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2 How Sam Zell Built A Billion Dollar Real Estate Empire From Scratch Maybe you ve heard of Sam Zell. He could be considered a poster-boy for what might be called The Great American Success story. Zell is a very, very wealthy man. The investment firm he founded in 1969, Equity Group Investments, owned the Schwinn bicycle company, Revco drugstores, and even the mattress company Sealy, among other businesses over the years. He s owned the Chicago Tribune, the Los Angeles Times and other major media outlets. In 2006, he sold one of his businesses, Equity Office Properties, to another investment firm, Blackstone, for $36 billion. When Zell was born, no one would have ever guessed that he d be a billionaire many times over. He s the son of Polish emigrants, who fled to the United States around the time of the invasion of Poland by Nazi Germany in His father was a grain farmer, then later, in America, a jewelry wholesaler. Sam s situation in his early life was almost the opposite of being born with a silver spoon in one s mouth. But even at a young age, Sam had a tendency toward entrepreneurialism. Sure, he s known now as a media magnate, owning some of the biggest newspapers in the world. But as a youngster, his media experience consisted of buying Playboy magazines and selling them to other boys in the neighborhood for a 600-percent markup (or so the stories go). Why is this so notable? Well, it shows that even at a young age, Zell knew well how profitable investing in something that s scarce and in-demand could be. This knowledge set the foundation for his massive wealth as an adult. Because while Playboy magazines might be scarce among curious boys, as well as in-demand, real estate is both scarce and in-demand for a far greater number of people. And make no mistake; Zell s vast fortune is a result of his real estate investments.

3 It all started while he was in college. He approached a landlord who owned quite a bit of student housing and got an agreement in place to manage a 15-unit student-housing building in exchange for free room and board. He parlayed his experience in managing someone else s properties into his own money-making real estate projects, buying distressed properties, improving them, then renting them to other students on his own. How many college students, living in college housing themselves, own income-producing properties they rent out to other students? In a college town, student housing is both scarce and in-demand, just like Playboy magazines were to his peers in his younger days. And scarcity and demand help ensure that properties, no matter how badly run-down they may be, have a high intrinsic value. This is a cornerstone principle for Zell. The lesson he learned as a young investor was that even a very distressed property, maybe even one that no one else wanted to buy, could be fixed up and become a good investment if it had some intrinsic value, such as student housing in a college town. From his college days, Zell s real estate empire snowballed. His knack for finding undervalued properties that he improved and rented out for income translated nicely into other niches in real estate, particularly the commercial realm. His investments were dictated by the same guiding principles: scarcity and demand, which in turn made them

4 intrinsically valuable, even if they were in bad condition. As he branched out from student rentals to commercial properties to other residential units, resorts, even manufactured homes, Zell began incorporating his different types of holdings into real estate investment trusts. This allowed him to take advantage of tax laws, but it also helped him manage the different types of properties in different business entities. Eventually, all of the various trusts fell under one umbrella, Equity International, which invested into other profitable businesses. All funded, originally, by real estate. As it turns out, the organization of his different real estate investments into various trusts allowed him to sell them off as he pleased, as evidenced by that $36 billion divestment to Blackstone. It was almost like real-life monopoly: Pass Go, collect money, sell some highly valued properties when they re scarce and in-demand, keep the properties you want, and keep collecting huge income from them. You might say to yourself, after reading this, Sam Zell was a lucky guy. That s what most of the general population thinks about billionaires. That they were lucky. That they were in the right place at the right time. That, somehow, the stars magically aligned for them. That they have some sort of Midas touch. But this is a story of a kid whose parents were, basically, war refugees in a new country. How lucky, exactly, does that truly sound? The fact is, it has nothing to do with luck. Sam Zell is a billionaire today because he recognized opportunities, primarily in real estate, that are available to everyone. Throughout entire career in real estate investing, he has stuck to one basic principle that just about everybody could also follow: Buy undervalued properties and improve their value This is an excerpt from a Forbes magazine story that perfectly sums up Zell s strategy: Over the course of his 50-year-plus career, Sam Zell has consistently sought out and created value by buying into industries, companies and real estate that others have written off as worthless. He invests at a discount, cleans shop and stays in for the long haul. In the process he has mentored hundreds of entrepreneurs and executives and created thousands--if not tens of thousands--of jobs. Think of him as the poor man's Warren

5 Buffett, if you can consider a man worth some $4 billion poor. Investing in undervalued assets is no secret strategy. In fact, the most successful investors in the stock market attempt to do it all the time. As the article mentions, you might see Buffett, for example, make a large investment in a company s stock when it appears to be struggling. Not all such investments pan out as planned, but Buffett has a very good track record overall. Again, the general population might see this as being lucky. The average person might believe that even expert investors buy shares of a stock and hope that it will increase in value. But the best investors do not simple wait and hope. And that s part of why real estate appeals so much to Zell and other great real estate investors. Distressed real estate can be bought just as shares in a distressed company can be. But the one HUGE difference between real estate and stocks is Control Even if you re Warren Buffet and invest in a company that might be struggling but still has some positive factors on its side remember scarcity and demand you might not have a ton of control over its fate. There are other shareholders who vote on important things. There are executives in charge of running the day-to-day operations. With shares of a stock, there s not a ton you can directly do to drive up its value. But in real estate you do have control. You can hunt for bargain investment properties, which is what Zell calls them, and have a direct effect on their value. Rehabbers do it all the time, fixing up run-down, vacant properties and selling them for more than they paid for them. But as the above Forbes excerpt states, Zell prefers to hold onto his properties for the long haul, maintaining that control over time. In doing this, not only can you make improvements to the property that increase its resale value, but you can also set maximum rental rates and earn consistent monthly income. Take a look at this Zillow listing from a building that one of Zell s equity firms bought in 2012:

6 According to news reports, Zell s firm paid $76 million for the property. At the time, it was scuffling a bit. Its previous owners built it with plans to make it a condominium building, selling individual units. After the real estate market crash, however, demand for expensive condos was down. So they switched plans and began renting it out instead. It s unclear why they sold, but you don t hear many success stories about people who build $76 million buildings to be one thing, then change up the entire plan midstream. Zell, however, knew that the building was in a desirable location. The scarcity and demand of Brooklyn real estate provided intrinsic value, even if the property at the time wasn t super successful. He knew apartment rents were on the rise and were projected to continue rising rapidly for years. And remember, Zell likes to maintain control over time. He understands that, with real estate, the investor can directly improve the asset s value and income performance. Five years later, as you can see from the Zillow listing, one-bedroom, 683-square-foot units are selling for over $900,000. There are 113 total units in the building, so even if its entire value was JUST in the resale value of those (there are retail spaces, too, so this is not the case), we re talking about $101.7 million, considerably more than was initially invested. When his group took the building over, a one-bedroom apartment was

7 renting for $2,700 a month and a two-bedroom went for $3,400 per month. Now, according to the website of the rental agent for the property, a one-bedroom goes for $3,660 and a two-bedroom is $4,660. So let s do a little math If 110 of the 113 units were rented, half one-bedroom and half twobedroom, the monthly rental income on this building would be $457,600. That s an annual income of $5.49 million. Obviously, we can t know what the operating costs are, but $5.49 million in annual income isn t too bad. Obviously, this example uses a bigger investment than the typical individual real estate investor makes. It shows, however, that the control real estate gives you over an asset allows you to increase its value both in the short-term and long-term and also in both its resale value AND monthly income. The same holds true whether it s a 113-unit apartment building or a single-family home. Remember, Zell started small, too, with college housing. Back then, Zell was meticulous in his market research and in his scouting for homes. Even when he began as a small-time investor, he followed his two rules: 1. Invest in bargains 2. Invest in assets with intrinsic value If he followed these two rules, then maintained control over the long term, improving the asset s value, he would have a winner. And remember, he s worth around $6 billion, so he s had his share of winners. To think, it all started with his first run-down college-town house that he fixed up and rented to other students. The strategy of buying real estate bargains is no secret. But most people probably think of flipping when it comes to bargains. Flippers buy inexpensive, run-down homes, fix them up, then sell them. And there are a lot of people out there who have tried this. Especially after the housing crisis, foreclosures and other distressed properties were prevalent, and quite a few amateur rehab investors tried their hand at flipping. I m sure there were plenty of people who made good money, but, unfortunately, there are some risks to flipping homes that not every beginner sees. Zell s method of buying bargain properties helps alleviate some of

8 those risks. Here are the two main ways maintaining control over a bargain property cuts down the investor s risk: 1. Instead of waiting for a rehabbed home to sell, a bargain that s kept can be rented almost as soon as work is completed. An empty home for sale earns you no income while it sits on the market. If you have a mortgage payment each month, that s even more money out of your pocket. 2. If the cost of improvements goes over budget, that money can be made up by rental income. If you don t keep the property and earn rental income from it, that money is gone from your pocket forever. Remember, too, that Zell s approach goes beyond just physical improvements to the property. By controlling the investment over the long term, an investor can also improve the monthly cash flow, not just the resale value. Zell learned this lesson as first a property manager and then a landlord back in his college days. His market research included close and careful studying of rental rates and trends, and working for the apartment company, he understood how to get absolute top-dollar in rents. The most obvious way is to simply raise rates, but good investors also buy homes in areas where they CAN raise rates. They make improvements to the property that allow them to collect the most rent possible. Again, Zell s strategy for increasing the value of a bargain property doesn t just include raising the resale value; it also increases the asset s value from ongoing income. The Forbes article calls Zell the poor man s Warren Buffett, and one of the reasons is because he has ascribed to one of Buffett s famous tenets: Be fearful when others are greedy, and be greedy when others are fearful. This simply means taking advantage of the times when everyone else is shying away from a particular asset class by buying low, and selling high when the asset class is something everyone else wants to get their hands on. Another highly regarded investment principle, diversification, has helped Zell grow his wealth immensely. As mentioned earlier, he has had investments in residential, retail, office-space, manufactured homes and other real estate-related assets. This diversification has

9 allowed him to get in and out of certain types of properties when he could get the absolute best value both in buying and selling. By buying low, for example, when no one else wanted to touch office buildings, then selling high when everyone wanted them, he was able to get that historical, $36-billion deal from Blackstone. He s diversified beyond real estate, of course, and has even said that real estate vs. the stock market isn t an either-or proposition, but rather that the same opportunities present themselves in both realms. But as you now know, it was his real estate empire that allowed him to fund his other investments. And it all started with one house, rented to college students. There are actually a ton of investing and wealth-building lessons that can be taken from Zell s pretty amazing life story, including: You don t have to be from a wealthy family to begin investing. Not everything that s cheap is necessarily a bargain; a worthy investment also must have intrinsic value beyond its current market price. You re never too young to start your investing career. Zell was a homeowner as a college student. If you invest into assets that are scarce and in-demand, you not only minimize your risk but also maximize your income and equity potential. Investing into assets over which you can maintain control will allow you to extract the most value from those assets, both in recurring income and resale value. Diversification is not only a risk-mitigation factor but also a way to buy low and sell high, the dream of every investor of any asset class. Passive investments are not always all they re cracked up to be; if you are willing to work, you can increase the value of almost ANY real estate investment. Investments snowball. You can start small. Remember, Zell s fortune began with a single distressed student-housing property while he was a college student. Each additional investment he made helped fund the next one, and so on. Be open-minded. One of Zell s biggest real estate deals occurred when he partnered with a competitor to acquire what was, at the

10 time, the largest real estate investment in U.S. history. Zell has always been creative when real estate opportunities have presented themselves to him. Zell personifies the idea that one man s trash can be another man s treasure. Honestly, it s difficult to think about another individual whose path to real-estate wealth includes so many lessons the rest of us can learn and put to similar use, even if you re not likely to ever consummate $36 billion deals. Sam Zell s story is a remarkable one, going from son of war refugees to college-student homeowner, to successful real estate mogul to one of the wealthiest people in the country. He built his empire literally from scratch. What s important to remember, however, is that it really did start with one distressed property. I m not saying you can be the next Sam Zell, but if you re interested in finding a distressed property with tremendous potential, I strongly suggest studying neighborhoods near where you live to get a feel for what kind of undervalued properties might be out there. Take Zell s advice and don t just look at what properties might be bought and sold for, but also take into consideration what rental income potential they might have, and, especially, what kind of long-term appeal they might have. Remember that you can t necessarily control what a home might sell for now, but that real estate allows you the kind of control that other investments do not. You can invest in a property and have direct influence over how profitable an asset it can be. If you have learned nothing else from Zell s story, you should at least remember that! If you re interested in a short-term investment property, our team can help you get started. We are a licensed full service real estate brokerage, management, and investment company. We specialize in helping real estate investors identify, evaluate, and acquire and sell profitable rental properties. In fact, our specialty is helping investors extract additional profits from their properties. I ll tell you right upfront: Not everyone qualifies to be a real estate investing client of mine. When you send your completed application to my office, I ll determine whether or not this is appropriate for you. It is important to answer the questions on this new client application honestly and accurately, so that neither your time nor mine is wasted.

11 If you re application is accepted, an initial consultation will be scheduled in our office. It is very important to keep your appointment for this consultation, as far more people request them than can be accommodated. We are not able to accept any investor as a client. We simply do not have enough time to work with every person who calls into our office. However, based upon my workload, I do agree to accept a select few new clients from time to time. To be considered for one of these client openings, complete the new client application and send it to our office. If your application is accepted, you ll receive the full services of my team, which includes: A one-on-one consultation to access your goals and the steps we will take together to accomplish them. Access to our monthly wealth-building newsletter where I share different real estate investment strategies you can use to increase your income and build wealth. Access to special real estate investor loan programs. Our team s exclusive 5 Point Home Search where we help you identify undervalued properties. For properties that match your criteria, we will walk through them together and analyze the condition and profit potential, the right way. We will help you negotiate your purchase and sale for the lowest price and best terms. We will manage the closing process with all involved parties (lenders, title companies, appraisers, and escrow agents) We will help you advertise, show and screen prospective tenants for your property. We will help you create an auction like environment for your properties whereby, prospective tenants will compete for your property.

12 We ll provide you with proper rental applications and disclosures to avoid risky lawsuits. We ll work with you EVERY step through the process until you have a qualified new tenant for your rental or buyer providing you with monthly income. Now I know what you re probably thinking... what will this cost you? If your application is accepted, new clients pay a one-time fee of $ This fee entitles you to all of our team s services in finding, analyzing, purchasing and financing investment properties for FREE. When we assist with your actual investing, we will charge the Seller of the property you purchase a commission to be paid out of their proceeds. This means you ll get all of our services for just $ You re under NO obligation to buy any investment property. However, to have access to my team s services, you must be an accepted client. During Your Initial Consultation, You ll Receive The Following Special New Client Resources - For FREE! NEW CLIENT SPECIAL BONUS #1 Best Properties An amazing system for finding Best Investment Properties Below Value. This system can be setup so you ll receive updates of homes available with motivated sellers. The best part of this system is other buyers typically aren t paying attention to these homes and you ll have less competition and we will be able to negotiate better deals for you.

13 NEW CLIENT SPECIAL BONUS #2 Greatest Secret A best selling book by Joe Vitale titled, The Greatest Money Making Secret in History! You ll see exactly what this secret is and how you can use it to your advantage. The best part? The secret actually works. NEW CLIENT SPECIAL BONUS #3 The Way to Wealth Franklin was a statesman, scientist, entrepreneur, inventor and more. He is synonymous with ingenuity and achievement. This essay will give you a lifetime of financial wisdom. NEW CLIENT SPECIAL BONUS #4 - The Art of Money Getting The legendary P.T. Barnum shares practical advice for wealth accumulation. Those how really desire to attain an independence, have only to set their minds upon it, and adopt the property means, as they do in regard to any other object they wish to accomplish, and the thing is easily done. NEW CLIENT SPECIAL BONUS #5 Science of Rich with. Wallace D. Wattles book titled, The Science of Getting Rich. In this short book, Wattles wrote, Whatever may be said in praise of poverty, the fact remains that it is not possible to live a really complete or successful life unless one is rich. No man can rise to his greatest possible height in talent or soul development unless he has plenty of money; for to unfold the sould and develop talent he must have many things to use, and he cannot have these things unless he as money to buy them

14 To be considered for one of our client openings, complete the attached new client application and send it to my office. You can send your application to: To your success, Brice Sheppard Sheppard Real Estate Group P.S. I didn t go into it in this report, but Zell has also always been famous for paying as little in taxes as legally possible. As you probably know, there are tax advantages that come with owning investment properties. I can touch on this a little bit with you when we speak, but you should consult with a tax professional to go over exactly how wealth-building through real estate will affect your tax situation. P.P.S. The number of client applications we can accept in any given month is limited. At certain times, we are unable to accept any new clients as the majority of our time is dedicated to assisting current clients. Also, people referred to us by existing clients take some of our new client openings each month. With this in mind, I can only encourage you to send your application immediately. Right now we have sent you this investing report at a time when we have openings for new clients. However, should you delay, when you respond there may be a waiting list and you any have to wait weeks for a client opening.

15 NEW CLIENT APPLICATION If you would like to be considered for one of our limited new client openings, complete this short application. Please be honest with your answers, as we will use this information to determine if we re able to help you achieve your goals. If your application is accepted, we will be in touch within the next 3 business days to schedule your consultation. First Name: Last Name: Phone: Do you have any investment properties now? What is your target monthly income goal? Are you planning to pay cash or get financing for your investments? If financing, are you pre-approved? Would you like to buy real estate in your retirement account? Are you interested in full property management services? Why are you a great candidate for this investment? Please Send Your Completed Application to our office Send to brice@sheppardgroupllc.com