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Data is everywhere. I’m in the process of buying a house right now. And I’ll tell you a story about using data and analytics in real estate, which is not our business, and we don’t have an interest in it. This is just what I’ve done personally to illustrate that you can use data and analytics everywhere. In addition, they have an extraordinary benefit in basically every industry.
Invest for cash flow
My investment philosophy is to buy real estate on cash flow, not appreciation. A lot of that is founded on the MBA from Columbia, the Economics and Finance and Accounting classes that I took, and the philosophy of “What are the bright people there?” In part, that is because I’ve lived through and watched a couple of real estate cycles. I mean, I’ve owned the real estate since I was 22 years old. Yeah, I bought my first investment property at 22.
If you’ve bought on cash flow when markets tank, it doesn’t matter much when the property values tank. Sure, rents may go down some, but a significant rent decline might be 10% over some time. Rent will not collapse like property values or the fact that you can’t unload properties, or you run into cash flow problems and get squeezed and have to give up properties in a bust market. That’s my investment philosophy.
Around 2015-2016, I started looking for an investment property because I had some money from selling a previous company Cobalt Health. And I wanted to diversify and buy some investment properties, cash flow generating properties. The problem was everything in Los Angeles had terrible cap rates. And if you’re not really from real estate, it doesn’t matter. The point is that it meant that there would have been negative cash flow,. What does this mean? Well, I would have bought the property. Every month, instead of getting a return on investment, I would have had to put more money into it to cover the principal and interest in taxes, insurance, upkeep of the property, property management, and so on.
Expand your horizons
Figuring all that stuff out, I have a pretty big Excel spreadsheet that I’ve developed to analyze all of this that includes all of these different factors. It even has projections for changes in the interest rates and inflation and all kinds of things over time, and it projects it out seven years.
I thought, “Okay, LA stinks,” even in 2015 and 2016. So I started looking further out at properties in the secondary markets, like Palm Springs in the Coachella Valley, a couple of hours outside of Los Angeles, the Central Valley, which is two to four or five hours away in the middle of nowhere in agricultural areas. Those properties did not make sense financially either. They’d essentially appreciated so much by that time that you couldn’t make a good return, sometimes a much lesser return at all.
I started looking further and further out in Las Vegas, in Portland, Oregon, in Phoenix, in Salt Lake City. They were all wrong. I thought like, “Okay if I can fly there and back in a day, like Salt Lake City or something, I can invest that far away.” None of them work. So I gave up after 2017, after spending a year and a half to two years trying to find properties and markets that worked.
Around the end of 2018, I thought, “You know what? I’m going about this in a very haphazard way, meaning I’m going in, looking at individual properties, analyzing the individual property, and trying to figure out whether or not that property is financially viable as a way to evaluate an individual market.” So I’d look at Las Vegas, pull a few properties, and analyze those individual properties. I felt like, “This is not a very sophisticated way to go about this.” We’re in the data analytics business. We should be doing this better than this.
Gamify the process
In late 2018, I thought, “You know what? I’m going to play a game and see if I can find places, not individual properties, but locations in the United States, where they had good cap rates, or I could have good cash flow, good cash-on-cash returns if you’re in real estate, and I could make money. Maybe, it’s tiny little pocket places in the United States.”
Even if I wouldn’t invest there because it’d be too difficult logistically, I just wanted to know, “Does this even exist? Has the market just gone completely sideways? Is this a very narrow distribution where everything has a bad cap right across the entire country? Or is there a fairly wide distribution in terms of returns based upon geography?”
Group things together
Part of this was a game to figure out philosophically, “Where is the world at?” And part of this was practically like, “Hey, if I can find a place, maybe I can buy some properties all in one place and make it make sense even if it’s far away.”
By the spring of 2019, late 2018, or early 2019, I did this analysis and found many places that had outstanding returns. Now granted, this was two and a half years ago. It still had excellent cash flow returns on average for particular areas, meaning that you could generate good cash-on-cash returns. There would be a positive return on investment.
By spring of 2019, I decided on a target location, a first place to buy some properties. I thought, “Okay, I’ll test this out here. I’ll buy some and build it up. If it works, I’ll continue to do it and maybe even go to places that have better investment returns.” So I didn’t even pick the best. I just picked one I thought I could knock off and test this out. In the spring of 2019, I bought the first property. Within the next seven or eight months, I bought six more investment properties, primarily single-family residences and a couple of duplexes. They’ve done exceptionally well: A perfect cash flow and a good appreciation even before the pandemic appreciation became complete craziness.
In the following podcast, I’ll give you some details about where we got the data and how we did the analysis. Again, I’m not trying to turn you guys into real-estate investors. But the point is more philosophically, “How are you approaching things in your business, in life, even if it’s a personal sort of side hustle, just investing your own money, or it is in your business?” I mean, how are you going about this? Is it haphazard? Is it sort of micro-drilled down? Or are you taking a systematic approach to things and figuring out how to make them work? And this is a story about how I changed from going after something is not a very targeted and systematic way. Yet, I’m still using a lot of analytics and taking a step back and looking at it from a 30,000-foot level and saying, “Hey, how can I approach this differently and figure out a way forward?”