Real estate billionaires don't get the airtime that they used to. High-flying tech billionaires and electric car/spaceship/solar panel/underground tunnel thing billionaires get most of the attention from the financial media. But real estate billionaires are still around, churning out wealth.
Let's take a look at what some of the most heralded real estate investors are up to today, and how two REITs, Equity Residential (EQR 2.40%) and Prologis (PLD 1.86%), as well as Berkshire Hathaway (BRK.A 2.24%) (BRK.B 1.97%) are involved. And find out how you can use these strategies in your own real estate and stock portfolios.
Moving out of tier 1 cities
Real estate investing legend Sam Zell isn't in the spotlight quite as much as he used to be, but his REIT, Equity Residential, is still making moves. Equity Residential is the modern evolution of the Equity Finance and Management Company, which Zell founded in 1969. It has grown to a $34 billion market cap multi-family REIT that owns 80,407 units over 310 communities.
As people started moving out of the so-called tier 1 cities (think New York, Los Angeles, and Chicago) during the pandemic, Equity Residential followed. In 2021, it sold $1.7 billion of older complexes, mostly in California, and either purchased/developed or closed on the future development of $2 billion in properties in places like Atlanta, Denver, and Dallas.
Equity Residential is focusing on the future and moving out of overly saturated areas. You can do this too in your investing. It's well known that the amount it would take to buy an 800-square-foot condo in San Francisco may buy you an entire strip mall in rural Texas.
Research the saturation and growth of the area where you're buying properties. You want to see a lot of population growth. If you're forced to buy thirty- or forty-year-old properties because the city was saturated decades ago, as millions of people move away you're setting yourself up for poor returns.
Buying industrial real estate
Two of the fastest-growing real estate billionaires, Leonard Stern and Ross Perot Jr., owe their recent success to industrial real estate. The warehouse and manufacturing-focused sector had strong growth in 2021 that should continue into 2022.
Much of the growth in the sector comes from storing merchandise that is sold online. The 800-pound gorilla in this type of logistics real estate is Prologis. The REIT owns 1 billion square feet of industrial space. It has 4,735 buildings in 19 countries, and amazingly right now has a vacancy rate under 3%.
Prologis has plenty of room to grow, but aside from investing in a REIT, industrial opportunities are few and far between for individual investors. Your best bet is to keep your eye open for office or warehouse space in your area that can be leased to long-term business operators.
They key is to give yourself plenty of opportunity to raise rents to the market rate in the lease. Many industrial investors were happy to sign long-term leases five years ago and now receive at least 20% less than the market rent.
Billionaire Jeff Greene has been successful in his career thanks to his flexibility. He reportedly owned 18 houses by the time he graduated college, but owes his jump into the billionaires ranks to a chance he took on credit default swaps in 2008. Greene was able to use his expertise in the housing market to see the crash coming and profit off of it.
Today, his wealth is spread around residential, office, and retail developments with some land sprinkled in. He is also diversified geographically, benefiting last year from his Florida holdings while his California holdings remained stagnant.
While it may not be in the cards for most individual investors to diversify to this extent, there are certainly benefits to diversification. You don't want your rents to drop, while your stocks are crashing, and the baseball cards you buried in the backyard are basically worthless. One way to start to diversify with stocks is with the types of companies discussed in the next section. If one real estate sector or geographic area is hit hard, it's unlikely that all of these stocks would crumble.
Bonus: Focusing on pick-and-shovel companies
Warren Buffett is certainly a billionaire, but he isn't really a real estate billionaire. Sure, Berkshire Hathaway owns over $150 billion of property. But what's $150 billion between friends? The mega-cap company has more than that in just cash and short-term fixed-income investments. And the company buys the property for its direct use, not to lease.
The way Berkshire makes money in real estate is with real estate adjacent businesses. Home Services of America is the largest real estate brokerage firm in the U.S. It provides just about everything to retail buyers, including mortgages, title and closing services, insurance, home warranties, and relocation services. Berkshire also owns Clayton Homes, which delivered 61,000 modular, manufactured, and tiny homes in 2021.
Many investors don't realize the extent of their own circle of competence. As you invest in real estate, pay attention to everything around you. Which title company is quickly growing? Which websites or apps are taking over the industry? Which banks are making the most loans? Every company that piques your interest is a potential investment.
Real estate billionaires don't become rich by using the same static strategy for 60 years (although it might take 60 years to become a billionaire). You have to keep growing. Move geographic locations when it makes sense, change niches when the markets change, diversify, and buy stocks in your circle of competence.