Do you ever daydream? I sure do.
In your dreams, are you ever the hero in a tale of a new gold strike or oil gusher? Or the inventor of a new cryptocurrency that outpaces Bitcoin? Or a new car that outperforms Tesla?
These types of dreams are as old as time. And they’ve motivated the human race to incalculable discoveries and inventions. Many succeed—but countless people lose their lives or fortunes every year seeking adventure and treasure in previously unknown realms.
I’ve done it myself. When real estate was on the ropes after 2008, I briefly fell back on my petroleum engineering degree. A group of my friends and I invested in a high-risk, high-reward speculation on a wildcat oil deal in North Dakota. We dropped over a million dollars on a hole in the ground, expecting to see a 10x or even 50x ROI.
Photo by Zbynek Burival on Unsplash
Our dreams came up dry.
We weren’t alone. But to be clear, some investors struck it rich.
But speculations are a roll of the dice. And it’s not the way I want to invest anymore.
A modern gold rush
If you haven’t noticed, we’re in the midst of a modern gold rush. Many who had never invested in real estate are now in it full-time. And I think that’s wonderful.
Many who limited their previous investments to Wall Street’s casinos have discovered real estate’s joys and wealth-building potential. And many who started in residential have migrated to commercial real estate, an arena formerly reserved for wealthy insiders. Relaxed crowdfunding rules and the explosion of social media and online marketing have provided practical access for millions of investors.
But there are dark clouds on the horizon.
There’s a new breed of real estate syndicators who had no real estate experience before the last crash. There is nothing wrong with that. Many are making millions for themselves and their investors.
But a problem arises when the herd starts overpaying for assets en masse. And when these folks (I call these new gurus Newrus) start spouting new rules, and convincing newbies things like:
“It’s different this time.”
“People always need a place to live!”
“There’s no end in sight for this bull real estate market.”
But, my friends, trees don’t grow to the sky. And no bull market goes on forever.
This is the type of sentiment that caused previously rational people to leave their homes, their jobs, and their families in the late 1890s to brave horrific conditions while crossing the Alaskan tundra on dog sleds to seek their fortune. Last year, I got to visit an Alaskan city where many departed but never returned.
The History Channel tells us that “only about 30,000 [of 100,000] weary stampeders finally arrived in Dawson City. Most were gravely disappointed to learn reports of available Klondike gold were greatly exaggerated. For many, thoughts of gold and wealth had sustained them during their grueling journey. Learning they’d come so far for nothing was too much to bear and they immediately booked passage home.”
Klondikers carrying supplies ascending the Chilkoot Pass, 1898Now, this all sounds like a lot of fun. Uhhhhhh… NOT!
Seriously, this type of investing can be fun. But don’t forget the words of investor extraordinaire George Soros:
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Many great investors, like Warren Buffett, share this sentiment.
So, who made bank…and ultimately had the most fun in the Alaskan and earlier California gold rushes? And what can we learn from them?
A handful of speculators got rich for sure. But it was those who took the boring path who consistently prospered in these situations.
I can’t imagine the boredom of setting up a hardware store to sell picks and shovels to hopeful prospectors—or establishing a hotel, restaurant, or dog sled operation. But prospective miners didn’t have many options, and these boring investors often enjoyed the abundant prosperity that eluded most prospectors.
And they didn’t necessarily have to risk their lives to get it. Many of them undoubtedly stayed warm and dry while miners endured hardships that I frankly find unimaginable.
While there are undoubtedly many forgotten exceptions, I think the proprietors ultimately had more fun on average. Why?
Theoretically, they had cash flow and savings, which provided the freedom to take vacations and relax in the mountains. (Alaska is beautiful in the summer!). The same mountains where their clients sweated and toiled and starved and froze to death. Their cash theoretically provided the freedom to hire staffers and enjoy free time.
Boring hardware store owners…boring investors…outmaneuvered gold speculators…shiny object chasers…to enjoy life and build multi-generational wealth.
So what does this have to do with real estate investing?
I published a recent post with my plea for you to consider becoming a boring investor. This is wholly relevant to this issue of investing during a gold rush. And anytime.
Here are four applications of the gold rush for real estate investors…
1. Invest with pros.
During a gold rush, the 80/20 rule is in full effect. It may be more like 90/10 (or more extreme). This means a small minority of the operators earned the vast majority of the wealth in gold. These were the pros. Those who knew what they were doing and had done it successfully for years. I imagine those who passively invested in their machines and technology prospered as well.
I’m guessing those who treated it casually, including many eager newbies, lost their fortunes, and often their lives. That was their choice. But I’d hate to be one of their investors back home waiting for the big payday that seldom came. Or one of their family members.
If you’re going to invest in real estate, carefully vet the operator. Don’t toss your capital to anyone without a proven track record, technology, and team. Look for operators with the skill to unlock intrinsic value to create wealth in any economy.
2. Don’t overpay.
These speculators sacrificed everything to chase hope. But hope isn’t usually a good business plan. And they undoubtedly overpaid for transportation and equipment in limited supply. One miner reported costs at 10x the normal prices. Of course, the proprietors of these goods and services made huge profits.
Right now, many real estate investors are betting the farm on hope. Hope that cap rates will continue to compress. Hope that interest rates won’t rise. Hope that inflation will cover the sins of overpaying in a blazing hot market.
I am in a mastermind with seven top multifamily syndicators. They are reaping enormous rewards by selling their overpriced apartment assets to those clamoring to get a deal at any price. There are investors benefitting in spades. Don’t be a victim of this gold rush—and consider investing with boring investors who make a profit in any economy.
3. Don’t chase shiny objects.
I hosted a podcast called How to Lose Money for four years. We interviewed 238 successful entrepreneurs and investors who lost money on their way to success. One of the big blunders we heard time and again involved chasing shiny objects. I was certainly guilty of this in previous decades myself.
To be clear, some of the greatest companies and inventions in the world were once someone’s shiny objects. But investment success in this arena is more the exception than the rule. I recommend you dial in on a specific strategy and say no to a thousand distractions on your journey.
4. Look for hidden value in undervalued assets.
Billionaire Howard Marks is a great investor and teacher. Warren Buffett reads everything Marks writes. His epic book, Mastering the Market Cycle, warns against market timing. He tells us to forget about accurately predicting market cycles—and to focus on acting appropriately for where we are in the cycle instead.
As we discussed, there is a gold rush mentality in the real estate investment realm today. This is not a time to pay top dollar for already-stabilized assets. Howard Marks tells us it makes no sense to overpay for the lowest margin deals at a time when the market could turn downward. Sure, inflation could save you as revenues outpace your fixed debt. But do you really want to depend on that to avoid ruin? Is that fair to your passive investors?
There are proven strategies to acquire undervalued assets that thrive in any economy. You don’t need to hit gold to make a profit. I’ve written about this extensively—this is one of the most recent posts.
Self-storage can be a profit center!
Are you tired of overpaying for single and multifamily properties in an overheated market? Investing in self-storage is an overlooked alternative that can accelerate your income and compound your wealth.
A surprise ending to my gold rush story
I told you about my gold rush story in the Bakken oil boom in a prior decade. We lost a lot of money on a hole in the ground.
But in our due diligence travels to North Dakota, we noticed running pickup trucks, cars, and semis parked overnight all over the area—and we couldn’t find a hotel room at any price. My business partner had a small jet, and he had to fly back to a neighboring state or go home at night after a visit. The tiny town of Watford City couldn’t house thousands of workers who had descended on it.
An idea took shape. We decided to sell picks and shovels to miners.
Well, not really. But we were both in real estate, and we had time and capital available. We decided to build a multifamily property to run as an extended stay hotel. This facility would serve all types of employees and contractors working in and visiting the burgeoning Bakken oil fields.
We quickly acquired land and brought in modular buildings. We hired a manager and built a website. We filled up every suite and developed a waiting list overnight.
Photo courtesy of Paul Moore
Basic area hotel rooms (when available) were running between $300 to $500 per night. Apartments could run as high as a few thousand dollars monthly. We priced our 300 square foot beautifully furnished suites at $4,000 monthly—or $129 per night.
We stayed essentially full while oil prices remained high. We made far more profit serving the oilfields than we lost investing by drilling for oil. We eventually sold to an institutional buyer with deep pockets.
More importantly for me, I successfully transitioned from residential to commercial real estate. This is something that intrigued me for years. But I didn’t know where the onramp was—not until I rethought how to profit from a gold rush.
So how are you investing during the real estate gold rush? Or do you think there is one at all?