The Duke of Dirt Guest Take Over

June 5, 2023

The Capital Stack

The Duke of Dirt Guest Take Over

Today’s newsletter is in collaboration with The Duke of Dirt.

Steve Schwarzman, Founder and Chairman of Blackstone, once said: “To be the best, you first must study the best”

That’s just what The Duke of Dirt does each week with Duke’s Download – studies the best real estate operators and presents their unique lessons so you can make better real estate decisions. Sign Up Here

This week we will feature The Duke of Dirt’s article on Barry Sternlicht.

Barry Sternlicht is one of the highest regarded real estate investors of the 21st century

He has built his firm, Starwood Capital, into one of the largest investors and owners of real estate in the world

Over the past few years, he has publicly shared his knowledge with all who have cared to listen

In todays download, I’d like to share 17 powerful lessons from Barry Sternlicht

Let’s get started…

1. Do Not Dismiss The Outlier

Early in his career, Barry was tasked with acquiring a portfolio on London. Part of his due diligence included interviewing 20 analysts to get their inside thoughts on the investment. Every single analyst liked the deal, except 1. But the 1 analyst who did not like it raised serious flaws about the deal. The deal was ultimately acquired, but it ended up losing money due to the reasons the 1 outlier highlighted. Heard mentality is present in everything – don’t dismiss the outlier

2. Let Your Winners Run

The most money he has lost was selling his best deals too early. When you know you have a good one, hold on for the long haul

3. Seek Demographic Growth

•              Population Growth

•              Increasing Employment Opportunities

•              Strong School District

•              Diverse Economic Environment

4. Seek Free Market Communities

Barry speaks about selecting geographies that welcome business and the right to work. He mentions excess unemployment, fiscal stimulus, and rent stabilization as reasons he is shying away from investing in specific states

5. Buy Below Replacement Cost

Buy below the cost to build the building or asset in todays dollars

6. Ensure You Buy With Positive Leverage

Ensure the interest rate is below the capitalization rate at purchase

7. Bet The Jockey, Not The Horse

Its all about the people leading the business. At the end of the day, they will have the most impact on the success or failure of the business plan. Do your diligence on the people pulling the strings of the business and make your investing decision based on your belief of their capabilities

8. The Only Benefit of Getting Old Is Experience

Experience is so valuable. Find ways to expose yourself to as much of it as possible. If you lack experience, partner with professionals with diverse backgrounds and quality experience

9. Money Buys Choice, Not Happiness

And ironically enough, more choices sometimes lead to unwanted pressures. Choice is a beatiful thing (in moderation) that enables living your life in the manner you decide.

10. It’s All About Design

Design matters more than most investors judge. In the hotel business (where Sternlicht owns many assets), it can be the differentiator between a massive success and an average investment. Do not overlook the aesthetics of a building.

11. Find The Freight Trains In Your Life and Get on Them, Not In Front of Them

It doesn’t have to be specific asset trends, it can be a specific relationship in your life, a unique insight you have, etc. Understand where the freight trains are in your life and get on board.

12. Three “Green Light” Asset Classes

•              Multifamily

•              Data Centers

•              Industrial

13. There is Not Enough Risk Premium Put On Emerging Markets

An 18% return in India is not the same thing as an 18% return in the US. There are so many things that can go wrong outside of your control in “politically uncertain” countries. Do not overlook this locally either

14. There is One Way The Rich Pay Less Taxes, They Do What The Government Has Incentivized Capital To Do

Research and understand what the governemnt is incentivizing. Take that knowledge and act on it if you want to assist the government and pay less in tax

15. Pay Attention To Public Markets

Equities have a impact which tenants can and cannot expand. When retail tenants have stocks at .50 cents they are done expanding. But when they are trading at 30x revenue, they want space

16. The World Is a Fair Place (When it Comes To Hours In a Day)

Everyone gets 24 hours in a day and how you choose to use that time is up to you. Are you maximizing *your* 24 hours?

17. Hope Is Not a Business Strategy

Before making an investment, its helpful to take a step back and analyze the true reasons you are doing it. Does it rely on big assumptions that are more hopeful than probable?Isolate the hopes in your business strategy to make better decisions

There you have it friends, 17 powerful lessons from one of the best business minds in Barry Sternlicht

I hope you have found them valuable

All the best,

The Duke of Dirt

Major Market News


Barry Sternlicht’s Opinion on The Fed

The RealDeal (May 4, 2023) wrote a recent article featuring Barry Sternlicht’s criticism of the Federal Reserve’s decision to increase interest rates, which he deems “bordering on idiotic.” Sternlicht expresses his concerns about the potential negative impact of these rate hikes on the real estate market and the broader economy. Sternlicht makes the point that the “single-family, multifamily, and hotel segments of Starwood’s business are performing well”. He argues that the Fed’s actions could lead to a slowdown in investment and consumption, as higher borrowing costs may deter businesses and individuals from making financial commitments.

Source: TheRealDeal. ( 2023, May 4). Barry Sternlicht: Fed rate hikes are “bordering on idiotic”. TheReadlDeal. https://therealdeal.com/national/2023/05/04/barry-sternlicht-fed-rate-hikes-are-bordering-on-idiotic/

Tips and Tricks

Tip- Maximize Your Real Estate Investments: Buy Below Replacement Cost and Capitalize on Tax Incentives.

We found the Dukes of Dirt’s interview with Barry Sternlicht very educational. We particularly agree with Barry’s 5th lesson “Buy Below Replacement Cost”. We have talked about the importance of “buying right” in several of our newsletters. In a recent article titled “Is it a Good Deal”, we review the qualities we look for an investment to have and summarize why buying below replacement cost is extremely important.

We have also found Lesson #14 to hold significant relevance. Lesson #14 states, “There is One Way The Rick Pay Less Taxes, They Do What The Government Has Incentivized Capital To Do.” Having a comprehensive understanding and the ability to explain how real estate investments offer tax incentives has been vital in educating our existing and prospective investor community. We wrote an article titled “Want A Tax Break” that explains how one can use real estate to take advantage of depreciation, bonus depreciation, and 1031 exchanges to reduce and defer taxes.

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