Introduction to Brit Properties – Part II
Shifting from Industrial Developer to Value-Add Investor
My next move was to shift strategies. Rather than acting as a developer, I decided I’d start buying buildings instead. I lined up a small group of investors and bought an industrial building for $700,000. We got very, very lucky with this deal. All we did was put in new windows and then turned around and sold the property for $1.2 million. I felt like a real estate genius!
But of course, I wasn’t. We just happened to buy a building from someone who was a very motivated seller and then lined up a very motivated buyer. Yet it was the exact motivation I needed to continue with this investment strategy.
This first value-add deal led to a string of 90 additional acquisitions with equity investments from more than 300 investors. The deals were all a bit unique. Each required setting up a different syndication. Not all investors participated in all deals, but that was just fine. Some preferred investing in certain types of properties and not others.
Somewhere along the way, I did try my hand at developing a few more times. I soon realized that I was right the first time around: developing isn’t for me. When you can buy a property, you can buy it for less than replacement costs. And the process is quick. You can get a deal done in 30 days and have it leased up and cash flowing in short order. Development deals have a much longer lead time and carry much more risk. From here on out, I would stick to just buying buildings. It’s a strategy that’s worked incredibly well for me.
Finding a Market Niche
Industrial is already a specialized niche within commercial real estate. But we tailored our business even more strategically. My company is in what’s called the “industrial user” business. We are not operating only on the investment side. We buy buildings that we find off market by knocking on doors—much like I did when I was a kid trying to find lawns to mow. We bought a lot of buildings by going door-to-door in industrial parks, asking the owners if they’d consider selling.
As the company grew, it made sense to bring on a brokerage team. We built up this side of the business to have about 30 brokers. We’d bring on young people and really invest in their training and development. Our brokerage arm became a feeder to our acquisition business. With 30 brokers out there pounding the pavement, they’d find buildings for sale and tenants who needed more space. This gave us a first look at bite at the apple before the properties were listed on the open market. It’s how we found some of our best deals.
Creating Your “Circle of Competence”
I’ll often refer to what Warren Buffet calls a “circle of competence.” The concept is simple: when you know so much more about a subject matter than anyone else, you focus on that area because, given your specific knowledge, you’re going to be more successful than anyone else who tries their hand at it.
Our circle of competence is the Chicago-area industrial market. I can tell you with some precision about the size, type, and color of almost any industrial building in any industrial park in the city of Chicago or its suburbs with map-like precision. Through my brokerage team, I learned the ins and outs of the market here better than just about anyone. There are about 400 industrial brokers in the Chicago area, and I know all of them and they all know me. It’s a very tight-knit community.
Buying Off-Market Properties
We’ve found that buying off-market properties is the way to add the most value for investors. Brokers will sometimes bring us deals, but by the time they get to us, the property is already publicly listed and being shopped around to other buyers who inevitably drive the price up. It’s always been better for us to find off-market deals.
On average, we’ll flip one out of every four buildings we buy within 90 days of purchasing it. We’re able to do that because we get there first. And we’re talking to everyone.
Case in point: one of our brokers will talk to a guy who’s manufacturing conveyor equipment. He’s growing out of his 50,000 square foot space. We’ll offer to buy the building from him, saving him the hassle from putting it on the market and paying broker commissions. We’ll then lease it back to him for as long as he needs, and in the meantime, we’ll start shopping around for other properties that he may be interested in when he’s ready to grow. Meanwhile, we’ll be knocking on doors to find a neighbor who may want to buy or lease the building from us.
Watch as Joel Friedland discusses his move from being a developer to being a value-add investor.
What we’re doing with this process is trying to find “sticky tenants” or “sticky owners” – people who would find it costly to move to a new building across town. Businesses, particularly those with large inventories or heavy machinery, have an easier time moving into a building that’s right next door to their current location. So we might buy a building off-market for $3 million and then approach the neighboring business owner asking them if they’re interested in buying it. The business “has to have it” and will pay us $4 million to lock it in. We are able to turn a quick, million-dollar profit because of our unique and specialized knowledge of industrial activity in that market.
Of course, this is a double-edged sword because now when we go to buy properties, we’re competing with the same user market that is willing to pay anything because an industrial property isn’t an investment for them, it’s a tool for their business. If they can’t run their business due to space constraints, they can’t make a profit. These businesses are willing to pay more for the “real estate tool” if it’s the right one for the job. Again, this underscores why it’s important for us to find off-market deals.
Over the years, we’ve bought 90 properties. We’ve sold 72 and continue to hold 18. Of the 72 we’ve sold, all but 5 have been sold to people in the user market – industrial companies who want to own their own real estate. We’re unique in that we don’t tend to sell to other investors, which is a common exit strategy for those in the commercial real estate industry. When you’re selling to another investment group, you’re selling based on cap rate. When a user buys a property, they’re more likely to pay a control premium, a premium for controlling the building for their business. These companies typically make more money through their business activities than through real estate, so they’re willing to pay that premium to lock up a building that allows them to grow their business. Users premiums are almost always higher than the investor price, no matter what.
The Value of a Liberal Arts Education
I mentioned earlier that I studied liberal arts, first at San Diego State and then at Michigan. People often ask whether the degree was worthwhile. They often think Liberal Arts degrees are just fluff..
But in fact, the liberal arts degree has served me well. This was something Milt Podolsky picked up on when I first interviewed with him. When I told him that I had studied liberal arts, rather than ridiculing me, he pulled out a Rolex that he quickly suggested was worth more than my car. But he wasn’t bragging. Instead, he told me that he’d trade his Rolex for a liberal arts education.
I was surprised, but he went on to explain: “A liberal arts education is the best thing you can have, because then you can talk to anybody about anything. If you’ve got clients who own companies, or sophisticated investors, they have varied interests. They don’t care about some little obscurity that you learned in economics. With a liberal arts background, you’re prepared to talk to anybody about anything, and I’m so envious.”
And I agree with him. I can talk to anyone about many different things. Real estate, sure. But also history, philosophy, arts and culture, politics and more. It allows me to connect with business owners and investors alike. The industrial business owners I’ve met are just fascinating. The range of their products is so wide, from someone selling sports tooling for machines that make plastic yogurt cups to a company that manufactures reflective lighting for roadway and stop signs. My liberal arts degree has allowed me to connect with people on so many levels, thereby fostering stronger relationships that have allowed me to grow my business.