Legacy Wealth Holdings

The 4 Buying Criteria of the Wealthiest People in the US

The other day, I sat down with my boy Chris Litzler, my commercial mortgage broker, and I asked him: “Chris, what are the top characteristics of the wealthiest people that you bank?”

Now Chris has brokered over $1,000,000,000 in loans and has represented some of the largest landlords and real estate investors in the commercial space in all of Ohio and, really, around the country.

I wanted to know about the people who have the biggest balance sheets, who have the most money in the bank, who have the largest net worths: what are they doing differently than everybody else?

Chris told me 4 things. 

#1 LOCATION, LOCATION, LOCATION

The wealthiest investors buy well-located real estate. They’re not buying in war zones. They’re not buying in sketchy areas that you wouldn’t drive to with your family. They’re buying in places with good schools, places with good economics, where people are moving to, with a dense population, where there’s a lot of stuff going on, and where there’s a lot of demand for the property.

#2 NEW PROPERTY

The second thing that they’re doing, they’re buying good properties, meaning newer properties.

They’re either developing them themselves or they’re buying something that’s been developed in the past 20 years or newer or has been substantially renovated during that time. So they’re buying well-located real estate and they’re buying nice property in great condition. That way they don’t have to worry about the zoning codes. They don’t have to worry about compliance codes. Insurance is cheaper, the maintenance is more predictable. There’s less likelihood of things going south and all the nonsense that comes with owning real estate from a physical standpoint.

#3 PROPERTY MANAGEMENT

These investors also have in-house property management. They’re not relying on third-party property management, who gets paid a fee based on the gross revenue.

Instead, they’re focused on the bottom line revenue because they’re the owners. And nobody’s going to take care of your property like you will. So they hire staff and they manage properties in house to ensure things are done the right way. This way, the owner and their team are in the same boat rowing in the same direction. And it’s easier to incentivize your team that way and pay them based on profit share rather than just on gross income.

Think about this: how much is a third-party property management company affected if you drop from 90% occupancy down to 80% occupancy?

Not much.

It’s not a huge setback for them because they’re still getting paid a 3%-8% management fee on the gross income of the property. But for you as the owner, a 10% drop in occupancy could take you from having positive cash flow to being break even.

So make sure that you’re building up your organization and building up your property management in a way that incentivizes the managers to manage it from the bottom line. That’s why these investors own their own property management firms.

#4 NEVER SELL

People might say: “Well, hey, the market’s up and everybody’s making money, and now is the time to sell.”

Nope, they don’t sell. You know what they do? They refinance, pull money off the table – tax free – put it in their pocket, live off of that for the next 10 to 15 years. And then they let their tenants pay down the principal balance on the loan. Again, let the property continue to appreciate, continue to take advantage of the tax benefits of owning rental real estate and the depreciation.

And then they do it all over again

The wealthiest investors never, ever sell their well-located, nice, new, self-managed real estate, and they hold on to it forever to build up that legacy wealth.

So do this: think about the last five properties you purchased. How many of those boxes do you check from the good properties you own that you enjoy owning? How many from those pain in the ass properties that you own, that you don’t enjoy owning? Chances are, the pain in the ass properties didn’t check all four of those boxes and the ones you enjoy owning and that are performing fantastically did check all those boxes. Personally, I’m going through my portfolio and getting rid of the properties that don’t fit that profile. And as I acquire new properties, I’m only focusing on the ones that do.

Now, I will say this: when you’re growing your real estate portfolio, you’re trying to get up to that place where you can sponsor your own loans, and qualify for financing, and get some real respect when you’re making offers on properties. That number is probably around $10 million of real estate in your portfolio. That’s about 100 units, let’s call it, if you’re buying multifamily.

When you get to 100 units, it means you pretty much have the balance sheet, the net worth, the liquidity, and the experience in order to qualify loans. At that point, you can qualify for about 98% of all commercial real estate out there because only about 2% of properties are more than $10 million.

I will say, to get there, I had to buy some C-class stuff.

I had to buy some properties that maybe didn’t fit that long term profile in order to get the balance sheet to where it needed to be before I could really start getting picky. Then I could start focusing on those four criteria.

So think about that from your portfolio. If you are in a position where your portfolio’s not at least $10 million, just acquire any solid, well located, decent properties to get the balance sheet there, and then you can use that to buy the nicer stuff. You can sell off the small properties or the C-class properties, the D-class properties, the management-intensive properties.

 If I was starting all over again, that’s the process that I would go through in order to get my balance sheet and my portfolio to where I wanted it to be.

We made a video on this! Watch it on the Legacy Wealth YouTube channel here: https://www.youtube.com/watch?v=-zP6BtakFSk