Steve's note: I've been bullish on housing for years – and the value is even more incredible right now. But you need to know a few things to take advantage of it. So today, I'm sharing an interview my colleague Ben Morris had with Stansberry Research founder Porter Stansberry in 2016. In it, he discusses the biggest takeaway for investors looking to repeat his success in real estate...
Ben Morris: What was your best trade ever – personal or published – and what important lesson did you take away from it?
Porter Stansberry: I invested with a private real estate group in Miami called Pensam.
We bought several multiunit apartment buildings in 2011. We rehabbed the buildings, raised the rents, and then – after they had been rented – refinanced the buildings.
My total return was right around 100% over four years... And I'm still earning 16% a year or so in yield.
It was the best trade I've ever made. I was able to put a significant amount of capital into it, because it was a very safe deal with high-quality operators. It has generated safe, consistent returns... and will continue to do so for decades.
Real estate deals can be unbelievably rewarding, thanks to the smart application of leverage. In this case, the property acquisition and rehab. Then, once the apartment building was transformed into a successful, higher-end, leading-market property with an excellent rental-income track record, we were able to take out 75% of our initial capital without losing any equity in the property.
In short, through these deals, we were able to vastly increase our yield on invested capital, thanks to leverage. It's not possible to do the same in stocks.
That's why buying apartments at the right time in the cycle is absolutely one of the best, lowest-risk ways to acquire tremendous amounts of wealth in a reasonably short period of time.
Ben: Why apartment buildings in that specific location? Are they in Miami? How did you value the buildings?
Porter: The units I acquired with Pensam were not in Miami. They were carefully selected, mid-tier markets with very stable employment and growing populations... like Texas.
I have done deals with other operators to acquire units in South Florida. My strategy in South Florida was a lot different, though, than Pensam's national strategy.
Pensam buys older buildings in the best neighborhoods in growing cities. These are fairly expensive properties that can be improved to become prime buildings, with excellent amenities and relatively high rents. This strategy yields tenants who can easily afford the rent and that makes it easy to market the building... Anyone in the market for an apartment would want to live there.
That strategy doesn't work as well in Florida because, generally, those kinds of buildings just don't get cheap enough to make the numbers work – not even when they need a lot of rehab.
In South Florida, I'm part of a private investment group. In this market, I prefer to buy much smaller apartment buildings – properties that are much too small for the "big boys" like Pensam to mess around with.
These are generally four- to 12-unit buildings, what I call "mom and pop" apartment buildings. A lot of these properties came into the market between 2009 and 2011 because Fannie Mae and Freddie Mac completely exited the market to finance these kind of apartment buildings... and the mom-and-pop owners couldn't get the capital to roll over their mortgages.
We only buy properties at the beaches... not oceanfront, but a few blocks from the water. These are typically the lowest-rent properties on the barrier islands. These apartments are easy to rent because they're the cheapest place to live where you can still walk to the beach and have a high quality of life. We market to year-round residents, folks like schoolteachers, who have steady income... but aren't rich.
In these deals, I provided capital to acquire the buildings and have earned a preferred return, plus an equity interest in the property, based on the time it takes to return 80% of my capital. This is known as "convertible preferred financing," and it will generally pay a little bit better than corporate-bond yields. I've earned something like 12% to 14% annually on these deals, based on the initial capital I've committed. Obviously, that yield will grow over time as rents increase.
Ben: Do you say it was "safe" based on the operators and value, or also because of your personal knowledge and experience in real estate? Any other factors?
Porter: In my view, the only thing that determines the safety of any investment is, ultimately, price.
Yes, there are lots of standard due-diligence issues that have to be checked. Titles, liens, etc. And yes, of course it's important to buy in good markets, where populations are growing and employment is stable.
But those things are merely necessary. They're not sufficient for a safe investment. Only a low price can guarantee the safe return of your capital.
Here's a great example. I bought one of the very few waterfront (Collins Canal) homes in Miami Beach with direct access to the beach via a semi-private footpath bridge. There are only two of these footpath bridges and only about a dozen houses have access to them.
There are no other private homes in Miami Beach where you can easily walk to the beach and have a boat behind your house.
These are unique properties, and their prices have soared since the crisis. I bought one of these houses in February 2011. I paid around $400 per square foot, which I believe was the lowest price per square foot for a waterfront property in Miami Beach during the crisis. That was about 60% less than peak prices reached on these properties in 2005 to 2006.
Although I did extensive due diligence on the property, I was defrauded. As we rehabbed the property, we discovered serious structural damage. It had been concealed by using steel jacks hidden inside the walls. You can't live in a building sitting on jacks in a hurricane zone. As an honest person, I would never attempt to hide such damage from another buyer, as someone had done to me.
If I had bought this house at "normal" prices, I probably would have lost millions of dollars on the deal. Instead, despite having to tear down the house and the guest house on the property, I was able to sell for a profit of more than $1 million in just four years. Yes, I had hoped to make five times that amount of profit on this trophy property... But because I had been so cautious about what I paid to acquire the property, what could have easily been a catastrophe turned into an OK return.
No matter how skillful you are as a real estate investor or how talented you are at improving properties or marketing them... there is no substitute for a low entry price. If possible, always negotiate a lower price. If you can't get the price you want, walk away.
I had been shopping for this particular property (canalfront, footpath location) since 2007. It took me four years to find what I thought was the right deal... and I botched it. But I didn't lose any money.
Ben: Around what percentage of your investable wealth did you invest? Is that the largest investment you've made?
Porter: I never buy anything I can't easily afford to lose, whether it's a car, a watch, or an apartment building. I know a lot of people who are burdened by their personal property or investments. They spend their lives worrying about what they might lose, instead of simply enjoying what they have. Here's a hint: You won't take any of it with you, so why worry?
And if you are worried, you're making a big mistake. Generally speaking, I won't put more than 10% of my liquid capital into any single investment – whether it's a stock or an apartment building. But of course, there are exceptions. Unlike most real estate investors, I don't use any debt to acquire properties. That sometimes requires a big capital outlay... But in those circumstances, I'm certain about what I'm buying and what it's worth.
Ben: Finally, the takeaway... When you have tremendous conviction, you have to go for the jugular? Invest in what you know, with people you trust? Keep a big slug of cash ready for the fat pitch?
Porter: Having a lot of available cash is the absolute key to getting great real estate deals. Being able to tell a distressed owner, "Call me when you need the money, I'll be waiting," is a terrific position. But to do so, you have to keep a lot of cash at the ready. Most people can't do that. I don't know why. I love it when people give me a hard time about how little I'm earning on the cash I have. They tease me, "Hey, what are you earning on your cash?"
And I always say, "I'm not earning anything. Yet."
I'm not sure they get it.
Editor's note: Right now, everyday investors can get in on an entirely new world of real estate options that were off-limits to them in the past. The best part is, you don't need to flip houses, become a landlord, or find a real estate agent – it's much simpler than that. Steve held an online chat last week with experts in the field to cover the details... Watch a replay of this discussion before it goes offline tonight.
Steve has been investing in real estate for more than two decades. And in his experience, following this one simple rule will help you go from cheap prices on paper to successful real-life deals... Read more here: Follow This Rule and You'll Succeed in Real Estate.
"It felt like the Wild West," Steve writes. After the real estate bust, many banks owned properties they weren't even aware of. That meant they could be acquired for cheap. And we can still learn from this situation today... Get the full story here: One Secret to Success in Real Estate.
Porter has one simple secret he uses to help find the best opportunities to invest in. And it can help you fast-track your investment success...
THE BULL MARKET FOR CYBERSECURITY IS STRONGER THAN EVER
Today's chart shows a company that's keeping us safe in the "big data" age...
The modern economy relies on the steady flow of information among everyone's computers, smartphones, and tablets – especially now that the coronavirus pandemic has millions of people working remotely. But all this online activity is a bonanza for high-tech criminal operations. And today's company is surging by helping folks fight back...
Splunk (SPLK) is a $30 billion cybersecurity leader. Splunk's software tracks and organizes data as it's generated by computers and other electronic devices. This information makes it easier for a company's IT team to respond to issues... anything from a resource-hogging application to an attempted hack. Today, 92 of the Fortune 100 companies use Splunk, and sales hit $434 million in the most recent quarter – up 2% year over year.
SPLK shares have more than tripled in the past three years, and they just hit a new all-time high. Data monitoring will only get more important, and that's a continued tailwind for Splunk...