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This review originally appeared in Real Estate investor’s Monthly.

Book review: Maverick Real Estate Investing

Real estate investment books generally used to be helpful. Some were better than others, but they were all good. Lately, the book store books on real estate investment have been largely worthless because they are not much more than lead generators for criminal gurus operating telephone boiler rooms in Utah.

Institutional authors

However, there is one category of real estate investment books that is still good. That is, books written by successful players in the institutional real estate market. The criminal gurus generally write about investing in one- or two-family houses and notes secured by such buildings. Institutional real estate is bigger residential properties and non-residential properties. In recent years, I have written enthusiastic reviews of such books including Churches, Jails, and Gold Mines by Steven Good, head of the premier real estate auction company and Shaping the Skyline by Julien Studley, former head of one of the top office-leasing companies.

No B.S.

The institutional players know what they are talking about, they have no overpriced seminars to sell or Utah boiler rooms to sell them. They cannot fill a book with B.S. because it would destroy their reputations with knowledgeable people.

They are not Mother Theresas. They have egos and are often trying to generate business. But their books are far more instructive than most current small investor books.

‘Mavericks’

Maverick Real Estate Investing by Steve Bergsman is another excellent book of that type. I do not care for the word “maverick” in the title.

The same word was used to describe Good in the promotion of his book. Generally, there are unique human beings, but in institutional real estate, you cannot really be a maverick because you are dealing with conservative institutions like pension funds. Apparently, someone has discovered that the word “maverick” sells books. The author was apparently forced to use the word throughout the book.

Interviewed them

Author Steve Bergsman is a financial writer, not a successful real estate investor. But the book is based on interviews with a number of top institutional investors like Donald Trump, Sam Zell, Eli Broad, Walter Shorenstein, Gerald Hines, etc.

Best-practices lessons

The book tells the details of how various investors did various deals including many well-known deals. The author tries to extract the best-practices lessons from those deals and generally does a good job of it. Sometimes, however, his rules are contradictory or tautological.

‘Golden rules’

For example his “12 golden rules” include, “Make a good deal,” “get good legal and tax counsel,” and “hire savvy managers.” Gee, thanks. There is also, “make safe gambles.”

Here are some of the good ideas:

Opportunity funds

Some of the advice strikes me as incorrect or incomplete. For example, the book is big on opportunity funds. That is, large pools of cash available to pounce of bargain opportunities. Makes sense, but I would expect the return on the pool would be depressed during the waiting period because of the need for great liquidity and resulting low yield. If the waiting period were long enough, it could have a significant adverse effect on overall return.

String out development?

The author also says that if you are developing a building and you encounter a down part of the cycle, you should string out the development so it is not finished until the cycle turns back up. Again, such waiting in a capital-intensive business is easier said than done. Generally, the developer would have a lot of money tied up in the property at any stage of development. Developers almost always race to finish and start generating income from rents or sales as soon as possible.

Still have carrying costs

The fact that you are in a down cycle would not change the fact that you have carrying costs. Indeed, since down parts of the cycle are often caused by high interest rates, I would expect that the carrying costs would be elevated during such a period. Seems to me that the more sensible advice is to avoid long-term leases if you are renting during the down part of the cycle. But that, too, is easier said than done because tenants are trying to do the exact opposite.

Don’t err

Again, the best advice is don’t err. That is, don’t complete a development at the down portion of the cycle. How do you do that? I don’t know. No one does.

Then what? Build to suit or pre-lease before construction. Is that also easier said than done? Yes, but unlike coming on line at the bottom of a cycle, failure to put together a build-to-suit or pre-leased development won’t kill you.

Faking it

In a number of places, I got the impression that author Bergsman is faking it. That is, he seems not to know that much about commercial real estate. For example, he makes a big deal out of cash flow, the need to understand it, how each company has a different definition of it, and that it is easier to comprehend nowadays because of computer software, etc.

Say what? Cash flow is rent minus operating expenses and mortgage payments. What’s to understand? He seems to be trying to turn cash flow into some complex, secret variable that few but the top investors understand—and, of course, those who have read this book. Seems a lot more straightforward than that to me.

What he really ought to be explaining is that a lot of investors have such a strong belief in appreciation that they accept negative cash flow. That makes their deals far more risky.

Tautological rules

Bergsman’s tautological rules also drive me nuts, although they seem to be a staple of investment writing. For example, when cash flow is at a peak, opportunistic investors sell. Brilliant! Brilliant! Now how do you tell when you are a peak? I can tell when you are at record highs, but how do you know they are not going to set new record highs in the future? Peaks are only visible in retrospect. In retrospect, it is too late to sell.

Bergsman quotes an Australian investment big shot who dislikes MBAs, accountants, and internal rate of return. With regard to MBAs, he prefers graduates of the school of hard knocks.

Why not both MBA and hard knocks?

We MBAs love that line. I was born in ’46. I spent two years at Harvard Business School and 35 years in the school of hard knocks. But somehow an MBA seems to nullify all my years of hard knocks. A 59-year old MBA is someone who has spent two years in the MBA program and 34 years in a coma. We also love being stereotyped.

The chapter after the successful MBA-hating Australian is about a very successful Stanford MBA in pretty much the same business: industrial real estate. Another chapter hero is Jeffrey Hines, son of Gerald. When I was president of the Harvard Business School real estate club, we hosted Gerald Hines as one of our speakers. His son Jeffrey later got a Harvard MBA.

I did not understand the aversion to accountants. As with MBAs, there are good ones and bad ones.

Aversion to IRR

I agree with the aversion to internal rate of return. I was originally enthralled with it. Now I see it as a trick Realtors® use to pump up a property’s return as much as possible. It is also useful for teaching and understanding how real estate investment works and for comparing unsimilar, guaranteed, long-term payments streams like mortgages or leases.

The main problem with IRR is the one the Australian investor identified. It is so complex and elegant that it makes people forget that garbage in garbage out still applies. Computer or mathematical model users must never forget that.