The Power of Real Estate and Why I Love it

The property that is now the The Grove in Los Angeles was a dairy farm. 256 acres of dairy farm back in 1880 when Alfred Fremont Gilmore purchased it with a partner and before it was the Farmers Market. It became a market when farmers began pulling their trucks up to the dairy farm to sell produce and would pay 5 cents/day to the landlord. In 1935 right about the time the actual Farmers Market was built out with stalls and rooms like where we are today, a stadium for sporting and racing events was added at the north side of the parking lot. Near the turn of the millennium, Rick Caruso spent $160 million to develop and open The Grove, after buying that land and the original Farmers Market from the Gilmores, with a promise to preserve the market and make the Grove an open-air style mall, which ultimately has made it so successful today.

The history of this property, like the twists and turns that occur to neighborhoods and the buildings within them, are the real estate pieces that make them interesting--always evolving. Real estate grants the owner the privilege of doing what they want with it. That autonomy calls creativity and strategy, to improve things and thereby add value. Oftentimes growth and change occur by chance, but it’s the ability real estate has to evolve, which adds to its power. 

The more dry accounting type benefits of real estate are also there. You can do a 1031 Exchange, which allows you to avoid paying taxes on profits made if you reinvest those within 90 days. A married couple when selling can avoid the first $500,000 of gains tax if they hold the property for at least two years. And mortgage interest payments are a write off. Real estate is a major part of philanthropic gifts. I have seen elderly people with no income, live off the real estate they so wisely bought and can count on to afford health care or assisted living. 

As you can see, there are many strengths to owning real estate, but tonight I am highlighting just three top characteristics I believe makes it so powerful.  

The first, and a major differentiator from other types of investments, is that it can be purchased by obtaining a loan from a bank. This is also known as leverage. And while that means you only need a fraction of its value in down payment cash, you still get to enjoy its full appreciation. Unlike an Amazon or Apple stock, when buying it, you need to have all the cash on hand to purchase--not in real estate. When buying property, the leverage you utilize allows you to own it in full and thereby enjoy all its upside. Let me explain here:

Let’s say you were to buy $1,000,000, and you borrow 75% from the bank, and after 10 years of owning the home you sell it for $1,500,000. Your investment of $250,000 down payment money returned you your original 250,000, plus $500,000 in profits. That’s what’s unique about real estate, is to make that ½ million you didn’t need to spend $1,000,000 to buy the house--only 250K. This concept of appreciation through leverage is a powerful part of ownership. 

In addition to its ability to go up in value, what I also love about real estate is that you can touch it. Compared to so many other types of investments, this one is real. If a property has a fruit tree you can pick that fruit and eat it. Value add can be simple things like installing a fence or new exterior paint color. But at a higher level you can do bigger changes and thereby reposition the asset--just as Caruso has done here at The Grove. A single family home can be knocked down and built in its place a fourplex. Or as they are doing across the street from The Grove today, next to Whole Foods, you can remove an old K Mart and build a 6 story mixed use complex with hundreds of apartment units.

If you own a piece of art, you can’t--or at least should not--change it. Or with a stock, it’s entirely out of your hands. Same as your 401K. You can watch it grow, but you cannot remodel the kitchen and bath add a guest house to your 401K--thereby increasing its value. With real estate, you can. You get to decide, roll your sleeves up and do exactly that. That value-add ability to real estate surely is one of my favorite parts and why it’s so powerful.

A third and very compelling part of real estate is that there are so many different kinds of it, and yet the concepts and principals from each are the same. 

Location, location, location. 

Make money on the purchase.

Leverage 

Highest and best use

This parallel concepts, mean the skills are transferable from one asset class to another, and therefore provides endless opportunity for an investor. 

Gas station, warehouse distribution centers, homes, condos, farmland, solar farms, casinos, apartment buildings, or offices. 

Most like to stick to what they know and for good reason, but with the concepts being the same, one can seek opportunities and challenge outside of what they may be most familiar with.

I personally became very familiar with residential 1-4 unit real estate from working as an agent selling homes. It’s familiar and that goes a long way sticking to what I know. 

One of my fourplex projects in West Adams 

But as of recently I began diving into commercial real estate, which has a different loan structure and nuance in how things work. Occasionally now I ponder what a small hotel or retail store could be like one day. Again, same concepts but would feel like a new venture and challenge.

Regardless of what you dream of doing in real estate, and the risks you choose to take within it, I hope you also see the potential and power it has. Its power becomes empowering. Owning it can provide you freedom, and a revenue source beyond your working years. 

So what real estate do you dream of buying and making your own? Maybe a dairy farm, for like Mr Gilmore, you just never know how far a property's legacy may go.