Not too long ago a colleague of mine was tipped off to the acquisition of an exciting historic rehabilitation project. The old structure was located in an “up and coming” neighborhood with excellent access to transit, amenities, and local shopping/dining. The neighborhood felt fresh, young, and ripe for new development.
I was getting more and more excited about the project as we jumped into the market research, schematic design, and initial due diligence. I could visualize exactly how important this rehab was to the street-scape and the surrounding neighborhood. If we hit a home run with this project, it’d be something special!
There was one problem…The numbers just weren’t adding up! The more I dug into the modeling the more it just wasn’t penciling out. Well maybe the we can negotiate the acquisition price down an additional 10%, and maybe we can put in a lower grade finish level in the units, and maybe our cash flow projections are too conservative. If you see yourself asking these same questions, STOP!
I had to have a strong heart to heart with myself over the project because I was loving it too much. So I sat myself down, poured a cup of coffee and said “Kyle, I know you are loving this project like it’s your first born child, but seriously, don’t don’t don’t break this cardinal rule.”
And what is this cardinal rule, you ask?!
It’s simple: Real estate should only be treated like a box. And with this box you only do three things. You 1) put money into it, 2) manage and operate it, and 3) get money out of it.
This lesson was the absolute very first thing a real estate professor said to me in his intro to real estate investing and development course back in business school. Seriously, he walked into the room and didn’t even introduce himself first because he wanted this rule to be stuck in our minds. His point: never forget this rule.
It has stuck with me and kept me sane when I start to deviate from my numbers. It’s extremely easy to fall in love with a potential project (like I did). And why not, real estate is freaking awesome! You have the opportunity to drastically improve the physical and social surroundings of a given area…how cool is that!? But given that real estate investing, acquisitions, and development are business ventures, they have to be treated as such.
I’m still picking through my model. But the more I look back at the situation and get all excited about the possibilities, the more I’m reminded of that simple, yet powerful cardinal rule of real estate investing and development.