It’s pretty easy to develop this type of business but it’s not so easy to be successful. First, you need money and access to leverage. Second, you have to have a growing population. If nobody's moving in, the demand will be low. Third, you have to determine if it’s cheaper to rent the property or the money.
The two business strategies in the real estate business;
Buy or build - and sell, versus
Buy or build - and rent
are driven by land and construction costs, versus interest rates. From Art’s perspective that’s it - that’s all you need to know about the business. Pretty simple, eh?
Then why are there so many foreclosures on houses, why so many For Lease and Available signs on buildings?
The answer too is simple. Real estate runs on short-term decisions with long-term consequences. We live in a world of cycles. What’s in goes out and what was important becomes less so. Every turn or change in a cycle produces a reaction. Some companies become super popular and others fail. When a new area has jobs availale, people are needed and there aren’t enough houses there or places for them to shop ans enjoythemselves. When jobs are lost people become unemployed, have no money to spend and then there’s way too much of everything.
The business also attracts too many people who lack experience. They misread the signals, get in too late, pay too much, and run out of money.
A good business strategy should be based on diversification. If you only feel comfortable with one product, say warehouses - have them in different geographic areas so a downturn in one place won’t be fatal. Have different sizes so you can accomodate different users. Maybe build them so they can be sold as condo units if mortgage rates and down payment requirements change to favor ownership.
If you are risk averse, your business strategy might include buying land in the path of progress. Pay cash and get options to buy more. If things start to heat up, sell big pieces and use the profits to put in the curbs and gutters so you can sell small pieces. When you get to the end of your inventory, build on the last pieces yourself and rent them out. Your cost will be lower than everybody else so you will be able to offer the cheapest rents.
Consoli’s first management consulting job in real estate was for a nationwide commercial lender. He was called in to solve the problems if the exposure was over a million dollars. He saw first hand the mistakes that were made. From that experience he concluded that most people need to reign in their enthusiasm.
“Projects fail for lack of vision, the inability to accurately predict costs, when the project will be ready to be sold or rented and how much the revenues will actually be. The bank however has a memory like an elephant. It knows to the day when the payments on the loan are due.”
His business strategy from the beginning was to create a fully integrated company. He wanted to provide diversified products and services. His company, Equity Directions, Inc established the following divisions:
A real estate development company A mortgage brokerage and servicing business
A manufactured home sales company
A securities syndication business
A real estate brokerage company, and
A real estate consulting practice.
Through a number of limited partnerships Art controlled and managed over 1200 mobile home park spaces, three office buildings totaling more than 60,000 sq ft, a 104 room Ramada Inn, a 100 unit senior citizen complex, and three warehouses totaling 75,000 sq ft. He also developed a 60-acre industrial park and a 250-lot manufactured home subdivision.
At the time the Tax Reform Act of 1986 was passed his holdings were appraised at more than $45,000,000.
Another valuable lesson, what the government can provide - it can take away.
