Why Barbara Corcoran’s Son Went Against Her Investing Advice

David:
This is the BiggerPockets Podcast, show 842. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with my co-host, Rob Abasolo, and some special guests.
Today, Rob and I are going to be interviewing Barbara Corcoran and Tom Higgins. And we are going to be getting into if real estate investing is art, science, a little bit of both, how to know which of them you should be focusing on, and the best way to move forward in today’s uncertain market. But before we bring in Barbara and Tom, today’s quick tip is going to be brought to you by Rob Abasolo.

Rob:
Go walk a neighborhood at night. If you are thinking about investing somewhere, don’t just look at the Google Drive photos or what’s posted online. Go drive there yourself after the sun sets and see what the vibe of the neighborhood is.

David:
And you’re going to hear Barbara talk about how she does it. She brings a bodyguard with her. So don’t do your walk Abasolo, do it Aba with a partner. Barbara, Tom, how are you two doing today?

Barbara:
Very well. Thank you very much for having us.

Tom:
Thank you for having us. Very excited to be here.

Rob:
I want to say that, Barbara, this is a little bit of redemption for me because the last episode that we did a few months ago, I remember getting off that interview and thinking, “Wow, that was amazing. I think I did really well. That interview was so great.” And then it got posted to YouTube, and I went to the comment section and everyone was like, “Rob, make your bed.”
And I realized that I was in a hotel and I hadn’t made my bed and it was just, the covers were in a ball, and I was mortified. And so I just want you to know I’ve dusted, I’ve meticulously crafted the chaos you see behind me. So this is my redemption.

Tom:
Well, Rob, I think David might have you beat because he racked the pool balls on the pool table.

Rob:
He did, and in the correct order. I see that eight-ball on the right spot. So we know he comes prepared.

David:
The level of detail about irrelevant things to real estate investing, Rob, with you is off the charts. You are like the Jedi of noticing things that will not make anybody money.
For anyone that didn’t catch our last show with Barbara, I highly recommend show number 763, where Barbara brought so much value that people like me didn’t even notice that Rob’s bed wasn’t made. If you didn’t catch that episode or you are unfamiliar with today’s guest, Barbara Corcoran is put simply the queen of New York real estate. She’s a host on Shark Tank, has been investing for decades, is also a mom of two kids, including our other guest on today’s show, Tom Higgins.
Tom started in real estate right out of college. He now works in real estate development and has followed in his mom’s footsteps, but tends to look at deals differently than Barbara does. Tom’s a little more head, Barbara’s a little more heart, and we are going to get into both of them today.
So I am excited for today’s show, especially in today’s market where no one really knows what to do because it is the craziest market that I have seen in my short lifetime. So today we’re going to be trying to answer the age-old question, should you trust your head or go with your gut? Is real estate investing art or science? We’re going to break down some deals each of you have done to see how these two different approaches work in practical terms.
Quick story now, before we get into the deals, Barbara, was there a moment from Tom’s childhood when you knew that he would grow up to have this fact-driven, analytical mind that would be so different than your approach?

Barbara:
No, it was a total surprise. His father and myself, we each owned brokerage firms in different states. We talked real estate at the table all the time. Tom never asked us a question, would wander off, he had no interest. However, he liked to play Monopoly and by the time he was 11 playing against adults, we all refused to play with him because he always won.
He always got Boardwalk and Park Place. He always didn’t pay rent when he landed on our property because he had coerced us into buying a utility and getting a free pass. I mean, he had more angles working, so we finally gave up, “We’re not playing with you anymore, Tom. Not playing with you ever again.”

David:
Sometimes it’s not what you know, it’s who you know, and when your parents are the ones playing the game, the shameless tugging of heartstrings can get you to the top, Tom. So way to work with what you had. Looks like that that strategy didn’t last forever, though. Do you remember a time in your life where you made a transition out of emotional manipulation and into actually knowing how the numbers work out a deal?

Tom:
No. I can’t say that I have, no. First, I definitely use what I had and advantages I had when I was playing Monopoly with my parents. But I don’t think I take the same approach in real estate investing today where you just mortgage all your properties and use all your cash to buy the most expensive one.
But I got my start in real estate when I was in college, like you said earlier, in brokerage. I wanted to use the Higgins last name, fly under the radar, and see if I liked the industry. And I was able to get my salesperson’s license, start renting apartments when I was attending Columbia.
At night, I was taking real estate finance classes. I really wanted to know that, is it in my DNA, and is this something that I want to do? And I didn’t want to get a misconception based off of who my parents were and get a different feel for the industry.
So I was able to get very direct experience and fly under the radar, which was very valuable to me. I leveraged that experience to get a job out of college, working for a large real estate developer in New York City, was able to get an internship and I held onto that and turned that into a full-time position.
And now I’ve worked for eight years in institutional multifamily development. And before starting my own company 18 months ago, I renovated or developed over 2,000 multifamily units in the US.

David:
All right, well that gives us a pretty good idea of where you’re coming from. Before we get into the deal that each of you brought, let’s take a quick break to hear from today’s sponsor.
All right, we are now going to hear from both Barbara and Tom about a deal that they’ve bought and then we’re going to discuss if the head or the heart is the right way to move forward.
All right, Barbara, I want to hear from you first as the queen. Frankly, if you didn’t go first, you’d have the ability to chop off my head and I like it where it is. I trust that you’ve got a good one here for us today. So tell us about a deal that you have in mind that exemplifies the gut/heart strategy.

Barbara:
I chose my second deal I ever made because it was indicative of so many deals I made after that point. I was wanting to find an office in Fort Greene, Brooklyn because I knew, as a real estate agent, nobody was in there. My competitors were asleep at the wheel and I wanted to go in there and blow them away, honestly. It was just my competitive spirit.
So I was looking for the right location in Fort Greene. I knew nothing about it, and so I went hunting for people. I started talking to people and I found a lovely school teacher who knew that block, every block inside and out, and knew Fort Greene. She was born and raised there, and I made her my 10% partner.
She was thrilled. And what her job was, find me the best building. I could have relied on brokers, nobody really saturated that market, but I knew if I had someone who was born and bred in that area, she knew the good blocks and the bad blocks. And she brought me to what was, I think one of the best blocks in Brooklyn on Lafayette Street.
It was up and coming. It was a four-story townhouse with six apartments and a commercial space on the ground floor. So I threw in an office, opened an office, hoping to God I’d make money on that office. But I knew one thing for sure, the tenants above paid the mortgage.
And that has always been my golden rule, if you could buy a property with 20% down, which has always been my formula because I used to do it with 10%, but it’s not possible anymore. 20% down, you break even, you get the tenants to pay your mortgage, you always make money. And if you could saddle it onto the back of an up and coming area, you make a lot of money.
So I paid $1 million and put $200,000 into that and 20 years later I sold it for 3.2, which I think is 10 times the return in equity. I’m not sure if that’s the lingo. But I repeated that formula again and again and again, always with a 10% partner, always finding the best spot, trusting the partner, and then making sure the tenants paid my mortgage. And it’s pretty easy that way. I mean, I was conservative, I had my formula, liked apartments, so it just felt natural to me. And I’ve repeated that scenario again and again and again.

David:
So you started with $200,000 down. Was it 10 years later you sold it at a $2.2 million profit?

Barbara:
No, I wish it was 10 years later. It was 20 years later.

David:
20 years later. Okay. So you more than 10 X’d your money over those 20 years. And you said that it was the mortgage was covering the asset at the time you had it. Was it actually cash-flowing at all or was it pretty much breaking even?

Barbara:
Just exactly breakeven. And in fact, I have to tell you, I don’t look to make any money in any building I buy. I figure the first year or two if I break even, I’m smiling all the way to the bank. And then by the second year, third year, New York is a magical place, the value always goes up, and then I start getting a lot of cash in. Then I refinance and pull a lot of cash out, refinance, pull more cash out. Come on, real estate is magical. If done right, it’s magical, and it’s such a pleasure to deal with real estate.

Rob:
Yeah. Well, I think we can all agree there. I’ve got a follow-up question on that because you said that you go into these properties and you don’t necessarily mind breaking even because that’s part of the real estate game. But for someone starting out, what is your suggestion on making money? Should someone have a 9:00 to 5:00 or should someone have another form of making money and try as long as possible to never really pay themselves from real estate?

Barbara:
Definitely. You cripple your business if you start taking money out. You want to see how long you could go without touching a dime, and that’s what I did every time. My day job was running a brokerage firm and building it. I made good money from that. But my buildings, I never looked to it for money until they matured a little bit and then I started getting a lot of cash out.
If you are new to the business, you have an advantage that old people don’t have. People have done it a hundred times before, you don’t have a memory of what it’s sold for last year. You’re new to the market, you can judge it on its face value because your memory is not your deficit. With somebody like me, I remember what I could have bought it for last year, the year before. It makes me pay less. But as a newcomer, you usually pay the top price and that’s usually the right thing to do as long as it’ll break even.

David:
Well, you ended up with a slightly higher, if my math in my head is correct, a little more than a 50% return if you look at the equity-

Barbara:
I know. That’s a little different.

David:
… year over year. Right?

Barbara:
I should have had Tom figure that out.

David:
Yeah, funny. Well, most people analyze a property and look at its cash on cash return and that’s how they make their decision. Is it 8%, is it 10%, is it 12%? You didn’t look at any of that, but you followed the principles of successful investing and it worked out to more than a 50% ROI year over year, which nobody can find in today’s market. So does that have something to do with why you look at these fundamentals and rely with your gut rather than letting the spreadsheet make the decision for you?

Barbara:
Yes. A, I don’t really understand the numbers as you’re citing them. I don’t know what they’re called. I can do only simple math. It’s not my forte. So I can do the math. Will it cover the overhead? Okay, I’ll buy it. Can I come up with the 20%? Okay, I’ll buy it. Will I pay more than the next guy?
I very often overbid another buyer. I don’t care as long as it’s breakeven. I pay 10% more, usually it’s breakeven anyway, or just about breakeven. So I don’t hesitate at all. And I don’t have any sophisticated rules in my head. I’m just no good at it. So I use what I’ve got.

David:
Tom, was there anything you wanted to add about your mom’s deal?

Tom:
No, no. I just was reminiscing on when I first started doing deals, why I had a W-2 job using the 1% rule, when I was listening to BiggerPockets and Brandon Turner in college. So it was just fond memories of building enough doors and building enough revenue to be able to eventually go out full-time into real estate investing.

Rob:
And is your philosophy similar in that when you’re getting into real estate and you’re real estate investing, buying a property, not paying yourself from real estate, making money in other ways or where do you align on that, Thomas?

Tom:
I think it’s case by case. I think if you’re truly taking an investor-first approach, definitely having the W-2 income is near essential, especially if you’re starting in true sub-institutional value add multifamily. Collecting those first 10, 20, 30 doors before you can go out full time and have the management revenue or whatever other fee revenue support you, it’s essential.
If you’re a broker and you’re doing transactions and maybe picking up a few units along the way, it’s maybe a little bit different of an approach. But having that other income, especially in an environment like this, is essential in my opinion.

Rob:
That makes sense. And you were pretty similar there too, right, David? I mean, I think you were working as a waiter and just stacking all your chips as much as possible and never really paying yourself from your real estate for many, many years if I remember correctly.

David:
Yeah, same philosophy when I was a waiter, then when I was a police officer, and even when I was a real estate agent, I wasn’t living off any of the money that the properties made. It was really delayed gratification, which is the same thing Barbara spoke about.
I love it because of the simplicity. You make sure that it pays for itself so you don’t have to worry about losing money if it’s at least breaking even. You don’t think about it, so you’re not tempted to pull out the equity and put it into something else or get too fancy with it.
You put your brain power towards making money in different areas, which is a much better return than fanatically, maniacally looking at your investment every single day and worrying about what Zillow says or something else says. And then you go back and that $20 that you left in your coat jacket is now like $2,000 because it’s been growing the whole time. And you say, “What’s the best use of it here?”
Now, Tom, I’m going to shift over to you. Rob and I are going to run down a list of questions to learn about your deal and then we’re going to hear a little bit about it. So the first question is, what type of property is it that you have to discuss today?

Tom:
I’ll use a nice combination of heart and mind for the deal that I prepared. I think it’s one that checks the boxes of a lot of the items that my mother instilled to me at a young age, but also relied heavily on the more traditional real estate finance training.
So it’s North Side Castle is the deal. It’s in Pittsburgh, Pennsylvania in the North Side. It is an eight-unit value add multifamily deal that was bought on market. We initially offered on it in 2019. Early 2019, we hung around the hoop for 12 months. It was bought from a mom and pop that did not have enough money set aside to renovate it.
And we underwrote that actually pretty much identically to the 1% rule. We don’t use that term anymore. We view everything on a unlevered, untrended stabilized yield on cost. But in preparation for this, I did a little bit of a cross-reference. Assuming a 30% expense ratio, your 1% rule equals an 8.4% yield on cost. So it was 8.2. We underwrote it too when we bought it.

David:
Can you define the term yield on cost?

Tom:
Yeah, net operating income divided by your total cost basis, not contemplating debt. So revenue minus expenses divided by total cost.

David:
So that’s very similar to when we talk about a cash on cash return with residential real estate. You’re taking how much the property made and dividing it by how much you put into it. That’s what cost basis would stand for.
And I can see, Tom, you do have a background in real estate finance because you use all this fancy terminology. I’m curious if you’ve ever been tempted to call it finance instead of finance, because that does sound fancier. It’s a bit of the pinky raise when drinking the glass.

Tom:
It’s funny, within my limited experience in the real estate finance world, even using unlevered yield on cost is like a no-no. It’s like that’s the simplest metric you can possibly use. People are typically referring to IRR, net multiples, MOIC. It can get really, really crazy. But we try to focus on what is very similar to cash on cash or the 1% rule is your unlevered yield on cost.

David:
There’s a principle in life that, in my opinion, when someone takes a simple concept and tries to complicate it, they usually want to look smart and it’s about their ego. When someone takes a complicated concept and simplifies it, they’re usually all about trying to empower other people.
So that’s just one of the metrics when I’m getting to know people that helps me decide if I like them or not is do they use fancy acronyms and industry-specific vernacular so that they can sound like they’re smart, that makes everyone go, “Man, this is way too much for me. I couldn’t get involved.”
But really, the metrics and the fundamentals of real estate are the same whether they’re in commercial, whether they’re in residential. You’re always trying to buy in the best location. You’re always trying to add value.

Rob:
David, I concur with everything you just said.

David:
I see what you did there, Rob.

Rob:
Great pontification there. Superb.

David:
He does this to me all the time. And then Rob wears shirts with buttons and collars and stuff now because he definitely looks fancier when we do these shows. He does his hair in this coif style. Really, we used to have the same exact hair until he added that little coif toupee.

Rob:
A toupee as we call it.

David:
So I’m curious, Barbara, as someone who has a ton of success both in real estate and in business, which I personally believe is the better route, I wrote about that in Pillars of Wealth, that too many people focus on one pillar. They’re all in on investing or they’re all in on business, but you really want to be blending, playing good defense with your money, making money as well as investing it.
Do you ever consult with Tom and bring him in on some of the deals you’re looking at to see if your gut instinct actually makes sense from a logistical standpoint, mental standpoint?

Barbara:
More recently I have. You have to appreciate everything you guys were just talking about, those terms, I have no idea what they are. So very often when Tommy explains something to me, I don’t know what he’s talking about. But I know he knows what he’s talking about, so I’ve learned to trust that.
What happened recently, I was renovating a duplex down on West 11th Street or 12th Street in the Village and it had a commercial space on the ground floor. I had clearly decided I’m turning that commercial duplex space into four units. I love units. The tenants always pay the rent, the rent’s always going up. It’s a cash cow that building. I’m getting rid of this commercial space, it’s hard to rent, and I’m making units.
And we got the approvals all set to bash in the walls and Tom calls and says, “I got an out of the box offer from a guy who’s willing to grossly overpay, sign a long-term lease, do all the work. You should contemplate doing this deal.” And my immediate response is, “No, I’m already committed to residential. I really want to go there. That’s really what I want.”
Until he shared his numbers with me in a way that I could understand and it was like, “No problem. Let’s let them have the lease, no cash upfront.” What were all the benefits of that, Tom? You were very persuasive to me and you convinced me to go with the other deal within about 30 seconds.

Tom:
I mean, $5,000 more a month and one third the dollar spent out your pocket. So like David said, it gets simple quickly when the deal is good enough.

David:
So was this person, was it a triple net lease and you didn’t have to spend as much money to renovate it because he wanted it-

Tom:
Yeah.

David:
… closer to the condition it was already in?

Rob:
Now look who’s using fancy words, Mr. Triple Net Lease.

Tom:
Double net lease. No, I’m kidding. So it was a commercial duplex in a great neighborhood downtown and as of right it could be converted to residential. So it was grandfathered in non-conforming use. But we got an unsolicited offer from a furniture company that wanted to use it as a showroom. And instead of saying, “No, we’re going multifamily,” we dug in and we diligenced the high credit tenant with multiple other locations nationally and we decided to go forward with them. And so far, so good.

David:
And what I like about that is if it doesn’t work out, Barbara’s original plan is still right there. You’re really not losing anything by taking this chance, because as you said that, I thought about, I think I’ve seen more going out of business from furniture stores than any other company. They’re always going out of business, but shoot, if you’re making all this money while they’re there, and then worse case scenario happens, they do go out of business, you just go turn it into four residential units and you’re even better off.

Barbara:
I’ve always been more comfortable with residential space.

David:
Yeah, me too.

Barbara:
I like nothing better than a fat tenant on my third floor paying me a lot of rent and I raise it up, raise it up with the lease renewals. I don’t really like 10-year leases on a commercial space where it’s predetermined. For me, it’s not as exciting, but the numbers were so convincing I had to listen to Tom and go the other way.

David:
Well, Barbara, do you also think your business experience plays into this, because you’ve seen how easily businesses can go out of business versus a residential tenant is less likely to just stop paying their rent?

Barbara:
A residential tenant moves out, you evict them if they don’t pay their rent, anything goes wrong, you replace them with another tenant who will pay you more. That’s generally the case in New York City. But a commercial tenant, no matter how good their credit is, no matter how successful they are, it’s not a personal investment for them and they will be quick to fold and go out of town. So I don’t really trust anybody in the commercial space. I have a hard time trusting and that is my business experience. I don’t even trust myself on commercial stuff nevermind the next guy.

David:
And another thing there is when you have a turn on a residential unit, which is the phrase we use for when the tenant leaves and a new one comes in, paint, maybe some flooring, a couple repairs, it’s good to go. These commercial properties, you may have your next tenant want $150,000 in tenant improvements to make it suitable for them. And sometimes you’ve got to wait eight years before you break even on that thing.
Tom, I see that you’re just ready to jump in. Educate us on the difference here between when you have a residential tenant leave and a commercial tenant leave.

Tom:
No, no, I was just agreeing with you. The TIs that people require in New York City now are insane.

Rob:
And sorry, sorry, Tom. What is a TI?

Tom:
Tenant improvements.

Rob:
Okay.

Tom:
So the amount of money that the tenant makes you put into the space, it makes an apartment turn look very, very attractive.

David:
Imagine if you had a residential tenant and they said, “Hey, before I move in I’m going to need Viking appliances and I don’t like the floor. Move these walls around. I want vaulted ceilings. I’m going to need a hot tub in my bedroom and it’s going to be $100,000 for me to agree to move in.” That’s how the commercial space can work. And no one tells you that when they’re talking about these great triple net passive income properties.

Tom:
And then four months free, two months security deposit. No, but as a whole portfolio, we only have three properties with retail and they’re only on the bottom floor. So it’s all mixed use.

David:
And Barbara, you made a really good point too, that just before we move on to Tom’s deal I wanted to mention. The rent increases in residential historically are like Godzilla compared to what they are in commercial where it’s like the GEICO lizard. And it’s one of those things where Barbara’s gut, you recognize that’s the case.
You don’t always work it into a spreadsheet to be able to articulate it like that, but your brain sees it, it puts it in the background of the algorithm that you use to make decisions, and it’s a wise way of looking at it. But sometimes when we talk about the heart or the gut, we assume that it’s just pure emotion and there’s no logic or factual data to back it up.

Barbara:
If you think about what your gut is, it’s the culmination of everything you’ve learned to date and that’s why I trust my gut. You must have had a lot of different experience in different areas, but in the end, when you just get a gut feeling that this is a winner, this is a phenomenon, and you trust that gut without second guessing yourself, it’s usually based on a lot of fact and experience you’ve had. You might not articulate it, but it’s not just whimsical like, “Whoa, I love this street.” Not that kind of thing at all.

David:
I love that. Barbara Corcoran dropping bars on the BiggerPockets Podcast.

Rob:
So Tom, I’ve got a question for you. I know we talked about you consulting Barbara on this deal and the numbers trumped the vision or the heart on this. Are there times where that’s flipped, where you’re in on the numbers and Barbara comes in and says, “Hey, I’ve got a much bigger vision for this,” and deters from your plan? How often are y’all consulting each other?

Tom:
I would say that it’s more general guidelines that she gives me. I was trying to think about some really concrete examples of times that I’ve leaned on my mother’s advice in investing. And I think the North Side Castle example is great.
So we offer what we believe is the right price. It’s at the 1% rule or 8.4% yield on cost, so it checks our box. Debt at the time was at 3 and change. You have amazing spread, at a low LTV, it’s going to cashflow extraordinarily well. How we found that property and how we turned down the property nearby were both examples of the guidance, the softer skills.
So when I first started getting into the Pittsburgh market, the way we got turned onto the North Side is I went out to all the local bars and I asked the people living there, where would you want to live when you graduate college or where are you looking to stay? And that was how we got turned on to the North Side and how we found the path of progress within that city.
Even if you looked at the supply metrics and the job growth in the individual area, you need to interact with the humans and just hear where cool people are wanting to live to really sense the path of progress.
The other side and the softer skill side is a property right down the road … We absolutely love the deal that we did in the North Side here. It’s doing phenomenally well, has great views, high ceilings, existing building built in 1920s. Very similar property down the road exists and we were pretty much fully capitalized, ready to do the deal.
But one of my mother’s early tips that she gave me is, you always have to see a property at night. It may look great on Google Maps, you may drive it, you may walk it all during the daytime, but you don’t know a property until you see it at nighttime. And we were ready to close, ready to buy it, and I just had a feeling and followed her advice and saw it at night.
And it happened that there was people selling drugs in the next door spot and people all standing outside, something that you would’ve never known but it would’ve made leasing that property up, your vacancy would’ve been extraordinarily high, and it would’ve resulted in a very bad outcome.

David:
Well, speaking of things that happen in the night, I just found out today that one of my cabins in the Smokies had a bear rip apart the spa cover in the middle of the night. I got a picture of the spa cover that was ripped to shreds by some bear. I don’t know what they were trying to do getting in the spa, but I do think that that’s a very good point, that the way that things look under a certain light is not necessarily how they look under others.
And while that’s an obvious example of night and day and under light, sometimes the numbers won’t reveal the true nature of the property. You can make a proforma look a certain way, you can manipulate the numbers to be the way that you want them to be and that isn’t the way that it works out in execution.
And Tom, I think that you’re doing a good service to everyone mentioning the fact that if you rely heavily on what you see on a spreadsheet and you assume numbers are safe and everything else is just like Barbara said, whimsical, you can make a really big mistake because numbers can be manipulated just like everything else. Do either of you have an example of a time that you’ve seen a deal in your own life or maybe in someone else’s?

Barbara:
I’ve got a great example of the first deal I made. I bought a 20 unit motel. I may have mentioned this in the last podcast, forgive me if I have. But I bought a 20 unit motel in Dutchess County because it was a fat and juicy rent roll. I thought, “Ooh, I can afford the down payment.” I was about 30 years old, I’m getting excited about making my first deal. I checked all the leases and the rent roll was phenomenal, but when I closed on it, I found out that no one in the complex had paid any rent for over two years. No one was employed. It was like a boarding house.
And so what really happened with that building in the end, I lost all my money. I buried the building with a local guy who came with a tractor trailer and dug a hole and shoved it down the hole and I got out of it. Well, let me tell you-

Rob:
Wait, really?

Barbara:
Definitely. And I would never, ever buy anything without checking the rent receipts. You learn that lesson.

David:
I’ve never heard of a person burying a building before this, Barbara. You’re the first.

Rob:
Yeah, I thought you were going to say figuratively like, “Yeah, figuratively, we buried it.” Literally you hired someone and then they came and then they pushed it into a hole.

Barbara:
Old Charlie did it, yeah. And you know what the feedback I got? Not what happened in the building or with the motel, but people were mourning the loss because all the young women in the neighborhood who were about 30 years old said, “That was a hotbed hotel. We met our boyfriend there.” Everybody mourned the loss of the romance of the whole thing. Not me, I was happy to get rid of it.

David:
Well, nobody was having to pay for anything, of course. They lost their free ticket there. Tom, have you heard the story of the Atari game E.T. Where they had to make a whole bunch of copies before Christmas, but they rushed the production of the video game and it ended up being the worst video game that had ever been made and no one bought it?
So they had hundreds of thousands of copies of this horrible video game and they ended up just burying them in a huge hole in the middle of the desert in complete shame. That reminds me of what Barbara did at this hotel and then did you build something in its place or did you sell the land to a developer?

Barbara:
Vacant land and I handed the deed back to the original owner, an elderly man. He didn’t even want it back. It was just gone. Gone, adios.

David:
Yeah, but it’s a great point. On a spreadsheet it looked solid, right? If other people would’ve been investing in that deal based off what they saw on a spreadsheet, which is another thing that comes up a lot, when you put your money in with a syndicator and you ask for, “Well, show me the numbers.” How do you know what you’re looking at is actually real? No one asks that question.
They can make the numbers look like whatever they want. You make your decision based off of numbers that are not tied to or connected to reality, it can go pretty bad. So we’ve seen how trusting just pure information can be misleading. So Barbara, what does make you feel comfortable when you’re going after a deal?

Barbara:
Trusting the individual, and that is a gut feel, if you want to call it that. But I don’t look at the object. Even on Shark Tank today, I don’t look at the businesses very deep. I look at the entrepreneur and examine them. Is this somebody I really trust? When I’m buying a piece of property and someone’s representing numbers, I check out as best I can, but there’s so much finagling that can go on. I ask myself, “Do I trust this guy?”
We’re all dealing on trust. Well, we are in real estate. You want to build a big business, got to get people to trust you. You want people to trust you, you’ve got to be trustworthy. So I think trust is a major card in all sales and all investment. You have to trust whoever’s dealing it out.

Tom:
I couldn’t agree more, and I think it’s like all the way up and down the real estate game.

Barbara:
Yes, it is.

Tom:
The brokers, the lenders, the inspectors, your contractors probably most importantly. I probably spend 90% of my time on the contractor piece of the equation and building trust, and building them up and firing them and building them up and firing them and finding people that you can really rely on.

Rob:
Is that your main thing that you’re looking for? Is that what makes you comfortable is you’re going into a deal where there’s already a good contracting labor force there? Are you looking for value add specifically? Are you looking to get into a stabilized property? What’s a prime opportunity for you in 2023?

Tom:
We do 95% of our deals, heavy value add. My background’s in construction management, ground-up development. I feel very comfortable in that space. I grew up reading Fine Homebuilding Magazine and listening to BiggerPockets and did some really rough deals in the beginning and cut my teeth doing flips. And now we do everything BRRR, sub-institutional, heavy value add, and we rely on our local contractors to do that work.
I think if you can get in at a great basis with very reasonable leverage and you have a good team to bring properties in the path of progress to top of market value, it’s a really great way to build your portfolio in my experience. But it takes a lot of work.

Barbara:
I learned something from Tom’s uncle, my brother who was a roofer his whole life, a small roofer with three guys working for him. I asked him one day, I was trying to decide on contractors, I was asking him to come and interview these contractors to renovate, for my record, a big job. It had like eight units. I was a little nervous. It’s bigger than I was used to.
And he said, “You don’t need me. Just look at the guy’s truck. If it’s neat, he runs a good job. If it’s a mess, he’s not going to come through.” I use that over and over again, “Come on now, let’s talk about your truck.” You have a look at the truck, it tells you what kind of contractor you have there.

Tom:
Yeah, we’ve had to build our construction companies in each of our markets pretty much from the ground up where we take a guy with one or two people that are working with him and give him more business, build out his team, provide him prop tech, provide him consistent workflow, put, what, guardrails on the process.
And that’s the only way we’ve been successful. When we’re just out there shopping big contractors and bidding jobs, bidding jobs, it’s just maybe one project goes well and by your third it’s a problem. So we feel like you really need to build it from the ground up.

David:
Have you considered starting a construction company arm?

Tom:
Heavily. We do a lot of construction management today, both for our in-house projects and third party, but it’s something five-year plan, would love to do it.

David:
So Barbara, Tom mentioned the path to progress and looking to buy where things are going and I know that’s something that I think you’re one of the experts on. You’ve given some very powerful but simple advice. Just for people that haven’t heard your take on how to know where to go buy, can you share some of the simple things that you look for that have led to you having so much success in the past?

Barbara:
Truly some of them are similar to Tom. I didn’t know he went to bars and listened to people where they want to live. Really smart. I wish I had thought of that myself and had done that. But where I found my up and coming neighborhoods is always at restaurants, usually nice restaurants where there was a creative community there, kids that are hustling, are really dancers, are really artists, but they’re breaking into New York. They’re very young in their early 20s.
I always chat them up much like Tom talks to the bartender, I guess, “Hey, where do you live? Where are you going? Where should you live? Do you have roommates?” I’m friendly to them. And then they say, “I’m in Bed-Stuyvesant, Brooklyn.” Where is that? I don’t let two days pass by where I don’t take a car out there with a big driver, so I’m not afraid at night, and coast the streets at night just to see what’s really going on there.
And why at night that I like it? Because all the bad stuff, as Tom related earlier, shows up at night, but also the street light, the activity, the little tiny restaurants. They all happen at night first because the rents are cheap, and little dive bars and stuff like that. I see the activity. If the gay community’s moving in there, it’s a sure shot. I bring my money right in there.
I’m always looking too for the right side of the street. I stand during the daytime and do a body count of how many … I think that’s done with, I guess, all kinds of people renting commercial space, but I do it for residential space. See what side of the street people like to walk on. That gives me more tenants. I buy in the right block, the right building. I look at the nightlife.
Another thing I use is old ladies during the day. When I go back during the day, I’m always looking for old ladies in New York City. Old ladies sit on benches when they’re not afraid. You go into a neighborhood and you see empty benches, it’s not a good sign. I see the old ladies sitting there feeding the pigeons, it makes me smile. I look at the geranium boxes in the windows. People steal geraniums, they pull out the geraniums, they rip off the boxes, but I see the geranium boxes there the whole week. I’m like, “They’re leaving the boxes alone.”
And then the very last thing I’m hoping for, I’m saying, “Come on, bring it in for me, bring it in,” is I’m hoping to spot little baby strollers here and there in vestibules. Look in the vestibule, the baby strollers are there, I’m thinking “Aha, the yuppies are moving in. They’re just beginning, they’re following the creative community. This is a hot area.”
So that’s the basic call for me, the hot area. You can almost pick the wrong building and do well because a lot of errors get erased if you bought in the right area. But I like to build the right area, the right block, the right building, and of course always with the right partner, my 10% partner that’s not a broker who’s going to give me honest to good guidance as to what the right blocks are and why I should be there, if I shouldn’t be there.

Rob:
We had a guy on the podcast one time who had what was called the Chick-fil-A rule, and he said if there’s a Chick-fil-A in the area, that’s where he would invest because they’ve already done all the market research and spent six figures on all the studies to find out that it is a good up and coming area. Likewise, I’ve also heard that with Whole Foods. If there’s a Whole Foods there, it’s too late, you can’t afford it anymore.

Barbara:
Whole Food, it’s too too late. I’m not even sure Chick-fil-A is early enough, honestly.

David:
Tom, what about you? Do you have anything to say on this topic?

Tom:
Yeah, I just wanted to add one of the rules that I think my mother instilled into me that makes her version of real estate investing much safer and more successful, and how I started out in the industry and how I say to every single person I ever speak to, whether it’s via BiggerPockets or just friends of mine, start either with all cash or very low leverage.
I think time solves a lot of problems in real estate, if you don’t have a bridge loan. When you have a bridge loan and a gun to your head, it makes it really, really, really difficult. And then we got to be laser focused on every other income line item, every repayment penalty, every little detail. The moment you start getting into bridge financing, construction loans, floating loans, makes the game like you’re working with dynamite. So that’s something that was instilled to me at a young age is buy all cash, re-fi out.

David:
So a bridge loan in this context would be referring to financing that’s for a short period of time. Maybe in the residential space, you could consider a hard money loan on a flip where you have a very small margin of error because it’s expensive money that you’re borrowing. And like you’re mentioning, Tom, there’s a lot of details when it comes to hitting everything right.
What I hear you saying here is that the more details that you add, the more complicated it becomes, the more ways there are to make a mistake. You’re juggling 20 eggs instead of 2 or 3, and if an egg breaks, you’re going to lose a lot of money. Is that what you’re getting at when you’re saying buy cash and renovate out is you just simplify it?

Tom:
Simplify it, do it for a decade. You still love it, you want to add propane to the fire? Start using bridge financing.

David:
That’s really good.

Tom:
That’s an extreme. That’s an extreme obviously, maybe 3, 4, 5, 6 years, but definitely not out the gate.

David:
No, I would throw that in. In my experience, that’s very sound advice both with real estate investing and with business. The more moving pieces you add to any endeavor, we were just talking about that this morning. I have a picture in my mind, once you start to grow, that when it’s just you and one person, or just you, it’s like this business is this self-contained system and all the energy stays inside of it.
And as you start hiring other people and leveraging out, every person that you bring in becomes a layer of complication and a place for energy to bleed. And it’s hard to keep your eye on all of that stuff, or even if you somehow do it, it becomes not fun. And now you subconsciously just don’t want to invest in real estate because all you’re seeing is the work.

Barbara:
I picture too many people like having a lot of screws that are loose that I can’t tighten. I don’t know which ones are going to fall out, which ones are strong. You got to spend all that time evaluating that. I love it. It’s a tight ship.

Tom:
I should caveat this, though. At no point am I trying to fearmonger. I think that with an excellent team that has proven itself in a very tight ship, there is always a place for leverage in real estate.

Rob:
That is something I wanted to ask because I mean, as much as I love the advice of, “Hey, buy in all cash and then renovate and re-fi out,” that’s not the most relatable thing for a lot of investors that are looking to get in the game, especially in 2023. So do you have any advice for someone that really is starting from scratch? And what is a very reasonable way forward for someone that wants to get into the game now?

Tom:
I have my opinion on that. I think that partners, partners, partners, partners, network, network, add value, add value, add value, add value, add value and even, try to avoid pulling the lever of private bridge loans. I think it’s so tempting, if you can qualify for one. It’s so tempting and it can work in a dropping interest rate environment.
In this market today, it’s your first deal, your second deal, your third deal, your fifth deal, partner. People want good deals today. People want to put their cash out. People want to partner with people. At least that’s been my experience. BiggerPockets alone is a phenomenal community to provide those opportunities.
And try to be as conservative as humanly possible with your leverage, because if rates go up another 100 basis points and you’re at a 65 LTC and you’re trying to re-fi at a 50% LTV and your appraiser is getting beat up every day and your appraisal comes in $100,000 lower than you were expecting, it’s a problem. And that’s your third deal and you don’t have a large portfolio to rely on, you might not make it through the cycle.

Barbara:
I think my rule is keep it simple and I think for everyone, your first deal is your hardest. Your first deal is your hardest because you’re still struggling to trust yourself and you’re thinking the whole time you might be wrong. In fact, you go further, you think I’m probably wrong. So finding someone to be able to give you the cash is very difficult.
So I believe, again, getting a simple deal where you could put 20% down and the mortgage and expenses are paid by your tenants and you make no money, it keeps it nice and simple, and then you could build your confidence on that. I really haven’t gone beyond that in confidence honestly. I just do the same old thing over and over and over again and I’ve become very rich.
You know what I realized the other day? Someone mentioned to me, my accountant, and I hope I believe him, he said, “You worked your whole life. You sold your business for 66 million in cash and I’m happy for it, but I’ve made so much more money than 66 million investing in property and sitting there and letting them mature.” I mean, I work so less on the properties than I did in my brokerage business. Again, I say real estate, I just love it.

Rob:
I think what I like about what you just said is that you hear a lot of people talk about real estate in a get rich quick scheme kind of capacity. And what you just said is buy a property and make no money on it, break even, and it will appreciate. And it kind of instills this notion of real estate isn’t a get rich quick scheme, it’s a build wealth slow game. And I really think that’s the message that people need to take away from today’s episode.
So with that said, I do want to say, I said last episode I was coming to make an offer on your penthouse in New York. I have to be honest, I’m not quite ready for that one yet, but maybe on the next episode of BiggerPockets, I’ll be there.

Barbara:
Yeah, but I’m ready to sell. If I could double my money, you’re more than welcome in my home.

Rob:
I might need a little more time.

David:
Thomas, I know you’ve been using BiggerPockets for a while now. What is some advice you can share for people listening to this episode who hear what you’re doing, hear what Barbara’s done, say, “Hey, I’d love to end up in that position in the future”? With the community that BiggerPockets has behind it, how did you use it and what advice do you have for other people to speed up their learning curve and get started?

Tom:
You guys know this, I think it’s just extraordinarily valuable, I highly recommend, and if anyone reaches out, I’m more than happy to provide the script that I use, but I’ve had over 100 calls with people from the BiggerPockets community as Tom Higgins.

Rob:
Wow.

Tom:
The interaction on the forums and speaking with individuals in your general sphere, it doesn’t need to be exactly in your market but somewhere close to your market, creates a snowball effect. You can find partners. We’ve done deals with people from BiggerPockets. They’ve invested with us. You can find contractors. We always start there. Cleaning companies, inspectors, tax advisors, tax certioraris.
Whenever we’re looking for, especially when we first started out, when we were looking for a new resource to build our business and we were at a place where we had a team in a team meeting, I always said, “Have you checked BiggerPockets?” And the answer is often no, and within a week or two of them engaging with the community …
I’m not saying go just search in the forum search bar and say all your answers are going to be there. It’s like DM the person. Follow up with the person if they don’t respond. Schedule a phone call. Do a 15 minute Q and A. See how you can add value to them. Maybe create a newsletter where you put all the information that you’ve learned in the last month via talking with people on BiggerPockets while you’re working your W-2 job, while you’re looking to do that all cash or low LTV first deal.
I think engaging and providing value and being transparent and honest creates a snowball effect and we’ve benefited from that through the BiggerPockets community, through our own people that I used to work with. Just staying in touch with them every three months, staying in the loop, engaging with people on Twitter, it’s been extraordinarily valuable.

David:
This is the monopoly strategy showing itself up.

Barbara:
Yes, it is.

David:
Isn’t it?

Barbara:
Yes.

David:
Build these relationships so that they feel guilty not helping you when you land on their property.

Barbara:
I’m so annoyed that you always wound up with Boardwalk and Park Place. I really am. You never gave anybody a chance. It’s not right.

David:
Well, apparently he inherited your taste, if he’s going after Boardwalk and Park Place.

Rob:
I’ve always been a Baltic Avenue kind of guy.

Tom:
Yeah, me too.

Rob:
The purple at the beginning.

Tom:
What were the orange ones? The orange ones were the best because they had the highest-

Rob:
Pennsylvania Avenue.

Tom:
Tennessee Avenue had the highest percent chance of being landed on out of jail.

Barbara:
Let me tell you, not if you were playing with Tom, because he would’ve bought a free pass or two or three of landing on your property. So just when your teeth are coming out, he lands on you, you can’t collect rent from him. Don’t play with him.

David:
That’s awesome. Right, last question for each of you. Thomas, what advice do you have for people when it comes to understanding the fundamentals of real estate and using their head? What are the most important things that they should focus on?

Tom:
That’s a great question. I had a boss when I was working at the Lennar Corporation, largest home builder in the United States. I was doing ground-up development for them, and he always told me, you can miss on your rents, but you can never miss on your operating expenses and your hard costs.
So for me, in my career, always have been excruciatingly detailed on hard costs and have gotten better deal after deal. We’ve done 54 deals now, deal after deal, getting better at OpEx. Rents are hard, you need to feel the market, you need to run the comps, you need to dig in, but you can miss. No one gets fired if you miss on rents. You miss on hard costs, people get fired. So that was the advice I was given.

David:
Awesome. Barbara, same question to you. When it comes to trusting the heart, following the gut, what do people need to get right?

Barbara:
I believe you have to believe in the whole package, the whole package being real estate, that values go up over the long term. And I’m just a believer in keeping the faith. When things go bad, I never get shaken. I think, “Wait a bit, just wait a bit.” And sure enough, things turn around. I think it’s a long game and you just have to have faith in the longevity of the game and where it’s going to land you.
About my penthouse that you’ll be buying this year, I want to tell you something, I would’ve never had that penthouse if I didn’t buy my first studio. I rolled that into a one bedroom. I took out the financing out of a Village building, I bought a three bedroom. I took out the refinancing of another building, I bought a penthouse.
Let me tell you, it was all tax-free. All the cash came out because I’d been owning these buildings 18, 20 years, they’re my cash cows, juicy and fat that I could grab that money. But you’ve got to believe that long-term, it’s going to be there. If you stay with it, stick with your knitting and don’t strangle the buildings by taking money out too much. I wait till it’s really fat and juicy and then I grab a lot of millions out of them.

Rob:
Okay, that’s good advice. Maybe I’ll set my goals to be a little more realistic, I’ll start with the studio in New York City and trade up, the paperclip method, until I get to the penthouse.

Barbara:
It’s reached almost a million dollars for a studio in New York City, and the rent now on a studio in New York City is $6,000 a month. Crazy. Good for the owner, good for the landlord.

Rob:
I was going to say, it’s $6,000, I mean, on $1 million mortgage at 8%, that’s going to be like $7,000, right? Would you be losing money on a studio at the moment?

Barbara:
No, you’re not. You might be losing it short term, but the minute interest rates come down, this market’s going to go bonkers. The minute it’s around 5%, 5.5%, everybody’s going to charge the market and all the rents are going to go up. People are going to get greedy. You’ll never get your hands on a piece of real estate. Now is the time to buy, I like to say, but I really believe now is the time to buy.

Rob:
Love it.

David:
Well, thanks you two. This has been a incredibly fascinating conversation and I was not expecting to get the monopoly background here. Tom, you’ve come a long way and you were trained by a real shark, so it’s great getting to see the dynamic that you two have and the sound advice you’ve shared. So thanks very much. And for people that want to know more about you, Tom, where can they find you?

Tom:
Yeah, on BiggerPockets, very, very active, Tom Higgins, also on Twitter, tomchiggins. This was the first time that I’ve ever done something with my mother, but I couldn’t turn down going on BiggerPockets. I’m a big fan.

Barbara:
It was only because you love BiggerPockets. You said, “I’m not going on anything with you, mom. I do my own thing,” until I said, “How about BiggerPockets?”

David:
Well, what did it feel like seeing your mom on here before you made it? Was there a little bit of jealousy there?

Tom:
We have a great relationship. My mother’s always extraordinarily supportive, so we get competitive maybe around who’s right on a deal, but people doing well and providing value, I’m always really supportive and happy for her.

Barbara:
Well, I want you to know I don’t really like you, Thomas Higgins, because you’re doing better than me. You’re getting better returns. I’m a little bit annoyed about it.

Tom:
Yeah. Well, I work-

Barbara:
Cut it out.

Tom:
… pretty dang … You’re busy all day on TV. I’m just grinding this.

Rob:
Well, we did say before we went live that if you’re ever referred to as Thomas, you’re in trouble. So I know Barbara meant it.

Tom:
Exactly.

Barbara:
I never wanted him to do better than me, believe me, neither did his father. I’m telling you that.

David:
Barbara, for people that want to find out more about you, where do you recommend they go?

Barbara:
Social media platforms, Barbara Corcoran, any of them.

David:
C-O-R-C-O-R-A-N.

Rob:
Go follow Barbara. You really do have amazing TikTok and Instagram Reels. Big fan of all the content that you’re posting.

Barbara:
Thank you. We work hard at it. I love doing it though. A lot of fun.

David:
Well, thanks you two. It was great having you on. Great interview. We hope to have you back again, and I hope you both have a great day.
And that was our show with Barbara Corcoran and Tom Higgins. Wow. This is a BiggerPockets exclusive, the first time that this mother and son duo has ever done a podcast together, and you and I were a part of it. How are you feeling, Rob?

Rob:
Honestly, honored, flattered. It was really great. They had an amazing dynamic considering they don’t do this together ever. One of the things I thought was really cute was that when Barbara was on the show a while ago, she talked about how she went to different neighborhoods and talked to the creatives of that neighborhood.
And then Tom gave the advice earlier that he goes to bars and talks to bartenders, and then Barbara was like, “Oh, that’s genius. I never even thought to do that,” as if they’ve never communicated the strategy. So I think it’s one of those funny things that Tom, the apple didn’t fall far from the tree and he’s following a lot of strategies that I guess it’s just in their genes, like the prudent investing.

David:
I could see so much of Tom’s framework was based in the stuff that Barbara talked about to us on previous shows. The whole time it was popping out, like pattern recognition of, “Oh, I know he got that from his mom. He probably heard her talk about this all the time.” I actually was thinking what a great job she did raising Tom, because that guy’s a stud. Tom, if you’re listening to this, very impressed.

Rob:
Yeah, smart.

David:
You clearly know your stuff.

Rob:
He reminds me of a young me, honestly. That’s what I was thinking the whole time. I was like, “You’re like a young me, man. Good for you.”

David:
So Tom, I think you’re great. Rob thinks that you remind him of a young him and his own greatness. Either way, though, very impressed, glad that you came on the show. Tom’s a big fan on BiggerPockets, so you guys can go message him on there and tell him what you thought of the show.

Rob:
And we’re big fans now, too. One other thing I was going to say as well is that Tom was coming at this from an analytical standpoint, and then Barbara was talking about coming at it with the head and the vision, and a lot of the things that she was saying like, “Hey, which side of the street are more people walking on?”
And it’s kind of funny how it is the head and it is the more feeling approach. But I feel like a lot of the things that she was talking about, in a weird way could be quantifiable and there are numbers behind some of her stances, which I just think it’s kind of funny that in her mind she’s like, “Oh, I’m not good at numbers,” but she just looks at the whole investment at a very different way, but the numbers are there.

David:
Well, she gave one of the best lines ever when she said, “Your gut is an accumulation of all the experiences that you’ve ever had in your life.” That’s a very different take than someone says, “I’m just going to shoot from the hip,” or, “I’m just going to go with my gut. I don’t want to put the time in.”
Barbara’s been around real estate for a very long time, around very smart people for a very long time. She’s absorbed some of the most high level knowledge that’s out there, and that has created what she calls her gut.
Well, that was a whole lot of fun, Rob. I’m glad you were able to be here with me. I didn’t let you talk too much on today’s show, and I apologize for that. So if there’s anything that people want to ask you, where can they go to find out more about you?

Rob:
Go to Robuilt on YouTube and on Instagram, R-O-B-U-I-L-T, and like, subscribe, leave a comment, learn something, learn something for free. How about you?

David:
There you go. You can find me at davidgreene24.com, or davidgreene24 on social media. Reach out, let me know what you thought of today’s show. And you can find us both on the BiggerPockets website. Thanks a lot, everybody for joining us. We are going to get out of here. If you’ve got a minute, check out another BiggerPockets video, and if not, we will see you next week.