Equity Lord

The number of mega wealthy people on this planet (a class that includes billionaires and millionaires, the latter, however, must have a net worth greater than $30 million USD to be included) is a tiny percentage of overall population—just 0.004% of adults qualify according to Wealth-X.

This group controls 12% of the world’s wealth, and it keeps growing.

How did they get to be so wealthy, and, once, there, how do they stay that way?

A few years ago, I did some research on the 100 wealthiest families in Canada. It might surprise you (then again, it might not) that 61 out of 100, almost two thirds, had all or substantially all of their wealth in real estate. It seems that real estate is foundational—one way to both preserve and enhance multi-generational wealth.

The 6^th Duke of Westminster passed away recently (August 9^th, 2016) at the relatively young age of 64, but not from a lack of resources—he had to make do with/get by on a net profit from his real estate holdings (Grosvenor Group) of $14,600 USD per hour or about $128 million per year as of 2012.

The 7^th Duke is now 25-year old, sole heir Hugh Richard Louis Grosvenor, deemed the United Kingdom’s most eligible bachelor not only because he’s a nice looking young man, but because his pocketbook also makes him attractive.

Hughie is worth about £9.35 billion (~$13 billion USD).

He’s in a class of rentiers, an old fashioned word meaning: “a person living on income from property”. Sounds like a good gig. So how do we sign up?

Well, first of all, how did Hughie get to be where he is today, other than the obvious answer: he chose the right parents?

You have to go back to 1740, the year when the great frost nearly froze everyone in Great  Britain. It was to be the coldest year for which reliable records are available. The tune, Rule Britannia, Britannia Rules the Waves was sung for the first time, and Sir Robert Grosvenor, 3^rd Baronet, age 20, married heiress Mary Davies, age 12. He had the title; she’d inherited 500 acres north of the Thames in London where ultra chic Belgravia and Mayfair are today.

Pretty soon thereafter, Sir Robert began development of mixed use Grosvenor Estate, made up of flats, shops, offices and beautiful public squares.

Sir Robert also hired Warren Buffett as his financial adviser. Mr Buffett’s advice was to build and hold, much as Warren did centuries later with Berkshire Hathaway.

OK, OK, Warren isn’t that old, so maybe he wasn’t around in 1740 to give the Grosvenors any advice. In fact, it might have been the other way round.

It wouldn’t surprise me to find out that Mr Buffett studied what old European families did to become so wealthy.

In any event, Warren is worth an estimated $65.3 billion USD so his methodology is working.

How would you apply his methodology to real estate?

1. buy or build smart
2. in great locations with a tight geography (the Duke has investments in London, Sydney (Australia), LA and Vancouver, cities with powerful economic engines of growth and sustainability—for most folks though, they should own within a one hour or 90-minute drive of their home plus maybe one other town or city or place lest their property management become unwieldy; even within a city, a tight geography (ie, a focus on one neighborhood or a few adjacent ones) will make the portfolio much easier to manage…
3. hold onto your property
4. add value/differentiate it
5. manage it properly
6. be patient
7. refinance it every once in a while and pull out cash, tax free
8. repeat
9. pass it on to your heirs in a tax efficient and cost effective manner (avoiding what Ari Wallach in his May 2017 TED talk, 3 ways to plan for the (very) long term, calls “short-term’ism,” https://www.youtube.com/watch?v=tjkrKA1cVdU, embracing instead trans-generational thinking and ethics).

I’d add a few other things like: keep your costs down, live within your means, focus on one or two types of real estate in one or two places, only buy or build property that cashflows from day one, and have as few partners as possible, the optimal number probably being zero.

The other thing would be this: want to know the fastest way to get poor? Get a divorce. So stay married if at all possible.

Lastly, there is a big hurdle for ordinary folks like you and me to get over, and, frankly, I’m not 100% sure how to do that.

Rich folks have access to very low cost debt, very. Some of the largest investors on the planet are issuing bonds that have negative interest rates. Investors can be people like successive Dukes of Westminster or large pension funds, REITs, publicly traded firms, insurance companies and investment banks.

In July 2016, Bloomberg reported that Blackstone Group LP had amassed a rental portfolio in the US of more than 50,000 homes. That’s fifty thousand. How long did that take them? Four years. I repeat: four years.

How long would that take you and me if we were able to buy one, say, every 2^nd year? The answer is easy—twenty-five thousand years, and, frankly, even Warren Buffett isn’t going to live that long.

What does Blackstone have that you and I don’t have? Access to low cost, and possibly negative cost debt.

CBC news reported that Canucks are also getting into the game—CIBC sold 1.25 billion Euros worth of debt with a negative yield in July 2016. Amazing.

So as a real estate investor, how quickly could you amass a top performing real estate portfolio if I lent you 1.25 billion Euros at a negative interest rate with loan to value ratios of 100% (or possibly more than 100%)?

Mighty fast I’d be willing to guess.

What’s slowing us down is the fact that lenders in Canada won’t lend you more than 80% loan to value on most property. They limit you to just four or five rental properties. They certainly aren’t giving you negative interest rates.

So basically, the top 0.004% of the world’s population and their friends on Wall Street, Bay  Street, in the City of London, Shanghai, Mumbai, Frankfurt
and other major financial centers have crossed over to become equity lords, and drawn up the drawbridge behind them. They’ve posted signs saying: KEEP OUT or NO TRESPASSING.

“Equity lord” is Neal Stephenson’s term for wealthy capitalists; he uses it in his work, The Diamond Age: Or, A Young Lady’s Illustrated Primer, Bantam Dell, February 1995.

So what should ordinary real estate investors do?

Give up, right?

No way!

You have to be nimbler and cleverer, move faster and invest in sectors where the big guys don’t play.

Here’s what entrepreneurs do: they do for one dollar what any other fool could do for two. They also know how to make two dollars for every dollar any fool could make.

FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
ROYAL LePAGE Performance Realty broker
Ottawa Senators founder
1-613-762-8884
bruce.firestone@century21.ca
twitter.com/ProfBruce
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brucemfirestone.com

• MAKING IMPOSSIBLE POSSIBLE
• FREEDOM VIA REAL ESTATE INVESTMENT AND PB4L, PERSONAL BUSINESS FOR LIFE
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@ profbruce

Image source: Public Domain, https://commons.wikimedia.org/w/index.php?curid=1041646

postscript 1: speaking of equity lords, look at the following list us the top 7 wealthiest US presidents. You will note that their wealth had one thing in common–real estate ownership.

Wealth of US Presidents

Rank Name Party Position
Date(s) Estimated wealth*

1 Donald Trump
Republican
President
2017–present $4.5 billion

2 George Washington
Independent
President
1789–1797 $525 million

3 Thomas Jefferson
Democratic-Republican
President
1801–1809 $212 million (died bankrupt)

4 John F. Kennedy
Democratic
President
1961–1963 $124 million

5 Theodore Roosevelt
Republican
President
1901–1909 $125 million

6 Andrew Jackson
Democratic
President
1829–1837 $119 million

7 James Madison
Democratic-Republican
President
1809–1817 $101 million

* adjusted for inflation
source: https://en.wikipedia.org/wiki/List_of_richest_American_politicians

postscript 2: more about the Duke of Westminster here, https://profbruce.tumblr.com/post/148735436624/duke-duke-duke-duke-of-westminster

postscript 3: if you want to know what some equity lords really think of the rest of humanity, read this exchange between New York City mega landlord Steve Croman’s son, Jake, and an Uber driver as reported by Bloomberg Businessweek, Oct 17-Oct 23, 2016:

In March 2016 came broader notoriety, when Croman’s eldest son,
Jake, a University of Michigan student whose LinkedIn profile lists him as an “associate” at his father’s firm, was filmed verbally abusing an Uber driver in Ann Arbor.

“There’s 50 of you and there’s one of me here who spends the most money here, you little f—,” Jake says, flanked by fellow Tau Kappa Epsilons. “Minimum-wage faggot. Go f— yourself. See you later. Go pick up another f—. You working all day? Guess what? I’m gonna go sit on my ass and watch TV.”