The Myth of Real Estate

Today’s show was inspired by a number of emails I’ve received over the past month. I’ll get to that in a minute. In reality, today’s show is about the myth of real estate. There is a Giant myth and it’s perpetuated by the people who promote the free evening intro to real estate investing workshop and the weekend bootcamp for $199. That myth is of passive income. Become a real estate investor and you’ll never work another day in your life.

Last month I was a guest on the Rich Dad Radio Show with Robert and Kim Kiyosaki. On that show we talked about senior housing as one of the best investment asset classes. Robert and Kim are great people and they’ve managed to put together a great deal with a senior living operator. Robert and Kim are pure investors, and they also run an active business. Their active business is education. They write and sell books and they have speaking engagements. They manage a portfolio of investments of about 8,000 multi-family apartments. They are hard working people.

They also happen to have mastered the art of maximizing their assets. For example, they have a parcel of land on Camelback Road in Scottsdale. It’s a prime location that had a fitness club on it. Then one of the new fancy fitness clubs opened with two swimming pools and everything was bigger and better. Their fitness club could not compete. They could have chosen to improve the fitness center, but that would not have been the right choice for Robert and Kim at this stage in their lives and careers. Instead, they negotiated a 99 year ground lease with the builder and operator of a senior assisted living business. Smart move. They get to maximize the value of their land and the investment appears as a passive investment to Robert and Kim.

Since the show aired, I’ve been inundated with offers for land to build assisted living projects around the country. The email is usually something like this. Hey Victor, I loved your episode with Robert and Kim. I have an idea for building an assisted living project on this parcel of land that’s near my house. Would you be interested in discussing this opportunity further?

I’m flattered that they appreciated the conversation with Robert and Kim. I’m flattered that they would love to work with me.

But here’s the thing. Imagine if I came to you and said. Hey, I’ve got a piece of land that I think would be great for a restaurant. I can point you to the land, and you worry about the restaurant, building the building, paving the parking lot, hiring the executive chef, hiring the staff, hiring the guys to valet park the cars, the marketing, the supply chain for fresh ingredients. We could be partners.

The land is perhaps expensive, but clearly contributes a very small percentage to the success of a restaurant. The same is true for assisted living. Nobody would ever mistake a restaurant business for a real estate business.

Assisted living is also a service business, just like the restaurant business. It has a real estate component, but the real estate is a small fraction of the value creation. It’s first and foremost an active business. It’s a service business. Yes, the business might get structured so that it looks like a piece of real estate for the purpose of having a tax advantageous structure. But it’s not a passive business.

Yes, you can invest passively in an active business. But don’t confuse being an active real estate project sponsor with being a passive investor. They’re vastly different.

Many businesses have a real estate component to them, but that doesn’t make it a real estate business per se. A restaurant isn’t a real estate business. A hotel isn’t a real estate business, and an assisted living and memory care business isn’t a real estate play either. They all reside in a piece of real estate, and there is definitely a real estate component to those businesses.