The construction of the transcontinental railroad in the United States in the late 19th century is considered one of the most marvelous feats in industry and engineering to have ever happened. And while it was certainly that, it was also awash with inefficiencies, as well as corporate and government cronyism.
Every transcontinental railroad (save one) was heavily financed with government subsidies. Burton Folsom describes this mess in The Myth of The Robber Barons as follows:
“The subsidies shaped the UP [Union Pacific] builders’ strategy in the following ways. They moved west from Omaha in 1865 along the Platte River. Since they were being paid by the mile, they sometimes built winding, circuitous roads to collect for more mileage. For construction, they used cheap and light wrought iron rails, soon to be outmoded by Bessemer rails. And Thomas Durant, vice-president and general manager, stressed speed, not workmanship. ‘You are doing too much masonry this year,’ Durant told a staff member; ‘substitute tressel [sic]and wooden culverts for masonry whenever you can for the present.’ Also since trees were scarce on the plains, Durant and his chief engineer, Grenville Dodge, were hard pressed to make railroad ties, 2300 of which were needed to finish each mile of track. Sometimes they shipped in wood; other times they used the fragile cottonwood found in the Platte River Valley” (Folsom 18).
Indeed, the UP was in such a rush that it built a line over snow and ice in Nebraska during the harsh winter. When it thawed out, the line obviously broke and had to be rebuilt. No worries, the government was paying by the mile. Similar problems and poor decisions also plagued the Central Pacific line.
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So How Did it Turn Out for These Two?
“…Some observers estimated the actual cost at almost three times what it should have been… After the construction was completed, many were astonished at the cost of construction. The UP and CP, even with 44,000,000 acres of free land and over $61,000,000 in cash loans, were almost bankrupt” (19-20).
On the other hand, there was James Hill and The Great Northern. This great entrepreneur took not one penny from the government and approached his railroad in a completely different way:
“As Hill built his railroad across the Northwest, he followed a consistent strategy. First, he always built slowly and developed the export of the area before he moved farther west. In the Great Plains this export was wheat, and Hill promoted dry-farming to increase wheat yields. he advocated diversifying crops and imported 7,000 cattle from England and elsewhere, handing them over free-of-charge to settlers near his line…”
“Unlike Villard [another failed railroad entrepreneur], Hill built his railroad for durability and efficiency, not for scenery. ‘What we want,’ Hill said, ‘is the best possible line, shortest distance, lowest grades and least curvature that we can build. We do not care enough about Rocky Mountain scenery to spend a large sum of money developing it'” (27).
Speed is great, but it’s not if you’re using speed to cut corners or if it’s just to create a pointless vanity project. Instead Hill focused on efficiency, which Folsom describes as an “obsession” for him. He also believed in quality, which cannot be reconciled with the corner cutting of the UP and the CP. Folsom again:
“…He believed that building a functional and durable product saved money in the long run. For example, he usually imported high quality Bessemer rails, even though they cost more than those made in America. He was thinking of the future, and quality building cut costs in the long run” (27-28).
As you should be able to guess, when it was all said and done, it was no contest between Hill and the others. “In the depression year of 1893, all the transcontinental owners but Hill [emphasis added] were lobbying in Congress for more government loans.” (29).
What Real Estate Investors Can Learn from James Hill
First of all, please don’t go begging the government for favors. Lord knows we have enough of that already. And as the example of the railroads show, it doesn’t even seem to help in the long run. Government handouts to businesses seem to just reduce their dynamism and lock them into inefficient ways of doing things.
But politics aside, I cannot tell you how many countless times I’ve seen properties where investors skimped on costs by using cheap materials or unskilled labor. To quote a previous article of mine:
“You may go with vinyl or builders grade carpet instead of tile and a higher quality carpet to save costs… But in the long run, that will probably cost you even more because it’s much harder to do spot repairs on vinyl as compared to tile and I don’t think I’ve ever seen builders grade carpet last for more than one turnover. Used appliances go out much quicker than new ones. Same with HVAC. Ever tried to wash marks off a wall painted with flat paint? Good luck.”
Vinyl is not necessarily the wrong way to go, but make sure it’s a quality vinyl. Overall, the lesson is not to skimp. For landlords, cheap materials, unskilled labor, and every other shortcut will simply cost you more in the long run. For flippers, you’re bound to get a bad reputation as buyers become frustrated with everything that breaks.
Hill also avoided frivolous amenities that didn’t add much. Sure, you want your property to look good and appeal to whatever niche you’re marketing it to. Oftentimes, little things like window shutters or just a mowed lawn and clean premise make a huge difference. But if you’re in a cheap area, no one is going to pay you more for granite countertops. Just like ALDI’s, don’t pay more to offer your customers something they don’t want.
In addition, Hill moved one step at a time. He didn’t try to get from A to Z all at once, but instead only bit off as much as he could chew. He made sure the areas he brought his railroad to were developed enough to merit transportation before moving farther West. He set ambitious goals, which is critical for any entrepreneur, but he went after them one at a time without trying to rush ahead. Instead, he had a clear plan of action, and he followed through on it.
It should also be noted that Hill had the decency to pay the Native Americans for their land instead of using the federal army to displace them like the other railroads. Not surprisingly, Hill didn’t have to deal with the frequent raids and attacks that plagued the UP and CP and “caused the loss of hundreds of lives and further ran up costs” (19).
Whereas the others were trying to rush their way across the West whatever the costs (and they were quite high), Hill focused on the process. He did right by others and approached his business with quality and efficiency in mind. It is therefore no wonder that Hill was so successful while the others had to rely on bailouts. There are many differences between railroads and real estate as there are with all businesses. But casting aside tempting shortcuts while maintaining a focus on quality and efficiency serves every business well, particularly real estate investment.
Investors: What do you take from this story that you can apply to your real estate business?
Let me know your thoughts with a comment.