How is wealth created in Real Estate? What do Billionaires do that you can copy? Understand the value chain of real estate to create your own wealth?

On the 13th of June 2016, Rebosis, a real estate Fund / REIT announced it is buying the buildings from a developer called Billion. If you look at the picture you will see the highlighted parts where experts believe it is overvalued and also there is not enough track record to validate the price of the buildings. This is exactly how people create real wealth (billions) in real estate, but you need to understand the value chain of real estate for you to be able to get the same results as billionaires.

 Real Estate Value Chain:

1. The first step is land rezoning, and generally land developers aim to make 30-plus percent return (IRR) on their money.
2. The second step is the developer then buys the zoned land and creates something of value, aiming for 25 percent return (IRR) on their money.
3. The third step is the investor (often the same person as the developer) then buys the asset and looks to increase the value by tenanting the property, what is called ‘seasoning the rents.’ They aim for at least 20 percent (IRR) return on their money.
4. Step Four is once they have seasoned the rent, their payday comes by selling the asset to a fund or REIT that is incentivized by the amount of money they have under management. They are basically trying to spend their money and buy cashflow so that they can pay the monthly contributions. They aim to buy buildings with a cashflow of five to eight percent.
5. And then the last person in the value chain is you, the person who invests in the fund or REIT and tries to beat inflation!

You want to get wealthy, invest in this financial product – Fund / REIT (which you think is real estate) and are happy to just beat inflation. The problem is you never get wealthy as you are at the bottom of the value chain and you are susceptible to stock market volatility and sentiment, not property fundamentals. If you want to be wealthy you have to do what the top one percent are doing — invest higher up the value chain.

Like Uber has done for taxis with technology, technology has cut out the middleman, dramatically reduced the costs, and increased the accessibility, transparency and trust. Before there were surmountable and significant barriers to entry for the average person to be involved in DEVELOPMENT or INVESTMENT stage; now, we all have access to cut out the middlemen and invest directly in the best parts of the value chain. This dramatically reduces the costs and as an example, rather than getting returns of 5% to 8% like in most funds or REITS, our investors in Wealth Migrate look forward to returns or 13% to 15% IRR when they invest directly in developments and investments.

Despite the industry’s growth, most in the mainstream are just starting to hear about real estate crowdfunding. When they do hear of it, one of the first questions that comes up is about the difference between real estate crowdfunding vs. REITs (real estate investment trusts).

For those who are unfamiliar with the concepts, the fundamentals of both are:

• REITs are a well-known and fairly common way to invest in real estate. As they are listed on stock exchanges, they are highly liquid. Their structure means that they must pay back 90 percent (or more) of their profits to investors as dividends. https://wiki.fool.com/The_Correlation_of_REITs_to_the_Stock_Market That may seem like a good thing for investors (and it certainly can be), but it also means that REITs are constantly sell equity in order to grow and acquire more assets. https://www.realtymogul.com/blog/crowdfunding-or-reits-to-diversify-in-real-estate

Anton Root: What are the advantages of investing in real estate, in general?

Scott Picken, Wealth Migrate: There is a reason that there is a saying, “He who owns the land is king.” For centuries, real estate has been the best asset to create and preserve wealth. In more recent times, it is also one of the best vehicles to protect against inflation. I could go into all the details of the positives and the risks of gearing [leveraging] but in simple terms, I get asked all the time what happens if America implodes with the debt crisis — what is the worst case scenario? Being a passionate and proud South African, I truly believe we have clear insight into what would happen should this occur. The reason is that Zimbabwe, the country to the north of our border, experienced this for the last decade.

In 1999, it was the best performing economy in Africa; by 2001 the entire economy had fallen apart. Inflation was in the hundreds of thousands of percent a day, the currency was worthless, the central bank collapsed and the entire economy came to a standstill. https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe Now you would think real estate in this situation would be grossly undervalued and it would be a real buyers market. But you would be wrong. Residential real estate was the only thing which held value in US dollar terms. People needed houses to live in and it was the only place to preserve wealth in a recognized currency. To this day, property in Zimbabwe is grossly overvalued and, therefore, the lesson I learned is that in the future, there will be more uncertainty than we can ever imagine in the economy. It is going to be more volatile than people expect.

What I learned from Tony Robbins is if you want to be successful, then copy successful people and copy what works. Having learned from Zimbabwe, this is why we and our investors own over 400 residential homes in the US.

There is a reason that 49% of the worlds wealth is held in real estate.

Real estate is sometimes thought of as a way to counterbalance volatility in the stock market, but recent research showed that since 2006, REIT correlation to the stock market jumped to nearly 80% -- do you think that’s something that will continue in the future? And if so, is that something that may entice people to invest in real estate crowdfunding?

A REIT manager manages your money. You have no say in what they do. Their incentives are aligned by the amount of money they have under management (4 to 1 focus), rather than on performance of the REIT.

Fifteen years ago, when you wanted to go on a holiday, you went to your travel agent and they recommended a holiday for you and booked everything. You didn’t have the information and you didn’t know who to trust. The travel agent had often been paid for by the hotel to fly there and ‘try’ their facilities which is why they were comfortable to recommend the holiday to you, not to mention the ‘bonus’ they probably received. Now we have TripAdvisor, the crowd tells us who we can trust and we book our own holidays, making the travel agent redundant. We use our common sense.

I believe real estate is a common sense investment and every single person on this planet has the ability to use common sense and see what is needed. It is all about understanding trends and making sure your investment is in front of the trend. An example is medical and health care real estate in the first world, or hospitals and houses in the emerging world. Don’t rely on other people. Use your common sense and invest where you know the needs are.

Who knows where the future will go. I do know I caught an Uber taxi this morning and the driver was telling me that the metered taxis were threatening him the night before. We have all seen France and the protests there.