CRE Lesson #5: How I Started Buying Property Without Any Money

And what I learned along the way

As a professional real estate investor, all you have is your track record.

But if you're new, you don't have one.

So how do you get a track record without a balance sheet?

Here's how we developed ours, along with a few tips I wish I knew then.

My partner and I walked away from a Wall Street mortgage desk in 2008 and moved back home to California to start a real estate investment company. We saw the worst of the subprime boom, knew where the bodies were buried and foresaw a tremendous opportunity.

Brilliant but terrible timing. It’s easy to forget how chaotic that time was, how the financial world and the economy literally ground to a halt.

We immediately began to fundraise, but with zero investing track record, zero real estate transactions under our belt, a limited network and zero capital, we struggled.

We survived at first by valuing distressed mortgage pools, specifically scrubbing and correcting the Broker Price Opinions that investors at the time ordered en masse to value the underlying real estate. The BPOs were consistently inconsistent, hastily thrown together, and we simply normalized the errors.

Between 2008 and 2010 we ended up working for some of the Street's top players, the world's biggest hedge funds and private equity firms who were gobbling up delinquent mortgages by the truckload. But that’s another story for another time.

Tip #1: Get to know your market.

You don't need capital to study comps, understand neighborhoods and learn how to value property. It takes a career to master, but valuing real estate is not rocket science.

One of our clients in New York wanted to start flipping houses, so we pitched them on the idea that if they put up the capital, we'd do the work. They bit, and in spring 2009 - literally the bottom of the residential market in the SF Bay Area - we started writing offers.

Tip #2: Be in the market.

Go to open houses, meet brokers, chase down local investors and ask them how they did it. Get out from behind your desk and into the world - real estate is physical, get out there and touch it.

We got no bites. I don't even know if we got any counters, our bids were so comically low.

But we kept writing offers.

Eventually that client tired of unsuccessful bids and they wished us good luck. But we were making progress. We had a fledgling pro forma, we had a pool of contractors eager for work, we had (terrible) pitch materials.

And we had felt that rush of writing an offer, waiting for a response.

We were hooked and on our way.

Tip #3: Relentless forward motion (hat tip Leigh Moser, pink-haired ultra-runner and 100-mile champion).

Never stop moving forward. In this business you're like a shark, if you're not moving your dead.

Starved for rent money, we briefly gave up on house flipping, and thanks to a series of happy accidents became the preferred Bay Area real estate brokerage for a loan servicer drowning in foreclosures listings.

Over the next 18 months we listed and sold 100+ foreclosed homes from Sacramento to Sonoma, San Francisco to Salinas. But that is also another story for another time.

Tip #4: Do transactions.

Another way to learn the real estate game without any money is to broker deals. Escrow isn’t sexy, but you damn well better know how it works when you start buying. Because the last thing you want to do when your offer gets accepted is immediately google: "can I lose a nonrefundable deposit?"

Then we caught a break.

Another one of our BPO review clients wanted to start flipping but needed boots on the ground. We had proven that our fledgling team was PHD (poor, hungry and driven), so they flew up to San Francisco for some tours.

We pitched them on San Mateo and Santa Clara Counties, which by late 2009 were already recovering on the back of a technology sector that barely registered the GFC.

By 2010 we were writing offers.

The deal was that they put up all the cash, and we did all the work. And above a threshold return we'd split profits 80/20.

Even in hindsight, not a bad cut given our nonexistent track record.

Tip #5: Look for win-wins.

Our client was looking to impress their investors by putting up good numbers, and we were looking for experience. We could have pushed for fees or even a better split, but figured that if our client made money, we'd end up happy.

They did and we were. And that principal still guides me today.

And finally one hit.

21 Portola Ave in Daly City, CA, I'll never forget it. I laid the sod in the front yard one foggy afternoon and knew we were on our way.

We did five projects with that client, the first four were winners (how could they not be at the time), and then number five fell flat. We misjudged a weak pocket of demand in a particular submarket, paid a bit too much and our last deal was a dud.

Our client had moved on to bigger things and we were eager to raise our own capital, so we shook hands and parted ways.

It would be another 12 months before we actually did our first multifamily deal, which you can read about here (it's a good one):

To summarize: real estate is a tremendously capital intensive business to start, but there are ways to get in the door before you get funded.

Build your toolbox so when you get you're break, you're ready to jump on it.