Apartment investing: art of the deal or down to a science?

Investing in and managing apartment real estate reflects both creative and logical opportunities to build success. One of the most successful apartment real estate entrepreneurs is now the President of the United States. Donald Trump wrote ‘The Art of the Deal’ in 1987 that chronicled his incredible success already achieved by that time. While his business is commercial real estate in general, many of his deals include apartments.

‘Deals are my art form’, Trump says in his book. Indeed, he turned deal making into an art by creatively putting very large deals together and himself into a league of his own. The chapters in the book are specific examples of deals he put together and how he came up with ways to make them work, despite the pitfalls that he experienced. His creativity helped him constantly come up with new ideas to make them work on a grand scale.

Trump’s first construction project in Manhattan was turning the old Commodore Hotel into the Grand Hyatt New York. He admits that at that time, he knew nothing about the hotel business. Against all odds, he successfully partnered with Hyatt and completed the $100 million renovation of the Commodore. This not only took a heck of a lot of guts, but demanded that he use every resource at his disposal.

Trump calls his deals artwork to reflect his creativity in making his deals work. However, reading through the book reveals a pattern of logic that appears as he moved from one big project to the next. Each one was met with situations that required difficult problem solving skills. At the same time he was renovating the Commodore, he decided to build the casino, Trump Plaza, in Atlantic City. Again, knowing nothing about the casino business, he took huge risks putting money into another venture he knew nothing about at the same time he was spending huge amounts of money on the Commodore project.

His eventual success with Trump Plaza combined his creative deal brokering with research on the biggest risks that were potential deal-breakers and indeed sank other casino attempts in Atlantic City. One of the biggest risks he found was gaining the coveted gaming licence. This process was unpredictable at best and several before him, Hugh Hefner being one of them, were denied license. Additionally, many other operators ran well over budget due to carrying costs while waiting for their license approval. Others had budget issues and schedule delays due to design changes required by the license commission after construction had already started.

Trump gained agreement with the commission to give him a decision on a license within six months which put a reasonable, definitive timeline on this critical requirement while other licenses were taking eighteen months or more. He further mitigated the risk of denial by providing the regulators with detailed plans and drawings well in advance of construction (a sound mitigation strategy). Six months after his proposal, the gaming division issued Trump his license.

Due to his diligence with investigating risks and execution of mitigating actions, Trump was able to avoid failure and turn high risk propositions into successes. His acuity of risk and process of managing it in a systematic way effectively turned his art form into a science with repeatable success.

In science and engineering, theory is turned into practice by repeatedly testing it until the results are predictable. Risk can be successfully managed by following methods that have passed the test of time. Investigating risk provides knowledge that reveals opportunities to mitigate, minimize and eliminate it. It has been proven to work and successful entrepreneurs have learned to harness that ability and turn lemons into lemonade.

There is always a need for creativity in apartment deals to ensure a successful venture, from new counter tops to dog parks, from creative financing to water savings. In addition to creative ideas to make deals work, risk is always around the corner waiting to spoil the best laid plans. Getting risk identification, assessments, management and control down to a science is a way to apply engineering principles to apartment deals and ensure the most successful venture possible.

How do you use creativity and risk management in your investment strategy?

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