Over 40? It’s Not Too Late to Build a Real Estate Fortune

I’m 55. And honestly, I get a bit discouraged when I see those statistics telling 20-somethings why they need to invest early.

It is powerful—don’t get me wrong. Those who invest a moderate amount and allow it to grow for 10 or 20 extra years beat the pants off those who invest a lot but later for a shorter time.

But it can be depressing for those of us who didn’t come off the starting line well.

Sometimes Investing Setbacks Happen—and That’s OK

Actually, I got a bad start with no investing education as a child at all—not from my parents or my schooling. Even an MBA with an emphasis in finance didn’t fix the problem.

So when I made a few million dollars at 33, I assumed the role of investor. Yeah, right. As I’ve said often, investing is when your principal is generally safe and you have a chance to make a return. So, that wasn’t me.

I was a speculator. Speculating is when your principal is not at all safe and you have a chance to make a return.

So, I pretty much blew that money. And had the opportunity to start over.

If you’re a millionaire by the time you’re 33 but blow it all by age 43, you’ve gained nothing—except for the opportunity to start all over again.

I learned a lot of hard lessons, and in fact, this has helped me greatly in forming my investment strategy now. I’m grateful for every lesson.

It’s Not Too Late to Restart (or Begin Investing for the First Time)

But the fact remained that I got a late (second) start on my real estate investing career. So, it is frustrating to think about what could have been.

Then, I came across this YouTube ad when I was cueing up some jams yesterday. (Do they still say that?) It was an annoying advertisement about building your retirement. Well, it seemed annoying—’til I actually tuned in to what they were saying.

They mentioned that three in 10 have nothing saved for retirement, which means about 3,000 who turn 65 per day have zero in savings. (And I happen to know that 6,000 of the 10,000 who turn 65 daily have under $10,000 in savings for retirement.)

What caught my eye in the ad was this graph about Warren Buffett. The graph is pretty self-explanatory:

The key takeaway here? If you’re over 50, or over 40—or any age, for that matter—there’s still hope for you! But you’re going to have to be very strategic.

The Older Investor’s Dilemma

Every financial planner knows that the shorter the time horizon, the less risk you should take. But low risk almost always leads to low return, and because of your short time horizon, you should aim to get a high return to make up for lost years.

The problem is that, in general, low risk leads to low return, and high risk does not lead to high return. In general, high risk leads to high potential return. And high potential loss, as well.

It’s a real dilemma, and most investors assume they missed out. It’s too late. They’re right in the sense that they missed a lot of great years to build their portfolio. But they’d be wrong if they believed there’s no hope.

There is hope. But like I said, you’re going to have to be very strategic. You’re going to have to get an investment that protects you from downside risk—and gives you very healthy growth and returns.

What Would Warren Buffett Do?

Buffett talks about investing with a margin of safety. This is a buffer that protects you in case of a downturn or unexpected event. (And these always happen.) We need to come up with a strategy like Buffett if we want to get results like Buffett.

Buffett also looks for undervalued companies, which is a similar idea. Buying a great company at a moderate price has given Buffett a doorway to Berkshire Hathaway’s incredible growth and profitability over the past five decades.

Buffett has also made a great profit buying mom and pop and family-owned companies. A jewelry store, a local furniture mart, and many other mom and pop-owned companies have blossomed under Buffett’s leadership.

Buffett has made a fortune betting on great jockeys and letting them choose and train the horse. He puts great faith in his management teams, and they don’t hear from him that often. Buffett already trusted the Capital Cities team that acquired ABC so much that he made the decision to make a massive investment there based on only a 15-minute phone call. No due diligence trip or review of any records or financial statements was necessary.

Buffett also looks for recession-resistant assets that are not reliant on technology to perform. Buffett was widely criticized (to the point of mocking and ridicule) for not participating in the tech run-up in the late 90s. You 40-plus folks remember it well. It ended in the tech bubble that burst in the early 2000s.

Buffett said: “I know in general what the economics of, say, Wrigley chewing gum will look like 10 years from now. The internet isn’t going to change the way people chew gum.”

I have been investing in real estate for 19 years now, since the turn of the century (I still love saying that). But I didn’t learn the secrets to compounding real wealth until the last decade (mostly since I was 50 myself). I can confidently say that if we apply Buffett’s principles, we can generate outsized returns with moderate risk. I’m betting my future on this, and so far, it is working very well.

Strategizing as an Older Investor

I’m going to break this down into several parts following Buffett’s strategy above. And for the sake of brevity, if that’s still possible at this point, I will reference other posts and documents if you want to dive deeper.

Strategy Point 1: Invest in Commercial Real Estate

There is a reason the Forbes 400 wealthiest of the world mostly invest in commercial real estate. There are many reasons, in fact, and they include great returns against moderate, predictable risk, as well as stunning tax advantages contrived by their friends inside the Beltway.

Check out this graph:

This is actually quite stunning, and it should get your attention. It is a bit hard to interpret at first glance, however. The goal is to be as high as possible on the Y-axis (high return) and as far to the left as possible on the X-axis (low risk). Commercial real estate clearly crushes every other asset class in this regard.

Within core commercial real estate, assets like self-storage, mobile home parks, and multifamily shine brightly—and would be even higher and perhaps more to the left on this graph if plotted individually.

This is further confirmed by the Sharpe ratio, which is another measure of return versus risk in various asset classes. The Sharpe ratio is a measurement of the risk-adjusted return for investments. The goal, of course, is to get the highest return per “unit of risk.” Check out this graph showing the Sharpe ratios of various asset classes:

The commercial multifamily Sharpe ratio is 4.6X better than the Dow Jones index, 1.3X better than private equity, and almost 1.4X better than the average of the other three commercial asset classes for the period analyzed.

[Note: Self-storage and manufactured housing (mobile home parks) are not analyzed on this graph. I am convinced that they would have an even higher Sharpe ratio, and I have some data to back that up in my forthcoming book about self-storage.]

First Conclusion: Start with commercial real estate! If you are new to it, please reach out to me here on BiggerPockets if you want to know more.

Strategy Point 2: Invest in Recession-Resistant Assets

There is a recession on the way. How do I know? Because it is always on the way.

I recently read Howard Marks’ book Mastering the Market Cycle. He points out that as long as there are humans investing, there will always be cycles. Fear and greed drive every human’s behavior. And as I write this, we are in the longest economic expansion in U.S. history.

A recession is coming.

Recession-resistant assets are assets that do well in good times and have a built-in buffering mechanism in bad times, as well. Mobile home parks are a great example. People need a place to live. And if they are bounced out of homes and even apartments, mobile home parks, with their low lot rent and relatively spacious accommodations, offer the last alternative for many.

If they can’t afford lot rent (averaging $280 nationally), their next step may be living under a bridge. This is one of the reasons our own Brandon Turner loves investing in mobile home parks.

In the words of BiggerPockets Podcast guest Robert Helms: “Live where you want, and invest where it makes sense.”

Ten-thousand Americans turn 65 daily. About six in 10 have under $10,000 saved for retirement. The affordable housing crisis is real. Mobile home parks are the only asset class I know of that has a shrinking supply and an increasing demand.

Check out the dip in performance of mobile home parks (manufactured housing) in the Great Recession:

There was no dip!

There’s much more I could say about this. But in the interest of space, I’ll move on. But if you would like to get a copy of my 32-page ebook on mobile home park investing, contact me via my BiggerPockets profile.

Second Conclusion: Invest in recession-resistant assets like mobile home parks.

Strategy Point 3: Acquire From Mom-and-Pop Owners

There’s a lot of things you can do right to make money in commercial real estate. But if you want to make the big bucks, pile up a boatload of equity, and create an additional layer of margin of safety, you should consider either ground-up development or acquiring assets from mom and pops.

Since ground-up development has inherent risks and complications, I strongly prefer the strategy of acquiring mom and pop-owned recession-resistant assets (like mobile home parks and self-storage facilities).

It’s estimated that over 39,000 of the 44,000 mobile home parks in America are owned by small operators. Typically, these are mom and pops.

About 40,000 of the 53,000 U.S. self-storage facilities are owned by independent operators. And the majority of those are mom and pops, as well.

12 Common Characteristics of Mom-and-Pop Self-Storage Operators

If you build it, they will come. This worked in the early days of the business and some operators have kept up the tradition.
No website (or a poor one). Similar to No. 1, the business was largely characterized by drive-by marketing for years, and this still works for many. (But can they really maximize revenue? They often don’t need to.)
No showroom. The opportunity for ancillary income is not a priority. Tenants can buy their boxes, tape, scissors, and locks elsewhere.
Rare price increases. Many small operators become friendly with their tenants and rarely raise rents. The result can be below-market pricing.
Across the board pricing. Where a savvy operator might raise their price on the last few units of a popular size, this is often too much trouble for a small operator, who would have to use whiteout or mark up his well-worn price sheet.
Rent what we got. Storage facilities are mostly sheet metal and rivets. They can usually be reconfigured to meet the current local demand. If the demand for 10 x 10s is high, and 10 x 20s are empty, walls and doors can be added to optimize occupancy and income. Most small operators wouldn’t do this.
Poor maintenance. Some of the 70s and 80s facilities look like… well, 70s and 80s facilities. There is little reason to update or maintain them well, and their revenues reflect this.
Poor security. The No. 1 crime at self-storage facilities is theft (obviously), and many smaller operators don’t go to the trouble of installing camera security and gated fencing.
What marketing budget? Many of these operators boast that their marketing budget is close to zero (except for that donation to get their name in the charity raffle brochure). Their revenues suffer but they may not know it or care.
Untapped land. Many operators have unused land or parking lots for RVs and boats that could be used for profitable expansion through a beautiful new climate-controlled building. You may be the one to make this profitable expansion.
Pest control and water infiltration. Many facilities get a bad reputation. In 1999, when my antique furniture was roach-infested and water-stained, I wasn’t a happy self-storage customer.
Rental truck income. Rental truck operations (U-Haul or Penske, for example) can often be a great source of ancillary income with little capital expense or effort. In addition to a healthy boost to the bottom line and asset value, this can also lift occupancy by 3 to 5 percent. Most small operators don’t go to the trouble.

You won’t get access to these deals in bulk unless you have a well-oiled machine and a great strategy. But if you do acquire assets like these, you may have the opportunity to achieve extraordinary returns—with a great margin of safety.

One of the operators with which my firm and our partners invest has been returning 65 percent or so annually (IRR) to investors. He is a master at acquiring from mom and pops, upgrading operations, and selling to REITs.

If you’d like to know more about investing in self-storage, reach out to me here on BiggerPockets.

Third conclusion: Acquire from mom-and-pop owners. Upgrade. Sell to REITs.

Strategy 4: Bet on the Right Jockey

I promised brevity, and look at what I’ve gone and done. Sorry. I’ll just say that in my two decades of investing, I’ve learned that it really pays to find great operators and invest alongside them.

This strategy allows investors (including me) to experience what many of our passive investor friends have learned. The lightbulb went on for them.

They now say: Why should I work harder than I need to… to make less than I could?

To learn more about why we’ve joined Warren Buffett on this path of investing in great operators, you can go to my prior post on passive investing success.

Are you over 40 and playing catchup? Or over 20 and trying to maximize your growth for the next several decades? I propose that this strategy will minimize your risk and maximize your returns and growth.

I’d love to hear your thoughts on it. Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.