Q:<\/strong> Do you trust \u201cThe market<\/em><\/strong>\u201d for your real estate profits?<\/p>\n A:<\/strong> Those who trust \u201cThe market\u201d<\/em><\/strong> are at the mercy of the market.\u00a0<\/p>\n I think this is folly. Hopefully, many of you agree.\u00a0<\/p>\n Here\u2019s what I\u2019m talking about\u2026\u00a0<\/p>\n The real estate syndication realm is awash with new operators showing their investors dazzling returns. Profits that would astound investors from Wall Street to Main Street.\u00a0<\/p>\n And these syndicators are raking in massive profits along the way as well. I know many operators who were in high school during the Great Financial Crisis and working W-2 jobs just a few years ago who have joined the multi-millionaire club in this current rush to riches.\u00a0<\/p>\n You see, the same \u201cMarket\u201d<\/em><\/strong> that made them and their investors rich could also destroy them. The streets of history are littered with such casualties.\u00a0<\/p>\n Here\u2019s how it looks in the real estate world\u2026<\/p>\n The value of a commercial real estate asset is based on two variables:\u00a0<\/p>\n Value = Net Operating Income \u00f7 Cap Rate<\/strong><\/p>\n If this formula is unfamiliar, check out this post<\/a>.\u00a0<\/p>\n The cap rate is the market\u2019s evaluation of the value of an asset. It is based on the interest rate, a risk premium, the desirability of that asset type, the location, and more. Factors outside the operator\u2019s control.\u00a0<\/p>\n And of course, the net operating income is the gross operating revenues minus expenses. And this is largely in the control of the operator.\u00a0<\/p>\n As you can imagine, a seasoned operator focuses on the latter. They see intrinsic value hidden in an asset. They acquire the asset and do their magic. They put their team and technology to work to raise the income and create value for investors.\u00a0<\/p>\n (If The Market cooperates, their investors get a double win. But their \u201chope\u201d lies elsewhere as we\u2019ll see.)\u00a0<\/p>\n But rookie syndicators trust the market to do the heavy lifting. They hope for various circumstances to line up perfectly to turn a profit. Factors like:\u00a0<\/p>\n Take away one or two of these factors, and their house of cards comes tumbling down. Because trees don\u2019t grow to the sky. And hope<\/em> isn\u2019t a sound investment strategy.\u00a0<\/p>\n Newbies trust the uncontrollable market for their profits.\u00a0<\/strong><\/p>\n Pros trust the market, too. They trust the market to <\/strong>lower<\/em><\/strong> their profits.\u00a0<\/strong><\/p>\n Seasoned pros assume<\/em> the uncontrollable market will lower their property values. Pros focus instead on the more controllable acquisition process and Net Operating Income.\u00a0<\/p>\n They trust their talent, team, and technology to create profits in any market. And they plan to hold assets through market ups and downs to provide investors a more stable and predictable source of true wealth.\u00a0<\/p>\n Do you remember the late \u201890s tech bubble? Investors made billions in this runup in tech values. I can see some similarities between what is happening today, though the excesses were even more extreme then.\u00a0<\/p>\n Buffett seemed out of touch. He and his Berkshire Hathaway investors missed out on stupendous profits as the dot-com bubble ballooned to staggering heights.\u00a0<\/p>\n Buffett was only in his late \u201860s, but he was called senile. At his annual billionaire\u2019s retreat in Sun Valley, Idaho, his colleagues wondered if he\u2019d lost his touch.\u00a0<\/p>\n Buffett addressed the group, assuring them he was well aware of the differences between investing and speculating. He was happy staying on the course that had served him so well over many decades.\u00a0\u00a0<\/p>\n In his 2000 letter to shareholders<\/a>, Buffett stated this:\u00a0<\/p>\n \u201cBy shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates) \u2026 Speculation is most dangerous when it looks easiest.\u201d\u00a0<\/em><\/strong><\/p>\n Of course, we all know what happened. The bubble burst\u2026and Buffett emerged as the hero\u2026yet again.\u00a0<\/p>\n Check out this graph<\/a> showing the NASDAQ\u2019s rise and fall.\u00a0<\/p>\n Wikipedia<\/a> described it this way:\u00a0<\/p>\n The\u00a0dot-com bubble<\/strong>, also known as the\u00a0dot-com boom<\/strong>,\u00a0the\u00a0tech bubble<\/strong>, and the\u00a0Internet bubble<\/strong>, was a\u00a0stock market bubble\u00a0caused by excessive\u00a0speculation\u00a0of\u00a0Internet-related companies\u00a0in the late 1990s, a period of massive growth in the use and adoption of the\u00a0Internet.\u00a0<\/p>\n Between 1995 and its peak in March 2000, the\u00a0Nasdaq Composite\u00a0stock market index\u00a0rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble.\u00a0<\/p>\n During the crash, many\u00a0online shopping\u00a0companies, such as\u00a0Pets.com,\u00a0Webvan, and\u00a0Boo.com, as well as several communication companies, such as\u00a0Worldcom,\u00a0NorthPoint Communications, and\u00a0Global Crossing, failed and shut down. Some companies that survived, such as\u00a0Amazon.com\u00a0and\u00a0Qualcomm, lost large portions of their market capitalization, with\u00a0Cisco Systems\u00a0alone losing 86% of its stock value.\u00a0<\/p>\n Are you tired of overpaying for single and multifamily properties in an overheated market? Investing in\u00a0self-storage\u00a0is an overlooked alternative that can accelerate your income and compound your wealth.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n I am not saying we are in a bubble.\u00a0<\/p>\n But I am saying that we need to learn from Mr. Buffett here. Buffett didn\u2019t care about the price of NASDAQ or the billions his pals were making speculating. He didn\u2019t care that his portfolio had underperformed the market for years or that people were calling him senile.\u00a0<\/p>\n Buffett cared about sound investing fundamentals. He cared about the same thing he had since he acquired Berkshire Hathaway in the mid- \u201860s.\u00a0<\/p>\n His goal was to invest in undervalued companies with sustainable businesses and products managed by competent management teams. That didn\u2019t change because the market changed.\u00a0<\/p>\n Buffett wasn\u2019t relying on THE MARKET to tell him how and where to invest.\u00a0<\/em><\/p>\n And I don\u2019t think we should either.\u00a0<\/p>\n We can count on the market for one thing: to be the market<\/em>. Just like the wind blows wherever it wishes. It is not in our control.\u00a0<\/p>\n Good sailors reach their destination in any weather. They are not dependent on wind or waves or temperature.\u00a0<\/p>\n If you are a Syndicator\u2026\u00a0<\/em><\/strong><\/p>\n Don\u2019t<\/strong> overpay for assets.\u00a0<\/p>\n Don\u2019t<\/strong> count on the market to make a profit.\u00a0<\/p>\n Don\u2019t<\/strong> believe \u201cit\u2019s different this time.\u201d\u00a0<\/p>\n Don\u2019t<\/strong> count on the next decade to be like the last.\u00a0<\/p>\n Don\u2019t<\/strong> overleverage with the belief that you can be just like the last guy who did it and repeat their success.\u00a0<\/p>\n If you want to speculate, do it with your own cash. Don\u2019t<\/strong> drag investors in and call this speculation an investment.\u00a0\u00a0<\/p>\n Don\u2019t<\/strong> invest with any syndicator until you\u2019re sure they\u2019re not a speculator.\u00a0<\/p>\n Don\u2019t<\/strong> put all your eggs in that one basket. Diversify.\u00a0<\/p>\n Don\u2019t<\/strong> swing for the fences. Slow and steady wins the race.\u00a0<\/p>\n Don\u2019t<\/strong> invest before conducting careful due diligence on the syndicator and the opportunity.\u00a0\u00a0<\/p>\n Don\u2019t<\/strong> invest in overheated deals in overheated asset classes in overheated markets. (Remember, hope<\/em> isn\u2019t a sound investment strategy.)\u00a0<\/p>\n Don\u2019t<\/strong> trust the market to generate your returns. Do<\/strong> trust a great operator with an excellent track record, a veteran team, and proven processes<\/a>.\u00a0<\/p>\n It\u2019s possible to trust the market as a commercial or residential real estate investor or in any other asset type. Did you hear about the great Dutch tulip bubble<\/a> of 1634 to 1637?\u00a0<\/p>\n Trusting your acquisition and operating skills will serve you well in any market. But please don\u2019t count on the market to do the heavy lifting for you.\u00a0<\/p>\nBut this scares me to death.<\/h2>\n
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Seasoned syndicators don\u2019t count on \u201cThe Market\u201d to do the heavy lifting. <\/h2>\n
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Warren Buffett\u2019s folly?<\/h2>\n
![\"Chart,](\"https:\/\/lh6.googleusercontent.com\/moLVdTVaVCTtJvhCnt0GprlN38XrXSlHgRa7YPXwR-uPfKk2KDJedvvaBBCYd_El2AFRodR7ujNQwqXt2tqHIGs3B2WLk0q6lyPynvPRObbh9moauW9W2S61RR3IliD26tlxxwuu\" "\\"A")
![\"Storing](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/Storing-Up-Profits-3d-1-1-914x1024.png\" "\\"A")
<\/source><\/source><\/picture><\/a><\/figure>\nSelf-storage can be a profit center!<\/h3>\n
So, are you saying we\u2019re in a bubble, Paul? And what can we learn from Mr. Buffett?\u00a0<\/h2>\n
A dozen recommendations for investors who believe this post\u00a0<\/h2>\n
If you are a passive investor\u2026\u00a0<\/h2>\n
Final thoughts<\/h2>\n