The Blackstone Group....

General Real Estate Investing
1

The Blackstone Group is one of the largest real estate investment firms in the world…

They started in 1985 with $400,000.

I am about to do the same thing.

How can I model myself after them. I spent today clumsily trying to fix a toilet seal leak until I had to give the job to the tenant because he could fix it by the end of the day.

The majority partner has access to lots of capital and needs to be shown that it can be invested wisely.

How do these firms grow from just $400,000 to something with cash flow that makes them who knows how many millions or billions every year. The Blackstone Group now has somewhere around $12.9 billion in assets in just over 30 years.

How do they invest so wisely? What do they know that I don’t?

And who knows how many billions they are going to add to this portfolio next year with ease.

Does anyone know how they do this?

Gold River?

It can’t just be economies of scale.

2

Well, until any of us have made 12.5 billion dollars, I’m not sure you can possibly get an authoritative response.

That said, a first principal in real estate investing is knowing what you want to accomplish.

I’m not even saying have a dollar goal set, necessarily.

I’m saying, you see a project, and figure out exactly what the upside is, and attempt to negotiate control over it, and realize that upside.

It’s also about negotiations, vision of what could be, ability to synthesize several points of view against various, informed opinions, and make a conclusion, and stick with it, until something comes along that begs for a course correction.

Otherwise, it’s knowing how to analyze a project, from different angles, and recognizing why a particular project is good, bad, or indifferent, and be able to defend that position.

For example, your RV park deal …at first it looked like a turd to me. As I got more information from you, and was able to analyze it, with more informed numbers, and precision, it looked like a solid investment, with good management application. And even better, with upgrades and improvement.

When I really drilled down, and compared the GSI with the PRICE you paid, the deal morphed into a steal deal, on paper, with a 3% rent/price ratio. Again, only with good management application.

Another thing that is good to mention, nobody gets rich alone. Trump, for example has a long trail of people that made money ‘with’ him that nobody would know. His fortune was made with relationships. Relationships with investors, with boards, with banks, with vendors, and the list is endless.

In fact, I would say real estate investing is first a business of relationships.

As far as Blackstone is concerned, I’m betting that the founders made some pretty severe sacrifices at the beginning, to accomplish what they have. Most people aren’t willing to make even small sacrifices, much less $12.5B worth of them. They won’t turn off Dancing With The Stars, to advance their business.

Which brings us to energy levels. Health is so important to any successful business. It’s been said that wealthy businessmen sacrifice their health for wealth, and later are forced to sacrifice their wealth for health. I’ve seen it happen myself.

Just to skim a rock across the water here I would just say, know what you want to accomplish; weigh the sacrifices; stay healthy, and stick with a plan until you win.

You start where you’re at. You control an RV Park. Focus on making that the most profitable park possible. Leverage that success into more deals. Wouldn’t your current partners feel a lot more eager to invest with you, once you’ve proven yourself with this simple project? The answer is, “Yes.”

The same goes with any prospective lenders, partners, or investors. And that’s why you keep a financial statement with your projects listed, along with their performance histories with you, to show off to anyone you want to do business with. This could include a prospective seller.

Nothing breeds success like a present success.

3

What does good management application mean to you? To me at this point, it means being able to screen tenants wisely and do as much maintenance as I can myself.

4

What is “good management application” is a great question. There is no way to adequately answer that question, other than to list a few major assumptions and points. I mean books have been written on this subject.

Meantime, let me say that “Managers are like ‘self-image magnets.’ They’ll attract, and fill your building, with people exactly like themselves.”

For instance, just because “Agnes The Killer Manager” knows how to beat late rents out of deadbeats, doesn’t at all mean she’s any good at management. She is likely the reason tenants have to be beaten to pay the rent on time in the first place …because the deadbeats she put in there, are just as ornery and obstreperous as she is.

And she gets along with these people, the rest of the time, and it’s just normal to beat them on a monthly basis over late rents, or whatever other violations occur. It makes her feel powerful and “needed.” Pffft.

So, we look for managers that most resemble whom we want to live in our buildings, and deal with on a daily basis. Whatever that description means for our operation.

It should go without saying, we want a manager with some personal pride, and social skills. The rest can be learned.

As an aside…
If you show up with a tat, you’re not working for us as a manager. We have a ‘no tat’, no smoking, and no iron in the face, management hiring policy. Those with proclivities to self-mutilate, drive off our most reliable customers, and cost us money. Nope. However, you could qualify for our collections team…

Assumptions:
A good manager has to learn to be a salesman, a negotiator, and a closer. That could mean knowing instinctively to show the worst units first, and quote a retail rent, and then show the better units second, to the same prospect, and offer it for five dollars more. Guess which unit rents first, and how fast?

We want managers who’ll agree to be “on” 24/7. That is, modeling our ‘best resident;’ dressing, speaking, acting professionally, and appropriately, anywhere around our project. Off-site, they can do whatever they want.

  • There is a procedure and policy for every circumstance.
  • There is a uniform screening process, whereby everyone qualifies equally, and/or is disqualified equally.
  • There is a single, uniform, lease agreement used across the entire project.
  • There is a single, common, due date for rents to be paid ‘on time.’
  • There is a significant penalty for late payments, unless arrangements are made in advance.
  • There is a regular, predictable rent-adjustment schedule, that tenant’s can plan their budget around, which is especially helpful if market rents are changing significantly. It can increase retention, but mostly it reduces sticker shock.
  • There is a daily journal of activities, or a ledger of routine tasks, to be completed by the manager.
  • There is a place to mail rents, receive rents in person, or a bank account for direct deposits.
  • There is no such thing as “accepting rent in cash.”
  • There is a monthly expense tracking, and/or profit-and-loss statement provided to the manager.
  • There is no such thing as deferred maintenance.
  • There is no such thing as unscheduled, unsupervised maintenance done by a resident.
  • There is a management bonus, given to managers if/when certain occupancy goals are reached.
  • There is an off-hours contact number available for all residents 24/7.

Okay, I could go on for lines here. Never mind how to supervise assistants, deal with vendors, and track costs. That’s only a gist of the what you’ll find with a good management. But that should get you thinking.

The bottom line resource (IMHO), and what all my manager’s have been asked to read and review, is John Reed’s property management book called “How to Manage Residential Property for Maximum Cash Flow and Resale Value.” It’s our Bible on PM’ing for profit.

It’s very expensive anymore. I bought mine when they were only $20/each. I think Amazon has it used for $100, and up to $3,000 new… Crazy. I’m thinking it’s out of print, or no longer being offered by Reed. Or someone is hoarding these suckers. I don’t know. I haven’t purchased any new ones lately.

http://www.amazon.com/Manage-Residential-Property-Maximum-Resale/dp/0939224429

5

Hi,

$12.9 Billion in assets does not mean $12.9 Billion in equity, Blackstone is carrying debt on paper if you read there SEC filings.

Typically most American’s spend more than they take in, we have been trained to spend, spend, spend and if were short one week we put money on credit cards, we typically have an I want attitude, we want the latest and greatest cars, cell phones, homes, electronics, furnishings, clothing, meals, etc.

Most American’s don’t realize if we live within our means we have additional capital to put into new opportunities, successful real estate investors know how to live on less than they make and to stay within a ratio which makes sense. When I first started out in 1979 I managed to start saving $25k or more that first year, by the time I got forward 5 years I had over $250k in operating capital, to put in and pull out of real estate deals.

By 1989 I was working over $1m dollars, placing it and either selling or refinancing to make profits. This did not include equity held in investment property or positive cash flow provided monthly from rental income. I always put away cash in reserves, for replacement and repairs of properties.

I typically work about 90 hours a week, that doesn’t mean I am working hard as I have found it better to work smarter! I love what I do so it does not feel like work, it feels like pleasure as I enjoy what I do.

Just reinvesting in your self will go far, you can end up with a multi million dollar net worth over 30 or 40 years, but a balance must be struck and you have got to become a professional and leave your amateur days behind you. We have been very successful because we have used our construction expertise to our benefit.

Jay and I could be brothers from another mother as both of our parents were avid investors, in my parents case they utilized my mothers real estate brokers license and my dad’s engineering and construction expertise to their benefit, they always bought property they could ad value to through management and remodeling.

My parents did well timing a growing market and reading, acknowledging and acting on the signs of a falling market to back off and stabilize their investments. They aggressively refinanced out equity to purchase new property and in California’s market it didn’t take long to build serious equity.
In the mid to late 80’s and early 90’s we did dozens of brick apartment buildings around southern California buying them for pennies on the dollar and earthquake retrofitting them and remodeling them to make huge profits.

The only reason I find myself buying more real estate today and taking advantage of my construction expertise is I am making a lot of money on businesses outside of real estate, allowing me to buy or build a large amount of portfolio property every year. Real estate has become a tax shelter and place to put capital where I can make more than 1/2 or 1 percent on my money offered by banks, plus it is a safe haven.

Now Blackstone Group is a publicly traded company so they have made capital raises through the public markets. The biggest thing about building a business is putting a top notch group of people in place at the right time, and knowing when to use outside resources and when to hire and utilize year round in house professionals.

Blackstone group has both in house and outside consultants who are professionals in their field including experts in construction, design, architecture, maintenance, management, gaming, accounting, legal, land design, entitlement, energy management, capital raising, banking, borrowing and lending, planning, developing scopes, vision, etc.

Blackstone group has no love, lust or passion for one property over another, they look at statistics and analyze the numbers and they are just as diversified as they can be virtually investing in most commercial property types, and smartly they stick to class A properties predominately.

Now your biggest problem is maintenance so rather than being reactive become pro-active, start rebuilding the park from profits from it’s roots forward, that may mean replacing sewer and storm drain lines, replacing water and electric supply, installing new meters, running new phone and cable lines, and installing cat 5 cable for internet just in case, then repairing and resurfacing your streets, providing lighting, and then painting exteriors and remodeling individual trailers.

This would allow you to raise rents which in turn would allow you to cover costs of the remodel and increase the property value!

Create the Beverly Hills of trailer parks, raise rents appropriately to reposition the property say over 2 years and start screening and renting to a more upscale client, think better credit, better income and better jobs.

                       GR
6

Do you think large firms like The Blackstone Group or General Growth Properties that owns a bunch of malls kicks their clients out if they are $10 behind one month?

How much leeway is GGP going to give Adidas in the mall if their sales drop?

Or JC Penney? Sears? Etc?

Or does such a thing even happen where these companies would not be able to afford rent?

7

Hi,

It is very unlikely that a publically traded company like Adidas, JC Penny or Sears would not pay there lease as agreed or move to settle there lease in the event of a down sizing. A single owner business would be required to pay there lease or be served a pay rent or quit notice, in the event of a single owner business going bankrupt there may or may not be a final settlement depending on whether a person guarantee was agreed to?

The only time a publically traded company would not make there lease would be in the event of either a re-organization bankruptcy where the amount of payment / settlement is pennies on the dollar or where the company suddenly closes it’s doors and can’t pay after years of trying to re-position there store’s and just can’t quite make it work like Sears is facing today!

No professional management team provides leeway for unpaid rent, the paper work process starts even if it’s settled at a later date.

          GR
8

So I should not have any sympathy for tenants who are $10 behind even if they have lived there for 5 years.

I have no problem with that. I tried to be lenient when I first started, but it doesn’t work that way.

The grocery store won’t let them pay for their milk if they don’t have the money today, so neither will I let them get by being behind on rent $10 at a time.

From this moment forward, I am a professional.

9

Hi,

There is a difference between residential and commercial! If a residential tenant was only $10 dollars short I would let it slide once, if they start taking advantage and the shortfall suddenly becomes $100 dollars then a pay rent or quit notice is probable in store.

There has to be some reasonableness as peoples life’s are at stake and money does not always overcome people and their value / needs!

An eviction action can cost roughly $150 to $300 dollars or more, think about it calmly and rationally when it comes to people, the single mom with 2 or 3 kids to raise who is doing her best and just can’t make ends meet deserves more consideration than the tenant who always seems to have cigarettes, booze or a fancy car but can’t quite pay the rent on time.

I just made a deal with a single tenant the other day who is always tight on money (Minimum wage job) but is honest and was willing to weed and clean up the property in exchange for extra cash / a little reduced rent. Sometimes the answer is being creative and doing the right thing over beating a good person over the head just because there going through a tough time.

There is a difference between deserving help and deserving to be evicted, learn to know the difference!

                 GR
10

How do you have time to know your tenants personally if you have hundreds of millions of dollars of real estate?

11

That’s very good feedback. Back in the day, when I was first attending seminars on creative financing strategies, one of the bugaboos that was always cropping up from the audience, was how to manage rentals. Of course, I already knew what I was doing by the time I was twenty. I was a grizzled veteran by then.

However, the thing that struck me, was the severe nature of the advice coming from these ‘trainers,’ advising newbies on how to manage real estate.

The assumption (apparently) was that all newbies are pushover, and need to overcome their mushiness by coming down like a ton of bricks on any infraction.

I remember hearing one guru for Robert Allen, respond to an audience question about what to do about an asthmatic, that had been in the hospital, and unable to pay the rent, etc. “What do you do in those situations?” was the question.

His answer was hilarious, unprofessional, if not unprofitable. He said, “You don’t care if the tenant is being ventilated with a leaf blower, the rent is due on the first, or there’s late charges. No exceptions.”

Of course, everyone laughed, including me. But there are exceptions. I’ll bend over backwards to avoid a vacancy, rather than blow a month’s rent on ‘the principal of the thing.’ Especially in one-off situations where I haven’t been camping on a slow-pay situation.

Meantime, that kind of mismanagement suggests to me that the landlord/owner is either grossly insecure, has mental problems, or both.

And that doesn’t address the emotionally immature, amateur, landlords that escalate on the tiniest items, and cause their own problems at the get go.

Good post.

12

Hi,

 Redstar just because your successful and have been blessed does not mean you don't have the opportunity to get around to your properties from time to time, and just because I don't know the tenants on a first name basis does not mean that our management team does not convey their feelings about tenants especially those tenants they know are trying and just need a leg up.

I actually knew nothing about this tenant personally until I visited, was briefed on the property status and management advocated to help a few tenants out, I knocked on the door of all these tenants personally to work something out; this tenant was the only one to answer and me and the manager reached out to help.

We actually want our management to be helpful, humble and “to do unto others as you would have done unto you” and I am fine with the idea of some creative resolutions to an otherwise sticky situation. Had I not personally been on the property that day the manager had already been authorized to find some way to work these tenants problems out without evicting them.

I try to get out to all my properties as often as I can, you can’t understand specific property dynamics without seeing and hearing the good and the bad, without some level of activity it’s like a ship sailing without a captain.

The tenant I helped out was worth the effort and I was happy to help out!

                 GR
13

Have you ever tried working with them or getting some type of apprenticeship with them?

14

Me? With the Blackstone Group?

No. Is that even possible?

15

What do they do?

16

Topic hit close to home, so I wanted to reply. First, in replicating or duplicating a Blackstone business model – sounds easy doesn’t it? LOL. They are the exception, not the norm. While there are plenty of “private equity” type of firms, from the largest to the countless nameless, faceless, etc., Blackstone, today, is far from a myopic “real estate” firm. I would classify them more in the “financial services” field. Second, today, they are diversified – focus and concentration, but diversified. They are a large, multinational “private equity” firm which specializes in alternative asset management, hedge funds, M&A advisory, LBO transactions, real estate, as well as being a diversified financial services firm.

They started in the heyday of the 80’s. While I am not saying today doesn’t offer the same, more or less opportunity, times were very different back then. Blackstone started as an M&A boutique firm and today they are one of the largest private equity investment firms in the world. They were one of the first major private equity firms to go public, when they had their IPO just before the financial debacle in 2008. In today’s day and age, I think they’ve now oriented themselves toward larger, more established companies and transactions.

If you read up a lot on them, a lot of people who remember their early days remember that while their initial foray was in the M&A world/private equity business, they struggled initially because neither of their founders (Schwarzman and Peterson) had ever done an LBO deal. Regardless, they were and are super bright guys. Early on, they also adopted a merchant banking and financing model because back then most deals, situations, etc. required an “investment” partner as well as an advisor partner. Roger Altman, a very prominent and well known investment banker, joined Blackstone in their early days. Of course he left to become Deputy Treasury Secretary under President Clinton. Altman later went on to co-found Evercore – which also had a major rise to stardom and is also a fascinating story as well.

Read up on Blackstone It’s a fascinating story, like many out there. Contact them. Even invest with them if you can/want. See if they offer any education opportunities. I would also see if the founders ever wrote a book. Look around, there is a lot out there on them. Good luck.

17

I like your really big GOALS!