Notre Dame. Fifty kids from the favelas, one of the toughest places in the world to grow up, were invited to go to South Bend, Indiana, to perform in a game between Notre Dame and Stanford.

They asked me to be a trustee, and I’d only been there for four years.

My Philosophy

You have to try to educate yourself as much as possible. When mu parents left Cuba, they didn’t have a dollar to their names. I learned that you could be stripped of everything, but all your experience and education would be with you for the rest of your life. You’ll be able to use knowledge for the good of humankind, for your family, for your community, and to pass on to your children.

You must try to balance your life. It’s not just about business or just about having fun; it’s about so many other things. As much as I’m honored to be called a Real Estate Titan and to be interviewed for this book, I would hesitate to give myself a nickname like that. I would hesitate to say that my life is perfect. I still haven’t achieved the perfect balance. I haven’t completed my education. My story isn’t over.

I’m not a monument on top of a mountain. I’m just someone who’s farther along than others, a little bit closer to the peak. But I’m still trying to find my perfect balance.

It’s okay if you don’t get it right. The journey is just as important as the destination.

Life is short. Do everything you can to enjoy every minute of your life. Build a business around things that you like. Follow your passion and use that to find the right path to reap your profits. Real estate can be an amazing and fun venture.