back of the envelope

Hello Mr. Collier,

I hope all is well with you. When you have some time, could you please answer the following questions? Thank you so much for your time, consideration and wisdom.

When you say you like “having roots” would you say that’s a preference or sound business practices?

Real estate is a local business, a relationship business much more than most. Even national firms often choose to partner with locals in order to have boots on the ground that have an equity interest. So to the extent that having deep roots gives you extraordinary local market knowledge, it can be a sound business practice. Also, stability, reliability, and dependability are in-demand traits related to deep roots that foster trust and long term relationships that can help create value. Furthermore, if you actively manage your real estate investments (and I highly recommend you do, it’s hard to find someone who cares as much as an owner with everything to lose!) then geographic proximity is highly beneficial. Find a location you like that has good future prospects, move there, and live near your investments.

What does “back of the envelope guy” mean?

A back of the envelope analysis is a rough calculation using simplified assumptions, a quick, down and dirty sketch often written down on the closest piece of paper available during a moment of inspiration, often the back of some other document or envelope hence the name. While my organization can and does create intricate Ten Year Pro-formas with myriad variables and assumptions about how they play out in the essentially unknowable and murky future, I’m most comfortable starting out with a back of the envelope analysis. If it doesn’t make sense at that level, then it is probably not worth pursuing further.

A major point to be made is that most complex spreadsheets with all sorts of back up sheets give a false sense of certainty. Dig into all the assumptions and professional judgements made and you will understand the shaky ground on which they are built. I shudder when I see projected IRR calculated out to the 2nd decimal (i.e. this investment will return a 14.27% IRR!). The real truth is that maybe, just maybe you can get the 2nd digit in FRONT of the decimal point right i.e. I can, with accuracy, reasonably well predict whether an investment will make high single digit return v. mid-teens return v. low twenties. That’s it! Note I said predict with “accuracy”; I did not say with “confidence” because all too many folks out there are “confident” of predictions that they have no earthly right to be!

Media in search of a sensational story or click bait will profile some “genius” with an incredible track record of correct predications. Usually, this is the equivalent of taking a year’s graduating class of new minted MBA’s and asking them to start flipping coins, asking anyone who doesn’t flip heads to sit down. The last one standing, having flipped a remarkable number of heads in a row, is annotated a genius.

As always, I share what I most want/need to learn. – Nathan S. Collier