How to become a millionaire using commercial real estate.

This is what worked for me.

A thread

Let’s start by making sure we’re on the same page about understanding how you add value to commercial real estate (CRE).

First, CRE is valued as a multiple of its net operating income (NOI).

Revenue
-Operating Expenses
=Net Operating Income

Operating expenses does not include your debt service (bank loan) on the property. You take debt service out of the equation when doing valuations because how something is financed differs for every deal.

If you have a property doing $200,000 in revenue with $100k of expenses, the NOI is $100k.

A great deal in today’s market would probably be purchased at an 8 cap.

What the hell is a “8 cap”? The cap rate is the rate of return on the total purchase price. Also referred to as unlevered yield.

To find this property’s value at a 8 cap you divide $100k by .08 = $1,250,000.

The lower the cap rate, the higher the purchase price, meaning you’re making less on your money when buying something at a lower cap rate.

What’s powerful about commercial real estate is once you own the property you can pull various metaphorical levers to increase your net operating income.

You can grow revenue (ie raise rents) and cut costs (reduce or eliminate expenses).

Let’s say day 1 we buy a property we can raise rents 20%. Sales are now $240k per year. If expenses say the same and we still use an 8 cap to assess the value the NOI is now $140k and the value is $1,750,000.

Congratulations, you’ve just added $500,000 to your net worth.

Let’s go a step further and find ways to cut expenses by operating more efficiently. Say the old owner paid someone $50k to staff the building all week long.

You use technology and outside contractors to bring your on site labor costs down to $10k.

$40k savings

Sales are now $240k, expenses are $60k, so your NOI is $180k.

At the same 8 cap validation your property is now worth $2.25m.

Congratulations you are now a millionaire (on paper at least)!

This is an extreme example and rarely is there this much upside but it is possible.

This is the exact framework I used to become a “millionaire” on paper.

No I don’t have $1m in my bank account but if I sold everything and paid off my debts I would.

You can do this with any kind of commercial real estate...industrial, medical office buildings, retail outlets, senior housing, self storage, RV parks, apartment buildings, etc.

@fortworthchris does it with industrial
@moseskagan @Keith_Wasserman and @scottyo21 do it with apartments
@sweatystartup @dpear85 @AjOsborne1 @ZachQuick12 and I do it with self storage
@Codie_Sanchez does it with laundromats
@joepohlen does it with senior living

The opportunities are endless and the best ones aren’t listed for sale.

If you want to make it in this space YOU need to make deals happen and not wait around for them to come to you.

The reality is you can do this with any business, not just real estate.

If you can buy a company and operate it better then the previous owner you immediately add value.

Real estate and recurring revenue businesses are typically valued at at least 10x NOI while service businesses, retail, wholesale, etc trade at 3-5x.

Even though competition is fierce for on market deals it’s still a great time to buy if you can find a diamond in the rough.

The baby boomer retirement wave is coming.

If they own a business it either needs to be gifted, closed down, or sold if they want to retire.

Put yourself in a position to capitalize on this trend and it could lead to generational wealth for you and your family.

Here is a thread on how I implemented the steps above. https://twitter.com/roblabonne/status/1296921902343168000

When you become wealthy everyone around you wins. It is not a zero sum game.

I wish I knew how this process worked 10 years ago. I’d be much further along on my journey.

Knowledge is power. Spread the word.