What are the top lessons learned over a very successful six decades of real estate investing? Tom Wilson, principal at Wilson Investment Properties, a seasoned investor in several asset classes including retail, office, multi-family, industrial and others, shares his wealth of knowledge and wisdom.

Major Lessons Learned
My first tip of the day is to go to Fannie Mae's website and look for Doug Duncan's predictions around what's going on in the marketplace, and he has accurately called every single rate change in the last 20 years.

Secondly, operations is indeed a critical element, Kenny McElroy prides himself in having come into the real estate world from the operations standpoint, and he often emphasizes how important that is. The best underwriting, the best market, and product are only as good as you can execute it. You really need all the legs of the stool to be able to have something come off successful. He does not wear his excess on his cuff but he couldn't help it a few years ago and he splurged and bought himself a beautiful red Ferrari and on the license plate says "C student".

What event or person in your life that at the time you didn't realize how important they were, but later on you realized that if it weren't for this event, or this person, your life would have been quite different?
It starts with your parents. Choose your parents carefully, unless Elon comes up with some way for us to time travel back, it probably won't quite happen like that. But what we can choose is, what we learn from them, what they model for us, which things we want to continue with, and which things we want to change. It might be they're very witty, or they inspire us to be curious or maybe there was an addiction problem and all those things. We can continue with those models that we see, those behaviors, or we can choose to change it, which isn't always easy to do, but be conscious about that, it's not just your parents as anybody else that you associate with.

One of my first great decisions was the partner that I picked who turned out to be my partner for 52 years until I lost her six years ago to cancer. The day that I went up to her and asked her to dance and she said yes was the beginning of a great relationship. I was very introverted at the time and she was a bubbly extrovert. She taught this engineer to enjoy people more and in later years, she said she wasn't sure that had been such a good idea. I was a ham radio operator, it’s an amateur radio operator at age 12 which was a good thing that happened to me. I was in school, finishing my EE career, and wanting to explore a bigger world, I went on-air and talked to a lot of people out in Northern California who said there was an emerging electronics industry, and you might be interested in exploring this and I was also a big fan of The Beach Boys. One night at dinner, I asked my bride, "Honey, what do you think about going to California?". She took one more bite of her dinner, she looked up and said, "Okay."

Coming out to California turned out to be another great idea and I started with Fairchild which was the start of the semiconductor industry. I went to get my keys for my rental house and the landlord lived next door and it turns out he owned 10 houses on the street. He was 38 years old, had no college education, and he was financially independent. This is 1969, so what do you call a moment like that? That's an aha moment, but I was told by a number of people that it was a bad idea to buy a house because prices had gone up so much in the 50s and 60s, they couldn't imagine going up anymore.

I was also told that what was to become Silicon Valley had its run, it was all over, all the jobs were going to Japan and I'd missed it. I didn't believe them, I've always been a contrarian; I like to think of calculated risk-taking. One things that separates us who have invested in real estate is that a lot of people can't get comfortable enough to try anything different from what they perceive as safe, like mutual funds, but you have to be willing to take some risks. But as we all know, those who have been in the business for a while, you don't put your chips down on the table, you do some serious calculating. I bought this house as the first rental and my wife's hand was shaking as we signed the contract, knowing that we'd only eat hot dogs and baked beans the rest of our lives, but I convinced her to go ahead and do it anyway, we paid $30,200 for that Silicon Valley in 1970. It was rented for $300. That rang a bell and it was about 1% per month of the value of the house, you could actually do that in California back then.

When did you start your investing career?
After 30 years in high tech and two startups that failed, I realized one day that I was earning more money from the rentals I bought in the 70s while I was sleeping than my day job and stock options were. I also realized that the house that we bought for 30,000 which was now worth about 500,000 was only making about a third of the revenue than when I bought it. So, I studied the country, this was before the internet was as prolific as it is today, and Dallas Fort Worth came on top, so what did they have? They had still a 1% ratio, they had a broad-based economy, there was a high population growth, high economic growth, companies were going there, it was business-friendly, and it worked out very well for me. I started selling properties in California and exchanged them for properties down there. I bought 13 duplexes from one house in San Jose. I bought a 68-unit apartment from one house in San Jose with no extra money in it, and learned the power of leveraging and the power of 1031 Exchange and that turned out to be a good path.

I took the typical progression of going from houses to one to four-plexes, to multifamily to then non-residential commercial. Commercial, its root word is commerce which means something that you take revenue from, many people when they say commercial, they think of industrial and retail, but it also includes multifamily. I went along that progression, so what was I looking for? To be able to scale, it's tough to do it with houses, the hedge funds learned that even though houses became a new asset class for them, they also realized, as Warren Buffett famously said, "I'd buy a bunch of them if I understood how to operate them, how to manage them." A lot of these hedge funds were buying houses in large bulk and before they could get management on board, they were being compromised and everything else. The values of the returns on houses came down because Wall Street needed less yield and you had a bunch of folks that had a schedule for how fast they wanted to deploy money, therefore, it became a lower return product but that's when I spent more time focusing on commercial properties.

A lot of principles that can guide us well in life are not that complex. It's awfully easy to look for really complicated things to guide us in which way we go, but I love simple principles. The Rothschild family at one time was considered the wealthiest family in the world. In the 70s, one of the grandsons was interviewed and asked, “To what did he attribute his family's great wealth?" and he said by selling too soon. The lesson is, don't be too greedy. When something's climbing up, it's always tempting to wait a little longer, but if you have a good profit, velocity of money is important. Keep moving money along for yourself, and for your investors, get their money back, take the profit, and move on. You'll lose a little bit, but when it cliffs off, it's catching a falling knife, it's too late at that point. Conrad Hilton, who was the very first one to build an international hotel empire was asked what was the most important thing he learned building that empire. He said, keep the shower curtain inside the shower.

Plan your exit. That can apply to your business, as well as each property so when you buy something you ought to have a plan on when you tend to get out and you're going to have a plan B, that's very important. But also, if you have a business, how are you going to have a successor, how are you going to sell it, and how are you going to exit at some point in time? Be very careful what people say who have a high level of influence. Ben Bernanke in 2005 said, "We've never had a decline of housing prices on a nationwide basis, what I think is more likely is that house prices will slow, maybe stabilize, I don't think it's going to drive the economy too far from its full employment though." Of course, we have to think about what the motivations are from the person that is saying it, whether it's the Chief Economist of the National Association of Realtors, who wants everybody to think real estate markets are always great, or whatever.

We always want high cap rates, low risk, and high appreciation but it's very hard to find all three, so you have to decide what is the most important to you. California has been able to generate great appreciations in recent years, but not so good on cap rates, and Texas, Florida, and other places have other things that are strong so you need to realize it's very hard to get everything you want, you have to choose which is important.

One of the most important things I've learned is how different sub-markets are and how different products are. It's incredible how different they are. You look at the curves of these markets and products. The general information will give you a general concept but you can always find products, you can always find portions of the market where it can be quite contrarian to what the general information is.

Markets have cycles. In the different cycles of the market, there are different cities, different products are quite different, timing on where they are in those circles. This happens to be a chart for the current office market. It shows the distribution of cities and sub-markets. MSA is all around the country and there are cities in each of the four major sectors of the market cycle. You look at retail, industrial, multifamily, they're all different. It's very important to look at each product and sub-market separately.

A good example of how things can vary, in California, where many of us are, during the pandemic there was a huge vacancy that occurred and still is occurring in the office sector, especially where they are professionals and it's a work-from-home environment. Unfortunately, a lot of lenders that say, "If it has the word office on it, don't even talk to me, I'm not interested." One of my two office buildings is in Savannah, Georgia. It stayed in the 90s all during the pandemic, and it's at 100% occupancy right now. How can that be? It's the type of tenant. The tenant is more important than the asset classes. If the tenant is in education, community services, health services, and so forth, where they have to be on-site and have a client, that's totally different than thee work-from-home professionals. You have to really look at the specifics. When Amazon started its explosive growth, a lot of people thought all retail was going to be scraped from the face of the earth. Well, so far, I don't think we can get our hair done or get a glass of wine on the internet. Strip malls and service industries, even big boxes, have complimentary websites, you go to pick up the thing you order online at the store, and you buy something else. Don't ever broad brush, everything is just based upon the general headlines.

What is the importance of underwriting?
With assumptions, you can make the results be anything you want, just look at your exit cap rate. It's 1000s of cells. When I used to do it myself, I'd always take the IRR and cash on cash, and copy that cell on each of the sheets where I was making the assumption so I could watch that and see if it makes sense, which way it goes and by how much, what the sensitivity is. I have someone else do it as well to make sure that the results come out the same, because the decision of whether or not to invest in something like that is very important. Look at just the parameter of the rent roll. It sold in Houston recently for 50 million, a six-location portfolio of industrial with 103 tenants. When you're doing the due diligence, you're doing the underwriting, what do you get to do? You've to look at the rent roll, you've to look at each tenant, and take a guess whether or not they're going to renew. If they don't, how long is it going to be vacant? And when you lease it up again, what price is he going to rent it? And you have to do that for all 103 of them, not just that part of it. Underwriting is very critical.

What other lessons were learned in real estate?
Don't fall in love with a deal and try to make it happen. Saying no can be more valuable than saying yes. Almost every property I've bought, I've gone to see it myself, I don't do the level of detail I used to but when you scale, you have to delegate to others. Go look at the other stores around the area, retail, grocery, etc. Who is it that actually comes in there? Market studies from the listing agents show you the one-mile, three-mile, and five-mile, what the demographics are, that's not necessarily who's in your property. As you can tell by going at nighttime, park the car, and see what comes in and out. When you make a mistake, it's tough to grieve, and lick your wounds for a while but don't run from it forever. Go back with your team and analyze what is it that went wrong or what is it we can do better next time. Sometimes we learn more from the things that don't work, than the things that do.

Change your model periodically. Switch from market to market to asset class to another, whatever it goes with the time so the market. One of the things I've done that has contributed to my success is to change the model. One of the things I haven't done so well is probably not change it as fast as I could have. It's hard to leave something that was working.

Lastly, share whatever you can give to others. Help others and you'll both win. When I was in tech, I had a marketing position for a few years and this was before the internet, it provided this tremendous amount of data, I would write marketing reports about our competition and my peers said, "Tom, how in the world did you find out these things from your competition?" I said, "Well, thank you. It's my little secret." My secret was that I would ask my competitors, and I would share information about what I thought they would get some value from me. If you're Google or Apple, you don't want to lose marketshare, but if you're relatively small in the marketplace, you both win. I always believed that's important because coming from a world of abundance as opposed to scarcity is very beneficial for all of us.

And, above all, enjoy the journey. It's so easy to get caught up on every day operations and finding more success. But along the way, give back and smell the roses. If you ask my daughter what's the most valuable thing that she ever learned from her dad, she would say, smell the roses every day and enjoy the journey. So, I encourage you to do the same.

What's the most valuable asset that you have?
I think it's the 2,000 names that I have on my phone, because with those relationships you can start over if you have to rebuild. Relationships are critical, and character is more important than competence. It's nice to have both but character is number one.

Q&A portion from the audience:
You bought your first house in 1970 for the rental, you're really nervous. Today, we see prices are high, rates are high, where do you think the single-family market is going with where the data is at and the rates are from your experience in all those years?
The market is 1000s of sub markets, they're going to vary quite a bit. From my conversations with Dr. Doug Duncan from Fannie Mae, he feels that we're not, overall, from a US standpoint, going to drop very much. Some markets will, some will stay stable. Right now, of course, the prices are being held up because there's no supply. People aren't going to move and let go because they're locked in low interest rates. The tough part is the same as it has been for 30 years. Me, personally, I haven't thought that it made sense in high-end markets like in California to buy a house for cash flow for 30 years, certainly 20 years. Just look at the rent ratio, look at the revenue relative to your number one expense, the debt service based on 80% leverage. It looks to me like we're going to stay pretty stable. Some markets will come down a little bit, some will go up a bit, but again, if you're looking for cash flow, not long-term appreciation, I think you just need to look at the rent ratio.

As a 23-year-old, would you say that I should focus on just pursuing multifamily or should I start with what you went for as a single-family route, multiple single-family to multifamily, or should I diversify?
Back when I started, other than my landlord who had those houses, that was a very contrarian business model. Maybe people kept their first house, and that was their rental but that was very unpopular. As time went on, we got to learn about that. I don't think there's anything wrong with buying houses, I think you just need to study all the markets and see which ones get the best returns, which ones have a history and projection of having the highest population growth, economic and business growth, which ones are business friendly.

Most of the products in the 24 markets that I've been in whether they were houses or other commercial properties, they have been in the heartland of America, the South. I tend to not like the Rust Belt up north, because it has largely had a declining economy, and declining population. Sometimes, back to simple principles, you can just ask yourself, "Okay, someone gets a job offer at GE in Utica, New York, and they a job in Austin, Texas, which one are they probably going to take?" Just look at where people are migrating. The trick is, of course, if it has a large migration, that tends to drive prices up, too. I think the heartland of America is still fine for single-family homes and I think that when you scale higher than that, I would say get a partner. Get experts on your team. That's really critical. I'm a big delegator. I micromanage a bit in the beginning but once they're on board, I think we're on the same page, unlike most techies and engineers, I tend to let go and step back. Get a partner no matter if it's a partner who has more experience or a partner that brings in the capital.

Tom Wilson